**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTS PURSUANT TOSECTIONS 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**(MarkOne)**

** **
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

**For the fiscal year ended December 31, 2001**

 

**OR**

** **
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

**For the transition period from                                  to                         **

 

**Commission file number 000-31623**

 

**SIMPLETECH, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **California**                                                              |   | **33-0399154**                       |
|-----------------------------------------------------------------------------|--------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization)              |   | (I.R.S. Employer Identification No.) |
|                                                                        |   |                                 |
| **3001 Daimler Street**                                                     |
| **Santa Ana, California 92705-5812**                                        |
| (Address of principal executive offices, including zip code)                |
|                                                                        |
| **(949) 476-1180**                                                          |
| Registrant’s Telephone Number, Including Area Code:               |
|                                                                        |
| **Securities registered pursuant to Section  12(b) of the Act:  None** |
| **Securities registered pursuant to Section  12(g) of the Act:**            |

 

| **Title of each class**        |   | **Name of each exchange on which registered** |
|--------------------------------|--------|-----------------------------------------------|
| Common Stock, $0.001 par value |   | The Nasdaq National Market                    |

 

Indicate bycheck mark whether the registrant:  (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý   No  o

 

Indicate by acheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S–K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10–Kor any amendment to this Form 10–K. o

 

As of March 1,2002, the approximate aggregate market value of voting stock held bynon-affiliates of the registrant was $41,511,389 (based upon the closing pricefor shares of the Registrant’s Common Stock as reported by The National MarketSystem of the National Association of Securities Dealers Automated QuotationSystem on that date).  Shares of CommonStock held by each officer, director, and holder of 5% or more of theoutstanding Common Stock have been excluded in that such persons may be deemedto be affiliates.  This determination ofaffiliate status is not necessarily a conclusive determination for otherpurposes.

 

As of March 1,2002, there were approximately 38,227,105 shares of Common Stock outstanding.

 

**Documents Incorporated By Reference**

 

Certaininformation required in Part III hereto is incorporated by reference to theProxy Statement for the Registrant’s 2002 Annual Meeting of Shareholders to befiled with the Securities and Exchange Commission pursuant to Regulation 14Anot later than 120 days after the end of the fiscal year covered by this Form10-K.

 

 

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** **

**SIMPLETECH, INC.**

 

**FORM 10–K ANNUAL REPORT**

 

**TABLE OF CONTENTS**

 
| PART I   |
|----------|
|     | ITEM 1. | BUSINESS |
|     | ITEM 2. | PROPERTIES |
|     | ITEM 3. | LEGAL PROCEEDINGS |
|     | ITEM  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|     |   |   |
| PART II  |
|     | ITEM  5. | MARKET  FOR THE REGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS |
|     | ITEM 6. | SELECTED FINANCIAL DATA |
|     | ITEM  7. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|     | ITEM  7A. | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|     | ITEM  8. | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA |
|     | ITEM  9. | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|     |   |   |
| PART III |
|     | ITEM  10. | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT |
|     | ITEM 11. | EXECUTIVE COMPENSATION |
|     | ITEM  12. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
|     | ITEM  13. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS |
|     |   |   |
| PART IV  |
|     | ITEM 14. | EXHIBITS, FINANCIAL STATEMENT  SCHEDULES AND REPORTS ON FORM 8–K |

 

**ABOUT THIS ANNUAL REPORT**

 

In this Report, “SimpleTech,”“we,” “us” and “our” refer to SimpleTech, Inc., a California corporation,and our subsidiaries. We own or have rights to product names and trademarksthat we use in conjunction with the sale of our products, including Simple®,SimpleTech®, IC TowerTM and CompactFlashTM. The CompactFlash Association makesthe CompactFlash name and logo available royalty-free to its member companies.References in this Report to CompactFlash are references only to our productsunless otherwise indicated. This report also contains other product names,trade names and trademarks that belong to other organizations.

 

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**This Annual Report on Form 10-K, including informationincorporated herein by reference, contains “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Thesestatements relate to expectations concerning matters that are not historicalfacts. Words such as “projects,” “believes,” “anticipates,” “will,” “estimate,”“plans,” “expects,” “intends,” and similar words and expressions are intendedto identify forward-looking statements. Although we believe that suchforward-looking statements are reasonable, we cannot assure you that suchexpectations will prove to be correct. Important language regarding factorswhich could cause actual results to differ materially from such expectationsare disclosed in this Report,including without limitation under the caption “Risk Factors” beginning on page16 of this Report. All forward-looking statements attributable toSimpleTech are expressly qualified in their entirety by such language.  We do not undertake any obligation to updateany forward-looking statements.**

 

**PART I.**

 

**ITEM 1.****                                                          BUSINESS**

 

**Overview**

 

SimpleTech isa technology solutions provider offering products based on dynamic randomaccess memory, or DRAM, static random access memory, or SRAM, and Flash memorytechnologies. We design, manufacture and market a comprehensive line of over2,500 memory and storage products, as well as connectivity products thatconnect memory cards and hard drive upgrade kits to PCs. These products areused in high-performance computing, networking and communications, consumerelectronics and industrial applications. Examples of these applications includedesktop and notebook computers, servers, routers, switches, digital cameras,digital video recorders, MP3 digital audio players, personal digitalassistants, or PDAs, embedded controls and medical instruments. Our patented ICTower stacking technology allows multiple memory chips to be stacked togetherto increase the capabilities of memory modules without increasing the productfootprint. This technology allows our customers to design memory intensivesystems on a more competitive basis. Our CompactFlash cards provide portabledigital devices, such as digital cameras and MP3 digital audio players, withincreased storage capabilities in a smaller size product. We believe ourdesign, manufacturing, testing and logistics expertise, along with ourproprietary technologies, enable us to respond to our customers’ rapidlychanging product and service requirements. We provide our customers with timelyaccess to higher speed and higher density memory products, increasing theirability to bring products to market quickly and decreasing their capitalrequirements and production and inventory costs.

 

We offermemory solutions through our Industrial and Commercial Divisions.  Commercial Division channels include valueadded resellers, or VARs, mail order customers, commercial and industrialdistributors, and retailers. We believe our comprehensive line of productsallows our customers to efficiently manage their inventory purchases byconsolidating their sources for memory, storage and connectivity products. OurIndustrial Division sells primarily custom memory products for newlymanufactured systems, with most sales based on a coordinated design effortbetween us and our Industrial Division customers.  Our principal Industrial Division customers, including salesthrough their fulfillment partners, were Adtron, Alcatel Italia SPA, CiscoSystems, Lucent Technologies and Unisys in 2001 and Cisco Systems, LucentTechnologies, Motorola, Silicon Graphics and Unisys in 2000. Our CommercialDivision designs and manufactures industry accepted memory storage andconnectivity products used as upgrades in or enhancements to computing systemsand consumer electronics. Our principal Commercial Division customers includedCDW Computer Centers, Costco Wholesale, Ingram Micro, Insight Direct and Sam’sClub in 2001 and CDW Computer Centers, Costco Wholesale, Ingram Micro, InsightDirect and PC Connection in 2000. Unisys and CDW Computer Centers accounted for more than 10.0% of ourtotal 

 

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revenues in 2001, and CiscoSystems and CDW Computer Centers accounted for more than 10.0% of our totalrevenues in 2000.  No other customer accounted for more than 10.0% of our totalrevenues in 2001 and 2000.

 

**IndustryBackground**

 

Thedevelopment of high-performance PCs and servers and the evolution of theInternet infrastructure have increased the demand for greater capabilities inthe storage, manipulation, transfer and management of digital data. Digitalcomputing and processing have extended beyond traditional computer systems,such as PCs and servers, to include a wide array of networking andcommunications, consumer electronics and industrial applications, includingrouters, switches, digital cameras, digital video recorders, MP3 digital audioplayers, PDAs, embedded controls and medical instruments. The increasedfunctionality and decreased size of many of these products have led to agreater demand for higher density memory products with smaller size, lowerpower consumption and higher speeds at a lower cost.

 

The memorymarket can be divided into several types of integrated circuit, or IC, devicesthat are designed to perform specific functions within computer and otherelectronic systems. Three significant types of memory IC devices are DRAM, SRAMand Flash. DRAM and SRAM are considered volatile memory since they require aconstant power supply to retain data. Since Flash is able to retain datawithout a power source, it is considered non-volatile memory. Within each ofthese categories, manufacturers are offering an increasing variety of memoryproducts that are designed for different applications and performancerequirements. This increasing variety has placed greater demands onmanufacturers of computer and other electronic systems to maintain engineeringexpertise.

 

DRAM is ahigh-density, low cost per bit, random access memory component which storesdigital information in the form of bits and provides high speed storage andretrieval of data. SRAM performs memory functions similar to DRAM, but is muchfaster and does not require the memory modules to be electronically refreshed.Flash memory is a solid-state, non-volatile technology that can be used as analternative to rotating disk drives. Flash is noiseless, considerably lighter,more rugged and consumes substantially less power than a rotating disk drive.

 

**TheSimpleTech Solution**

 

SimpleTechdesigns, manufactures and markets a comprehensive line of memory, storage andconnectivity products used in high-performance computing, networking andcommunications, consumer electronics and industrial applications.

 

Our productsoffer the following features:

 

·       *High density*. Our patented IC Towerstacking technology allows us to design and manufacture CompactFlash cards andDRAM memory modules in which multiple memory chips are stacked together to increasethe capabilities of memory modules without increasing the product footprint.This technology allows our customers to design memory intensive systems on amore competitive basis. As the component chips increase in capacity, ourability to increase density in the same footprint also increases.

 

·       *Small footprint*. We are able tomanufacture high-density DRAM and Flash memory products with some of thesmallest footprints on the market.

 

·       *High performance and reliability*. Ourmemory products utilize sophisticated error detection and correction processesto provide high data reliability and integrity. In 

 

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addition, ourmemory products are designed to withstand high levels of shock and vibration aswell as extreme temperature fluctuations typically associated with mobilecomputing and industrial applications.

 

·       *Low power consumption*. During read andwrite operations, our Flash memory products use less power than most rotatingdisk drives. At all other times during system operation, our Flash memoryproducts require no power. This low-power consumption translates into longerbattery life for many mobile computing and consumer electronic devices.

 

We offer ourIndustrial Division customers a comprehensive technology solution from conceptto design to the creation of prototypes through high volume production andtesting. We believe our quick-turn design capabilities and automatedmanufacturing and test processes allow our Industrial Division customers toquickly and cost-effectively bring products to market. This outsourcing alsoallows our Industrial Division customers to focus their resources on activitiesand technologies in which they add the greatest value, such as system design,sales, marketing and distribution. We believe our technical capabilities andvolume manufacturing strengths allow our Industrial Division customers tocost-effectively design and implement customized, advanced memory chiptechnology in high volume product applications.

 

Our CommercialDivision customers include VARs, mail order customers, commercial andindustrial distributors, and retailers. We believe our comprehensive line ofproducts allows our Commercial Division customers to efficiently manage theirinventory purchases by consolidating their sources for memory, storage andconnectivity products. We are able to strengthen our relationships with theseCommercial Division customers and develop the SimpleTech brand name throughvarious marketing programs. We also provide ongoing customer support, includingon-line pricing and navigation tools, toll-free technical support and accountmanager training programs. For further details regarding our various marketingprograms, see “Business—Sales and Marketing.”

 

**Design,Manufacturing and Test Engineering**

 

*Design and production*.  The typical production cycle consists of adesign stage followed by a prototype stage and ends with full production of thefinal product. The length of the design stage has been reduced due to rapidimprovements in technology. In recent years customers have demanded shorterdesign and production cycles. In response, we have developed quick-turn designand manufacturing services. By working with our Industrial Division customersearly in the design and prototype stages, we are able to resolve criticaldesign issues effectively and efficiently, thus shortening the time fromprototype design to volume manufacturing. In addition, working closely with ourIndustrial Division customers throughout the design and production stagesallows us to gain important insights into their future product requirements. Webelieve our quick-turn design and manufacturing services also allow us tointroduce upgrade products to the aftermarket on a timely basis to coincidewith new product releases by these customers.

 

*Manufacturing*.  Ourmanufacturing processes are highly automated and involve the use of specializedequipment for the production of memory products. Our manufacturing systems havebeen optimized to support the placement of a large number of IC devices on eachmemory board. We believe we are able to achieve a high manufacturing yield andminimize direct labor costs as a result of our design efficiencies, high levelof automation and general manufacturing expertise. Because our manufacturingsystems can be easily configured for different memory products, we have theability to offer our customers short manufacturing and test cycles on small andlarge projects. We also have developed an automated method of manufacturing ourIC Tower stacking products which we believe results in further manufacturingefficiencies. Our manufacturing process is ISO 9001 certified.

 

*Test engineering. * An important aspect of ourmanufacturing operations is our focus on test engineering. We test 100% of ourmemory products upon completion of manufacturing, which results in 

 

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lower returns due to productdefects. We believe our test engineering expertise will continue to grow inimportance as the speed and complexity of memory products increase. Our testengineering group develops proprietary processes which, together with ourcontinued investment in advanced testing equipment, enable us to consistentlyproduce high-quality products.

 

**Researchand Development**

 

Our researchand development efforts are focused on developing reliable, high-performanceand cost-effective memory products to address the needs of traditional andemerging memory applications. We believe the timely development of new productsis essential to maintaining our competitive position. Our engineering staffworks closely with our Industrial Division customers and provides servicesthroughout the production cycle, including component selection, schematicdesign, layout, manufacturing and test engineering expertise. We design ourproducts to be compatible with existing industry standards and, whereappropriate, develop and promote new standards. An important aspect of ourengineering operations is to understand the challenges presented by our IndustrialDivision customers’ custom design requirements and satisfy them by utilizingour proprietary technologies and our technical expertise. In the course ofmeeting our customers’ challenges, we are often required to develop newtechnologies and processes which are later added to our design library for useby our other customers. Our design library consists of over 1,000 designs thatare available for a wide variety of custom and industry-accepted productconfigurations. We focus primarily on new high speed memory modules,improvements in manufacturing processes and technologies, and improvements intest routines and related software. We plan to continue to direct our researchand development efforts toward the design of new memory products which addressthe requirements of our Industrial and Commercial Division customers.

 

In the Flashmarket, our research and development is directed toward the design andintroduction of new Flash products that provide improved storage capacities,higher speed read and write capabilities, smaller sizes and new interfaces.These products are intended for networking and communications, consumerelectronics and industrial applications.

 

Our IC Towerstacking technology enables us to produce high-density DRAM and Flash productsby manufacturing products in a three-dimensional form. These products offerhigher density capabilities in the same footprint than the traditionaltwo-dimensional designs. We stack unmodified memory devices to produce higherdensity and smaller form factor DRAM modules and Flash cards. This capabilityenables us to shorten our customers’ design cycles for high-density products tolead times normally associated with non-stacked memory solutions.

 

In January 2002, we completed a $2.3 millionacquisition of the assets, including intellectual property, of Irvine Networks,LLC, and hired their engineering staff. Irvine Networks has been developinginnovative content processing technology for Web-based server platforms. As aresult of our acquisition of Irvine Networks, we expect our research anddevelopment expenses to increase significantly in 2002 to approximately $8 to$9 million.

 

**Products**

 

We design,manufacture and market a comprehensive line of more than 2,500 memory, storageand connectivity products using our proprietary design and manufacturingtechnologies. Substantially all of our DRAM, SRAM and Flash memory productscomply with industry standards and are based on a variety of industryarchitectures. Sales of memory products accounted for 90.2%of our revenues in 2001, 91.0% of our revenues in 2000 and 89.8% of our revenues in 1999.

 

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***DRAM Products***

 

We offer DRAMproducts including a wide range of single in-line memory modules, or SIMMs,dual in-line memory modules, or DIMMs, and small outline dual in-line memorymodules, or SO DIMMs. Our standard DRAM products are available in variousconfigurations of up to 184 pins and densities of up to 512 megabytes. We alsooffer many of these products in 3.3 volt or 5.0 volt configurations utilizingdifferent DRAM architectures such as DDR, SDRAM, RDRAM, EDO and FPM.

 

The followingtable describes certain of our non-stacking DRAM products as of March 1,2002: 

 
| **DRAM  Product Family**              |   | **Density** |   | **Architecture**      |   | **Speed  (MHz)** |   | **Applications**                                                                                                       |
|---------------------------------------|--------|-------------|--------|-----------------------|--------|------------------|--------|------------------------------------------------------------------------------------------------------------------------|
| 184-pin DIMM                          |   | 64-512MB    |   | DDR                   |   | 200-266          |   | Servers and  workstations                                                                                              |
|                                  |   |        |   |                  |   |             |   |                                                                                                                   |
| Rambus DIMM                           |   | 64-512MB    |   | RDRAM                 |   | 600-800          |   | Desktop PCs,  embedded controls and workstations                                                                       |
|                                  |   |        |   |                  |   |             |   |                                                                                                                   |
| 168-pin and  184 -pin Registered DIMM |   | 64-512MB    |   | DDR, SDRAM            |   | 66-133           |   | Desktop PCs,  embedded controls, networking and communications equipment, printers,  routers, servers and workstations |
|                                  |   |        |   |                  |   |             |   |                                                                                                                   |
| 168-pin and  184 -pin DIMM            |   | 16-512MB    |   | DDR, SDRAM,  EDO, FPM |   | 10-133           |   | Desktop PCs,  embedded controls, networking and communications equipment, printers,  routers, servers and workstations |
|                                  |   |        |   |                  |   |             |   |                                                                                                                   |
| 144-pin SO  DIMM                      |   | 16-256MB    |   | SDRAM, EDO,  FPM      |   | 10-133           |   | Embedded  controls, networking and communications equipment, notebook PCs, printers and  routers                       |
|                                  |   |        |   |                  |   |             |   |                                                                                                                   |
| 100-pin DIMM                          |   | 16-64MB     |   | SDRAM, EDO,  FPM      |   | 33-133           |   | Networking  and communications equipment, printers and terminals                                                       |
|                                  |   |        |   |                  |   |             |   |                                                                                                                   |
| 72-pin SO  DIMM                       |   | 16-64MB     |   | EDO, FPM              |   | 10-33            |   | Networking  and communications equipment, and notebook PCs                                                             |
|                                  |   |        |   |                  |   |             |   |                                                                                                                   |
| 72-pin SIMM                           |   | 16-128MB    |   | EDO, FPM              |   | 10-33            |   | Desktop PCs,  embedded controls, networking and communications equipment, printers, routers  and servers               |

 

***Flash Products***

 

We manufacturethree types of Flash products: Flash modules, Linear Flash PC Cards and datastorage Flash products. Flash modules and Linear Flash PC Cards are commonlyused in program and code storage applications such as networking andcommunications and embedded applications. Data storage Flash products arecommonly used where data storage is the primary function, such as in digitalcameras, MP3 digital audio players, certain networking and communications andembedded applications, and ruggedized computers built to withstand shock andvibration.

 

*Flash modules*.  Weoffer standard, custom and application-specific Flash modules, including168-pin Asynchronous DIMMs, 144-pin SO DIMM, 80-pin Asynchronous SIMMs and72-pin 

 

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DRAM/Flash combinationSIMMs. Our Flash modules are available in densities of up to 256megabytes. We offer additional options such as on-board active reset controland system reset. Many of these products are available in 3.3 volt or 5.0 voltconfigurations.

 

The followingtable describes certain of our Flash modules as of March 1, 2002: 

 
| **Flash Module Product Family** |   | **Density**          |   | **Architecture**                                                             |   | **Applications**                                                |
|---------------------------------|--------|----------------------|--------|------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|
| 168-pin DIMM                    |   | 4-16MB               |   | 3.3 volt or  5.0 volt                                                        |   | Networking  and communications equipment, printers and switches |
|                            |   |                 |   |                                                                         |   |                                                            |
| 144-pin SO  DIMM                |   | 32-256MB             |   | 3.3 volt                                                                     |   | Networking                                                      |
|                            |   |                 |   |                                                                         |   |                                                            |
| 80-pin SIMM                     |   | 2-256MB              |   | 12.0  volt/5.0 volt programming, 5.0 volt only, 3.3 volt only, reset options |   | Networking  and communications equipment, printers and switches |
|                            |   |                 |   |                                                                         |   |                                                            |
| 72-pin  DRAM/Flash SIMM         |   | 8MB Flash  56MB DRAM |   | Plugs into  the DRAM socket; reads and writes like DRAM                      |   | Networking  and communications equipment                        |

 

*Linear Flash PC Cards*.  Weoffer standard, custom and application-specific Linear Flash PC Cards, withdensities ranging from 512 kilobytes to 64 megabytes.

 

The followingtable describes certain of our Linear Flash PC Cards as of March 1, 2002: 

 
| **Linear Flash PC Card Product Family** |   | **Density** |   | **Features**                                                                                     |   | **Applications**                                                                                    |
|-----------------------------------------|--------|-------------|--------|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
| 68-pin PC  Card                         |   | 512KB-64MB  |   | Plug and  play, compatible to Intel based series 1, 2, 2+ and Value Series 100 and 200  PC Cards |   | Medical  equipment, networking and communications equipment, notebook PCs, PDAs and  test equipment |
|                                    |   |        |   |                                                                                             |   |                                                                                                |
| 68-pin PC  Card                         |   | 1MB-64MB    |   | Plug and  play, compatible to series C and D AMD cards                                           |   | Medical  equipment, networking and communications equipment, PDAs and test equipment                |

 

*Data storage Flash products*.  Weoffer a broad line of data storage Flash products in various capacities, sizesand operating voltages and temperatures. Our current product families includeCompactFlash, ATA Flash PC Cards, solid-state Flash drives and Flash DiskModules. Our data storage Flash products are compatible with a majority oftoday’s industry-standard computing and communications systems.

 

*CompactFlash*.  Our CompactFlash products provide full PCCard ATA functionality but are only one-fourth the size of a standard PC Card.CompactFlash’s small size, durability, low-

 

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powerconsumption and ability to operate at either 3.3 volts or 5.0 volts make itwell-suited for a range of current and next-generation, small size consumerapplications such as audio recorders, digital cameras, MP3 digital audioplayers and PDAs. CompactFlash products provide interoperability with systemsbased on the PC Card ATA standard by using a low-cost passive adapter.

 

*ATA Flash PC Cards*.  OurATA Flash PC Cards are used in storage, data backup and data loggingapplications. Our products are available in PC Card Type I, II and III formfactors.

 

*Solid-state Flash drives*.  Oursolid-state Flash drives are available in 2.5 inch and 3.5 inch hard disk formfactors and are targeted at applications that require embedded data storagedevices. Our solid-state Flash drives offer rugged, portable, low-power datastorage and are compatible replacements for rotating hard drives, making themideal for notebook computers, communication devices, and networking andcommunications applications requiring embedded storage.

 

*Flash Disk Modules*.  OurFlash Disk Module products offer a transparent design, replacing or augmentingconventional IDE hard disk drives by leveraging from a miniature module footprintthat allows these products to be used as components in embedded systems.Specifically, the product line is available in a 40-pin configuration whichaddresses similar functionality to a 2.5 inch hard disk drive, a 44-pinconfiguration which addresses similar functionality to 3.5 inch hard diskdrive, and a standard 144-pin SO DIMM configuration.

 

The following table describescertain of our data storage Flash products as of March 1, 2002: 

 
| **Data Storage Flash Product Family** |   | **Density** |   | **Form Factor**                        |
|---------------------------------------|--------|-------------|--------|----------------------------------------|
| CompactFlash                          |   | 8-640MB     |   | Type I  (36.4mm x 42.8mm x 3.3mm)      |
| ATA Flash PC  Card                    |   | 8MB-2GB     |   | Type I  (54.0mm x 85.6mm x 3.3mm)      |
|                                  |   |        |   | Type II  (54.0mm x 85.6mm x 5.0mm)     |
|                                  |   |        |   | Type III  (54.0mm x 85.6mm x 10.0mm)   |
| Solid-state  Flash drives             |   | 8MB-3GB     |   | 2.5 inch and  3.5 inch                 |
| Flash Disk  Modules–40-pin       |   | 32-256MB    |   | 40–pin  vertical & horizontal |
| Flash Disk  Modules– 44-pin      |   | 32-160MB    |   | 44–pin  vertical & horizontal |
| Flash Disk  Modules–144-pin      |   | 32-1GB      |   | 144–pin SO  DIMM                  |

 

***Stacking DRAM andFlash Card Products***

 

*DRAM modules and Flash card products*.  Weoffer custom and application-specific stacking DRAM modules including a widerange of DIMMs and SO DIMMs. Our stacking DRAM modules are availablein various configurations of up to 200-pins and densities of up to 1 gigabyte.We also offer many of these modules in both 3.3 volt and 5.0 voltconfigurations utilizing different DRAM architectures such as DDR, SDRAM, EDOand FPM. Our IC Tower stacking technology has enabled us to offer a 1 gigabyte,Type II CompactFlash card, which is one of the highest capacity CompactFlashcards currently available.

 

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The followingtable describes certain of our stacking DRAM and Flash card products as ofMarch 1, 2002: 

 
| **Stacking DRAM Product Family**     |   | **Density** |   | **Architecture** |   | **Speed (MHz)** |   | **Applications**                                                                                                       |
|--------------------------------------|--------|-------------|--------|------------------|--------|-----------------|--------|------------------------------------------------------------------------------------------------------------------------|
| 200-pin  Registered DIMM             |   | 512MB-1GB   |   | SDRAM            |   | 66-133          |   | Servers                                                                                                                |
|                                 |   |        |   |             |   |            |   |                                                                                                                   |
| 168-pin and  184-pin Registered DIMM |   | 256MB-1GB   |   | DDR, SDRAM       |   | 66-133          |   | Desktop PCs,  embedded controls, networking and communications equipment, printers, routers,  servers and workstations |
|                                 |   |        |   |             |   |            |   |                                                                                                                   |
| 168-pin DIMM                         |   | 256MB-1GB   |   | SDRAM, EDO,  FPM |   | 10-133          |   | Desktop PCs,  embedded controls, networking and communications equipment, printers,  routers, servers and workstations |
|                                 |   |        |   |             |   |            |   |                                                                                                                   |
| 144-pin SO  DIMM                     |   | 128MB-1GB   |   | SDRAM            |   | 66-133          |   | Embedded  controls, networking and communications equipment, notebook PCs and routers                                  |

 
| **Stacking Flash Card Product Family** |   | **Density** |   | **Form Factor**                              |
|----------------------------------------|--------|-------------|--------|----------------------------------------------|
| CompactFlash                           |   | 1GB         |   | Type II  (36.4mm × 42.8mm × 5.0mm) |

 

IC *Tower stacking components*.  Ourpatented IC Tower stacking technology is a high-density memory designarchitecture that uses standard DRAM IC devices to create high-capacitycomponents. We offer a wide selection of stacked components to be used onmemory modules and on our customers’ specific applications. This technology isused in complex, high-capacity module designs and systems and offers chipdensities that are less expensive than non-stacked components on a per megabitbasis.

 

The followingtable describes certain of our IC Tower stacking components as of March 1,2002:

 
| **IC Tower Stacking Product Family** |   | **Density** |   | **Architecture**   |   | **Speed (MHz)** |   | **Applications**                                              |
|--------------------------------------|--------|-------------|--------|--------------------|--------|-----------------|--------|---------------------------------------------------------------|
| DDR                                  |   | 128-512MB   |   | 2 High  (64-256MB) |   | 200-266         |   | Standard and  application-specific memory modules and systems |
|                                 |   |        |   |               |   |            |   |                                                          |
| SDRAM                                |   | 128-512MB   |   | 2 High (64-256MB)  |   | 66-133          |   | Standard and  application-specific memory modules and systems |
|                                 |   |        |   |               |   |            |   |                                                          |
| EDO/FPM                              |   | 128MB       |   | 2 High  (64MB)     |   | 10-33           |   | Standard and  application-specific memory modules and systems |

 

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***SRAM Products***

 

We offer acomprehensive line of standard, custom and application-specific SRAM modulesand PC Cards, including synchronous, asynchronous and battery backup low-powerSRAM devices. Our SRAM products are available in densities of up to 8megabytes. Many of these products are available in 3.3 volt or 5.0 voltconfigurations.

 

The followingtable describes certain of our SRAM products as of March 1, 2002: 

 
| **SRAM Product Family** |   | **Density** |   | **Speed (MHz)** |   | **Applications**                                                                                  |
|-------------------------|--------|-------------|--------|-----------------|--------|---------------------------------------------------------------------------------------------------|
| Custom ZBT              |   | 4-8MB       |   | 133-200         |   | Networking  and communications equipment                                                          |
|                    |   |        |   |            |   |                                                                                              |
| PC Card                 |   | 512KB-6MB   |   | 6.6-10          |   | Embedded  systems, industrial control test equipment and networking and communications  equipment |
|                    |   |        |   |            |   |                                                                                              |
| 72-pin SIMM             |   | 2-8MB       |   | 66-100          |   | Networking  and communications equipment                                                          |
|                    |   |        |   |            |   |                                                                                              |
| 64-pin SIMM             |   | 1MB         |   | 66-83           |   | Networking  and communications equipment                                                          |

 

***Other Products***

 

Hard driveupgrade kits.  We offer hard drive upgrade kits for many major brandsof notebook PCs. Our products range from 6 to 40 gigabytes. The primary use ofthese products is to enhance the storage capacity of notebook PCs. We alsooffer USB data transfer/backup kits for desktop and notebook PCs.

 

Connectivityproducts.  We offer connectivity products that connect PC Cards,CompactFlash cards and hard drive upgrade kits to a PC’s parallel port or USBport. These products allow the user to move information from their PC Card,CompactFlash card or hard drive to their desktop or notebook PC.

 

**Customers**

 

                We sell our products through our Industrialand Commercial Divisions.  OurIndustrial Division was created in late 1998 to enhance the marketing of ourproducts to original equipment manufacturers, or OEMs.  Our Commercial Division sells our productsthrough the following five channels: value added reseller, or VAR, mail order, commercial and industrialdistribution, and retail.

 

***Industrial Division***

 

In 2001, ourIndustrial Division sold to over 150 customers, including sales throughindustrial distributors and contract manufacturers who incorporate our productsinto systems they assemble for our Industrial Division customers. We define ourIndustrial Division customers as OEMs who have purchased our products directlyor ordered our products from industrial distributors and contractmanufacturers.  Our Industrial Divisioncustomers make the purchasing decisions on substantially all of the products wesell through industrial distributors and contract manufacturers.  In 2001, Unisys accounted for 37.6% of ourIndustrial Division revenues or 11.0% of our total revenues. In 2000, CiscoSystems accounted for 31.8% of our Industrial Division revenues or 14.6% of ourtotal revenues. No other Industrial Division customer accounted for more than10.0% of our total revenues in 2001 or 2000.

 

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The following tablelists our top five Industrial Division customers based on revenues in 2001,including sales to their industrial distributors and contractmanufacturers.  We have no long-termcontracts with these customers.

 

| **Customer**         |   | **Market  Segment/Distribution Channel** |
|----------------------|--------|------------------------------------------|
| Adtron               |   | Storage,  Netcom                         |
| Alcatel  Italia SPA  |   | Netcom  equipment                        |
| Cisco  Systems       |   | Netcom  equipment                        |
| Lucent  Technologies |   | Netcom  equipment                        |
| Unisys               |   | Mainframes  and servers                  |

 

***Commercial Division***

 

In 2001, ourCommercial Division sold to over 1,000 customers through a variety ofdistribution channels including VAR, mail order, commercial and industrialdistribution, and retail. CDW Computer Centers was our largest CommercialDivision customer for both 2001 and 2000. CDW Computer Centers accounted for27.9% of our Commercial Division revenues or 19.7% of our total revenues in2001, and 31.2% of our Commercial Division revenues or 16.8% of our totalrevenues in 2000. No other Commercial Division customer accounted for more than10.0% of our total revenues in 2001 and 2000.

 

The followingtable lists our top five Commercial Division customers in 2001. We have nolong-term contracts with these customers.

 

| **Customer**          |   | **Distribution  Channel** |
|-----------------------|--------|---------------------------|
| CDW Computer  Centers |   | Mail order                |
| Costco  Wholesale     |   | Retail                    |
| Ingram Micro          |   | Commercial  distribution  |
| Insight  Direct       |   | Value added  reseller     |
| Sam’s Club       |   | Retail                    |

 

In addition,through our commercial distribution arrangements, we supply certain of ourproducts to e-commerce companies, including Amazon.com and Buy.com, for theirsale of these products on the Internet.

 

We expect thatsales of our products to a small number of customers will continue tocontribute materially to our revenues for the foreseeable future and believethat our financial results will depend in significant part upon the success ofour customers’ business.  We have alsoexperienced changes in the composition of our major customer base from quarterto quarter as the market demand for our customers’ products changes and weexpect this variability will continue in the future.

 

Although webegan tracking revenues and gross margins on a divisional basis in 1999, wehave not tracked, and do not intend to track, operating expenses on adivisional basis.  For further financialinformation regarding our Industrial and Commercial Divisions, includingfinancial information about our international sales, see Note 11 to ourconsolidated financial statements.

 

**Salesand Marketing**

 

***Industrial Division***

 

Our IndustrialDivision uses an internal direct sales force complemented by an external salesforce of manufacturers’ representatives and industrial distributors for salesto Industrial Division customers in the United States and internationally. Wepursue our customer base on both a geographic and account-specific basis. Webelieve these combined sales forces have the local presence, market knowledgeand strategic 

 

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insight to allow us to moreeffectively market our products to a larger number of industrial customers. Inaddition, as part of our sales and marketing efforts, our experiencedapplications engineers work closely with our Industrial Division customers indesigning our products into their systems.

 

***Commercial Division***

 

We shipSimpleTech brand-name products directly to VARs, mail order customers,commercial and industrial distributors, and retailers. As of March 1, 2002, ourproducts were available in more than 3,000 stores. In addition to in-housesales representatives, our sales efforts in the commercial channel are supportedby manufacturers’ representatives. For the mail order and retail channels, weadvertise in magazines and newspapers as a way of bringing end-users to ourcustomers’ locations. Some of our Commercial Division customers also featureour products in their advertisements in exchange for a fee. We offer certainVARs volume rebates and work with their customers to qualify our products fortheir information system departments. Volume rebates are used to incentivizecertain resellers, rewarding them with a rebate for our products sold. Forcommercial distributors, we purchase corporate image advertising, offer volumerebates and joint marketing programs, and generate leads at electronicstradeshows and refer those potential customers to our distributors. Through jointmarketing programs, we work together with resellers to incorporate theSimpleTech brand in the resellers’ existing marketing plans, such as catalogsand web banner ads. Lead generation comes from end users who visit our website,fill out our product registration cards, visit our booths at trade shows, andcall us in response to advertisements and direct mail. In addition, we havedeveloped direct advertising programs with certain of our commercialdistributors’ e-commerce customers in which we market our products on theirwebsites. We also offer account manager incentives which include sales contestsand reward programs designed to sustain reseller loyalty while also creatingexcitement for increased sales activity.

 

**CustomerService and Support**

 

We provide ourcustomers with comprehensive product service and support. We work closely withour Industrial Division customers to monitor the performance of their productdesigns and to provide application design and support. This also provides uswith insight into defining their subsequent generations of products. Ourstandard Industrial Division customer support package is generally offered withall product sales and includes full technical documentation and applicationdesign assistance. During our Industrial Division customers’ production phase,we provide extensive support which includes training, system-level design,implementation and integration support. We believe that tailoring our technicalsupport to our Industrial Division customers’ needs is essential for thesuccess of our product introductions and customer satisfaction. Our CommercialDivision customers receive technical support on an unlimited, toll-free basisand are assigned a dedicated technician familiar with their account. We alsotrain the account managers of certain Commercial Division customers to keepthem informed about changes in our product lines. In addition, we offerCommercial Division customers on-line pricing and navigation tools, and apersonalized web page available through our extranet which featurespersonalized information such as promotions, new products and contactinformation.

 

**Competition**

 

We conductbusiness in an industry characterized by intense competition, rapidtechnological change, evolving industry standards, declining average salesprices and rapid product obsolescence. Our competitors include many largedomestic and international companies that have substantially greater financial,technical, marketing, distribution and other resources, broader product lines,lower cost structures, greater brand recognition and longer-standingrelationships with customers and suppliers.

 

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Our primarycompetitors include:

 
| **Component Manufacturers** |                                   | **Module/PC Card Assemblers** |   | **Stacking Memory Manufacturers** |
|-----------------------------|----------------------------------------|-------------------------------|--------|-----------------------------------|
| •                      | Advanced  Micro Devices                |                          | • | Kingston Technology Company       |   | • | DPAC Technologies |
| •                      | Intel                                  |                          | • | M-Systems                         |   | • | StakTek |
| •                      | Micron  Semiconductor Electronics      |                          | • | SanDisk                           |   |   |   |
| •                      | NEC  Electronics                       |                          | • | Silicon Storage Technology        |   |   |   |
| •                      | Samsung  Semiconductor                 |                          | • | Solectron Corporation             |   |   |   |
| •                      | Toshiba  America Electronic Components |                          | • | Viking Components                 |   |   |   |

 

We expect toface competition from existing competitors and new and emerging companies thatmay enter our existing or future markets that have similar or alternativeproducts, which may be less costly or provide additional features. In addition,some of our significant suppliers, including Micron Semiconductor Electronicsand Samsung Semiconductor, are also our competitors. These suppliers have theability to manufacture competitive products at lower costs as a result of theirhigher levels of integration. We also face competition from current andprospective customers that evaluate our capabilities against the merits ofmanufacturing products internally. Competition also may arise due to thedevelopment of cooperative relationships among our current and potentialcompetitors or third parties to increase the ability of their products toaddress the needs of our prospective customers. Accordingly, it is possible thatnew competitors or alliances among competitors may emerge and rapidly acquiresignificant market share.

 

We compete inour target markets based primarily on quality and price, design andmanufacturing technology, and responsiveness to our customers’ needs. We expectour competitors will continue to improve the performance of their currentproducts, reduce their current product sales prices and introduce new productsthat may offer greater performance and improved pricing, any of which couldcause a decline in sales or loss of market acceptance of our products.

 

To remaincompetitive, we must, among other things:

 

•     Provide best-of-classdesign, manufacturing and test engineering services;

•     Maintain quality levels;

•     Provide technologicallyadvanced products;

•     Compete favorably on thebasis of price;

•     Offer flexible deliveryschedules;

•     Deliver finished products ona timely basis in sufficient volume to satisfy our customers’ requirements;

•     Successfully protect ourintellectual property rights; and

•     Accurately anticipate andprepare for new technological trends and standards in the industry.

 

The Flashmemory market is in the early stage of development. There is currently anabsence of a single Flash memory standard. It is possible that Flash memory standardsother than those to which our products conform will emerge as the industrystandard. If we are unable to anticipate and adequately allocate our resourcesin a timely and efficient manner toward the production and development ofindustry-standard Flash memory products, we may experience significant delaysin releasing new and commercially viable products. In addition, if a competingtechnology replaces or takes significant market share from the Flash memorymarket, we would not be able to sell our Flash products.

 

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**Suppliers**

 

IC devicesrepresent approximately 95.0% of our component costs. We purchase these ICdevices from a small number of suppliers. In 2001, our significant suppliers ofIC devices included:

 

| **DRAM IC Device Suppliers**                                                       |   | **Flash IC Device Suppliers**                                          |
|------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|
| •        Elpida Memory                     |   | •        Hitachi Semiconductor |
| •        Micron  Semiconductor Electronics |   | •        Samsung Semiconductor |
| •        Samsung Semiconductor             |   |                                                                   |

 

                Hitachi Semiconductor and SamsungSemiconductor supply substantially all of the IC devices used in our Flashmemory products. In addition, Elpida Memory, Micron Semiconductor Electronicsand Samsung Semiconductor currently supply a majority of the DRAM IC devicesused in our DRAM memory products. In the second half of 2001, we executed ICdevice consignment inventory agreements with our major DRAM and Flash memorysuppliers.  The agreements were executedwith Hitachi Semiconductor, Micron Semiconductor Electronics and SamsungSemiconductor.  As a result of the agreements,our inventory risk has decreased significantly as we are not financiallyobligated for the inventory until it enters the production process.

 

                Although we have a supply contract for FlashIC devices with Hitachi Semiconductor, we have no long-term DRAM IC devicesupply contracts. A disruption in or termination of our supply relationshipwith any of these significant suppliers would, among other things, causedelays, disruptions or reductions in product shipments or increase costs and/orprices and would harm our business.  Weare continuing to identify and establish additional sources of supply where wehave supplier concentrations, although there can be no assurance that theseefforts will be successful. In the future, if the demand for our productsexceeds our suppliers’ ability to deliver needed components, we may be placedon supplier allocation and we may be unable to meet customer demand.

 

**Backlog**

** **

Sales of ourmemory products are made under short-term cancelable purchase orders. Weinclude in our backlog only those customer orders for which we have acceptedpurchase orders and to which we have assigned shipment dates within theupcoming six months. Since orders constituting our backlog are subject tochange due to, among other things, customer cancellations and reschedulings,and our ability to procure necessary components, backlog is not necessarily anindication of future revenues. In addition, there can be no assurance thatcurrent backlog will necessarily lead to revenues in any future period. Ourcombined backlog was $4.5 million as of December 31, 2001 compared to $22.4million as of December 31, 2000. Our Industrial Division backlog was $3.8million as of December 31, 2001 compared to $21.4 million as of December 31,2000.  Our Commercial Division backlogwas $721,000 as of December 31, 2001 compared to $1.0 million as of December31, 2000. Commercial Division backlog is typically nominal since substantiallyall commercial orders are filled on a same-day or next-day basis. Our abilityto predict future sales is limited because a majority of our quarterly productrevenues come from orders that are received and fulfilled in the same quarter.

** **

**IntellectualProperty Rights**

 

We regard ourpatents, trademarks, trade secrets and other intellectual property as criticalto our success. We rely on a combination of patents, trademarks, copyrights andtrade secret laws, confidentiality procedures, and employee disclosure andinvention assignment agreements to protect our intellectual property rights.

 

As of March 1,2002, we owned nine U.S. patents, including U.S. Patent No. Re. 36,916 relatedto our IC Tower stacking products, and 12 additional patent applications werepending. We have two 

 

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agreements to license ourtechnology to two different third parties. One of the licenses is perpetual,although we believe that the licensee is currently not using thistechnology.  The other license providesfor the licensee’s exclusive use of our stacking technology for a one-year termand is automatically renewable unless either party declines not to renew.  In late 2001, we entered into a licenseagreement with Acticon Technologies to make, have made, use and sell certain PCMCIA-basedtelephone modems and PCMCIA-based Ethernet networking connectors and cards withrespect to certain Acticon patents.  InAugust 2000, we entered into a license agreement with Micron Electronics forthe use, sale and importation into the United States of certain memory modulesincorporating Micron’s proprietary technology. The license agreement wasentered into in connection with our August 22, 2000, settlement of a lawsuitoriginally filed by Micron on April 6, 2000, against 18 computer memorymanufacturers, including us, for our alleged infringement of certain ofMicron’s patents. A Notice of Entry of Order was approved on August 28, 2000,by the court which dismissed the Micron lawsuit with prejudice. The impact ofthe license for all periods presented in the financial statements would havebeen immaterial.

 

The followingtable describes our patents and their expiration dates:

 
| **U.S. Patent No.** |   | **Expiration Date** |   | **Description**                                                                                                                                                              |
|---------------------|--------|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                |   |                                                                                                                                                                         |
| Re. 36,916          |   | May 6, 2013         |   | Apparatus  for stacking semiconductor chips                                                                                                                                  |
|                |   |                |   |                                                                                                                                                                         |
| 5,555,209           |   | September 9,  2013  |   | Circuit for  latching data signals from DRAM memory                                                                                                                          |
|                |   |                |   |                                                                                                                                                                         |
| 5,562,504           |   | October 7,  2013    |   | Communications  card with integral transmission media line adaptor                                                                                                           |
|                |   |                |   |                                                                                                                                                                         |
| 5,596,757           |   | January 20,  2014   |   | System and  method for selectively providing termination power to a SCSI bus terminator  from a host device                                                                  |
|                |   |                |   |                                                                                                                                                                         |
| 5,660,568           |   | August 25,  2014    |   | Communications  card with integral transmission media line adaptor                                                                                                           |
|                |   |                |   |                                                                                                                                                                         |
| 5,673,419           |   | September  29, 2014 |   | Parity bit  emulator with write parity bit checking                                                                                                                          |
|                |   |                |   |                                                                                                                                                                         |
| 5,826,174           |   | January 22, 2016    |   | Method and  apparatus for improving data transmission over a wireless system by optical  spectrum positioning                                                                |
|                |   |                |   |                                                                                                                                                                         |
| 6,154,778           |   | April 21,  2018     |   | Multi-function  module incorporating flash memory having additional controller adapted to  configure the data from the memory that is to be provided to the external  source |
|                |   |                |   |                                                                                                                                                                         |
| D405,764            |   | February 16,  2013  |   | Adaptor for  a media line connector                                                                                                                                          |

 

                Although we consider the patents currentlyheld by us to be critical to our success, there can be no assurance that any patentscurrently held by us or any patents which may be granted to us in the futurewill not be challenged, invalidated or circumvented, or that rights grantedthereunder will provide meaningful protection or other commercial advantage tous. There can be no assurance that third parties will not develop similarproducts, duplicate our products or design around the patents currently ownedby us or which may be granted to us in the future. Because we view intellectualproperty rights as critical to our success, we intend to pursue future patentsand other intellectual property rights in the U.S. There can be no assurancethat we will be successful in these endeavors. In addition there can be noassurance that our trade secrets and know-how may not become known to thirdparties, or become part of the public domain, which in either case would harmour financial performance and business operations.

 

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                We have on at least one occasion appliedfor and may in the future apply for patent protection in foreign countries. Thelaws of foreign countries, however, may not adequately protect our intellectualproperty rights.  Many U.S. companieshave encountered substantial infringement problems in some foreigncountries.  Because we sell some of ourproducts overseas, we have exposure to foreign intellectual property risks.

 

                The semiconductor industry is characterizedby vigorous protection and pursuit of intellectual property rights. We believethat it may be necessary, from time to time, to initiate litigation against oneor more third parties to preserve our intellectual property rights. Inaddition, from time to time, third parties may bring suits against us. Fordetails regarding our pending intellectual property lawsuits, see “LegalProceedings” and see “Business—Risk Factors—We are involved from time to timein litigation over intellectual property rights, which may adversely affect ourability to manufacture and sell our products.”

 

                In the event of an adverse result in any suchlitigation, we could be required to pay substantial damages, cease themanufacture, use and sale of certain products, expend significant resources todevelop non-infringing technology, discontinue the use of certain processes orobtain licenses to use infringed technology. Any litigation, whether asplaintiff or as defendant, would likely result in significant expense to us anddivert the efforts of our technical and management personnel, whether or notsuch litigation is ultimately determined in our favor. In addition, the resultsof any litigation are inherently uncertain     .

 

                In the event we desire to incorporatethird-party technology into our products or our products are found to infringeon others’ patents or intellectual property rights, we may be required tolicense such patents or intellectual property rights. If we obtain licensesfrom third parties, we may be required to pay license fees or make royaltypayments, which could reduce our gross margins. If we are unable to obtain alicense from a third party for technology, we could incur substantialliabilities or be required to expend substantial resources redesigning ourproducts to eliminate the infringement. There can be no assurance that we wouldbe successful in redesigning our products or that we could obtain licenses oncommercially reasonable terms, if at all. In addition, any development orlicense negotiations could require substantial expenditures of time and otherresources by us.

 

                As is common in the industry, we currently havein effect a number of agreements in which we have agreed to defend, indemnifyand hold harmless certain of our suppliers and customers from damages and costswhich may arise from the infringement by our products of third-party patents,trademarks or other proprietary rights. The scope of such indemnity varies, butmay, in some instances, include indemnification for damages and expenses,including attorneys’ fees. We may from time to time be engaged in litigation asa result of such indemnification obligations. In addition, our insurance doesnot cover intellectual property infringement.

 

                In our efforts to maintain theconfidentiality and ownership of trade secrets and other confidentialinformation, all of our employees are required to sign employee non-disclosureand invention assignment agreements. This agreement requires our employees todisclose, document and assign their interest in all inventions, patents andcopyrights developed while employed with us. Our employees further agree topreserve all of our confidential information including trade secrets, customerinformation, know-how and other business information. There can be no assurancethat these agreements will provide meaningful protection of our trade secretsor other confidential information in the event of unauthorized use ordisclosure of such information. See “Risk Factors—Our proprietary technologyand intellectual property may not be adequately protected, which could harm ourcompetitive position.”

 

**Employees**

 

                As of December 31, 2001, we had 349 full-timeemployees, consisting of 178 in manufacturing (including test, qualityassurance and material management), 83 in sales and marketing, 48 in 

 

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finance and administration and40 in design and product development. Our employees are not represented by any collective bargainingagreements and we have never experienced a work stoppage.  Management believes that relations with ouremployees are good.

 

**RISKFACTORS**

 

*You should carefully consider the followingrisks before you decide to buy shares of our common stock. The risks anduncertainties described below are not the only ones facing us. Additional risksand uncertainties, including those risks set forth in “Management’s Discussionand Analysis of Financial Condition and Results of Operations” below, may alsoadversely impact and impair our business. If any of the following risksactually occur, our business, results of operations or financial conditionwould likely suffer. In such case, the trading price of our common stock coulddecline, and you may lose all or part of the money you paid to buy our stock*.

 

*This Report contains forward-lookingstatements based on the current expectations, assumptions, estimates andprojections about us and our industry. These forward-looking statements involverisks and uncertainties. Our actual results could differ materially from thosediscussed in these forward-looking statements as a result of certain factors,as more fully described in this section and elsewhere in this Report. We do notundertake to update publicly any forward-looking statements for any reason,even if new information becomes available or other events occur in the future.*

 

**Declinesin our average sales prices may result in declines in our revenues and grossmargins.**

 

In the fourthquarter of 2000 and in the entire year 2001, overcapacity in the memory productmarket resulted in significant declines in component prices, which negativelyimpacted our average selling prices. Declines in semiconductor prices could also affect the valuation of ourinventory, which could harm our business. During periods of overcapacity, ourability to maintain or increase revenues will depend upon our ability toincrease unit sales volumes of existing products and to introduce and sell newproducts in quantities sufficient to offset declines in sales prices. Ourefforts to reduce costs and develop new products to offset the impact offurther declines in average sales prices may not be successful. Declines in averagesales prices also would result in more memory being built into products byoriginal equipment manufacturers, which would favor our largest competitors andreduce the demand for our commercial memory products.

 

**Becausewe depend on a small number of suppliers for IC devices, any disruption in oursupply relationships could harm our ability to fulfill orders.**

 

We have nolong-term IC device supply contracts and are dependent on a small number ofsuppliers to supply IC devices, which represent approximately 95% of ourcomponent costs. Our dependence on a small number of suppliers and our limitednumber of long-term supply contracts expose us to several risks, including theinability to obtain an adequate supply of components, price increases, latedeliveries and poor component quality. Hitachi Semiconductor suppliessubstantially all of the IC devices used in our Flash memory products. Inaddition, Elpida Memory, Micron Semiconductor Electronics and SamsungSemiconductor currently supply a majority of the DRAM IC devices used in ourDRAM memory products. A disruption in or termination of our supply relationshipwith any of these significant suppliers by natural disaster or otherwise, orour inability to develop relationships with new suppliers, if required, wouldcause delays, disruptions or reductions in product shipments or require productredesigns which could damage relationships with our customers, and wouldincrease our costs and/or prices. In particular, if our supply relationshipwith Hitachi Semiconductor is 

 

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disrupted or terminated, ourability to manufacture and sell our Flash products would be limited and ourFlash business would be adversely affected.

 

**Weare subject to the cyclical nature of the semiconductor industry and changesfrom the current point in the cycle could adversely affect our business.**

 

Thesemiconductor industry, including the memory markets in which we compete, ishighly cyclical and is characterized by constant and rapid technologicalchange, rapid product obsolescence and price erosion, evolving standards, shortproduct life cycles and wide fluctuations in product supply and demand. Theindustry has experienced significant downturns, often connected with, or inanticipation of, maturing product cycles of both semiconductor companies’ andtheir customers’ products and declines in general economic conditions. Thesedownturns have been characterized by diminished product demand, productionovercapacity, high inventory levels and accelerated erosion of average sellingprices. Any future downturns could have a material adverse effect on ourbusiness and operating results. In the fourth quarter of 2000 and in 2001, asemiconductor downturn negatively impacted our average selling prices, revenuesand earnings. Furthermore, any upturn in the semiconductor industry couldresult in increased demand for, and possible shortages of, components we use tomanufacture and assemble our ICs.  Suchshortages could have a material adverse effect on our business and operatingresults.

 

**Wemay be unable to maintain a steady supply of components.**

 

Theelectronics industry has experienced in the past, and may experience in thefuture, shortages in IC devices, including DRAM, SRAM and Flash memory. We haveexperienced and may continue to experience delays in component deliveries andquality problems which have caused and could in the future cause delays inproduct shipments. In addition, we have required and could in the futurerequire the redesign of some of our products. In addition, industry capacityhas, from time to time, become constrained such that some vendors which supplycomponents for our products have placed their customers, ourselves included, onallocation. This means that while we may have customer orders, we may not beable to obtain the materials that we need to fill those orders in a timelymanner.

 

**Salesto a small number of customers represent a significant portion of our revenuesand the loss of any key customer would materially reduce our sales.**

 

Our dependenceon a small number of customers means that the loss of a major customer or anyreduction in orders by a major customer would materially reduce our revenues.Historically, a relatively small number of customers have accounted for asignificant percentage of our revenues. Our ten largest Industrial Divisioncustomers accounted for an aggregate of 71.0% of our Industrial Divisionrevenues or 20.8% of our total revenues in 2001 and 81.3% of our IndustrialDivision revenues or 37.4% of our total revenues in 2000. In2001, Unisys accounted for37.6%of our Industrial Division revenues, or 11.0%ofour total revenues. In 2000, Cisco Systems accounted for 31.8% of our IndustrialDivision revenues or 14.6% of our total revenues. No other Industrial Division customer accounted for morethan 10.0% of our total revenues in 2001 or 2000.

 

Our tenlargest Commercial Division customers accounted for an aggregate of 61.6% ofour Commercial Division revenuesor 43.6% of our total revenues in 2001, and 50.5% of ourCommercial Division revenues or 27.3% of our total revenues in 2000.  CDW Computer Centers was our largest Commercial Division customer forboth 2001 and 2000. CDW Computer Centers accounted for 27.9% of our Commercial Divisionrevenues or 19.7% of our total revenues in 2001, and 31.2% of our Commercial Division revenues or 16.8% ofour total revenues in 2000.  No other Commercial Division customer accounted for morethan 10.0% of our total revenues in 2001 and 2000.

 

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Consolidationin some of our customers’ industries may result in increased customerconcentration and the potential loss of customers as a result of acquisitions.In addition, the composition of our major customer base changes from quarter toquarter as the market demand for our customers’ products changes and we expectthis variability will continue in the future. We expect that sales of ourproducts to a small number of customers will continue to contribute materiallyto our revenues in the foreseeable future and believe that our financialresults will depend insignificant part upon the success of our customers’business.

 

**Threeof our beneficial shareholders have substantial influence over our operationsand can significantly influence matters requiring shareholder approval.**

 

ManouchMoshayedi, Mike Moshayedi and Mark Moshayedi, each of whom is an executiveofficer and director of SimpleTech, are brothers and beneficially ownapproximately 80.2% of our common stock. As a result, they have the ability tocontrol all matters requiring approval by our shareholders, including theelection and removal of directors, approval of significant corporatetransactions and the ability to control the decision of whether a change incontrol will occur.

 

**Weare involved from time to time in claims and litigation over intellectualproperty rights, which may adversely affect our ability to manufacture and sellour products.**

 

Thesemiconductor industry is characterized by vigorous protection and pursuit ofintellectual property rights. We believe that it may be necessary, from time totime, to initiate litigation against one or more third parties to preserve ourintellectual property rights. In addition, from time to time, we have received,and may continue to receive in the future, notices that claim we have infringedupon, misappropriated or misused other parties’ proprietary rights, whichclaims could result in litigation. Such litigation would likely result insignificant expense to us and divert the efforts of our technical andmanagement personnel. In the event of an adverse result in such litigation, wecould be required to pay substantial damages, cease the manufacture, use andsale of certain products, expend significant resources to developnon-infringing technology, discontinue the use of certain processes or obtainlicenses to use the infringed technology. Such a license may not be availableon commercially reasonable terms, if at all. Our failure to obtain a license orour failure to obtain a license on commercially reasonable terms could cause usto incur substantial costs and suspend manufacturing products using theinfringed technology. If we obtain a license, we would likely be required tomake royalty payments for sales under the license. Such payments would increaseour costs of revenues and reduce our gross profit.

 

We arecurrently a party to two lawsuits regarding intellectual property as furtherdescribed under “Legal Proceedings.” The outcome of litigation is inherentlyuncertain and we cannot predict the outcome of these lawsuits with certainty.These lawsuits have diverted, and are expected to continue to divert, theefforts and attention of our key management and technical personnel. Inaddition, we have incurred, and expect to continue to incur, substantial legalfees and expenses in connection with these lawsuits. As a result, our defenseof these lawsuits, regardless of their eventual outcomes, has been, and willcontinue to be, costly and time consuming. In addition, if our IC Towerstacking patent is found to be invalid, our ability to exclude competitors frommaking, using or selling the same or similar products to our IC Tower stackingproducts would cease. In addition, if we are found to infringe valid patents ofothers, we may be excluded from using the infringed technology without alicense, which may not be available on commercially reasonable terms, if atall.

 

**Ifindustry sales of products using Flash memory do not grow, our revenues, grossmargins and profitability would be harmed.**

 

The market forconsumer electronics incorporating Flash memory is relatively new and emerging.The success of our Flash business will depend largely on the level of consumerinterest in consumer 

 

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electronics utilizing Flashmemory, such as digital cameras, MP3 digital audio players and personal digitalassistants, or PDAs, many of which have only recently been introduced to themarket. If sales of products using Flash memory do not increase, we will beunable to grow our Flash business. In addition, if we are unable to anticipateand fulfill customer demand for our products, we may lose sales to ourcompetitors.

 

**Demandfor our products would decline if the market for Flash memory does not develop,or if a competing technology displaces Flash memory.**

 

There iscurrently an absence of a single Flash memory standard. It is possible thatFlash memory standards other than those to which our products conform willemerge as the industry standard. If we are unable to anticipate and adequatelyallocate our resources in a timely and efficient manner toward the productionand development of industry-standard Flash memory products, we may experiencesignificant delays in releasing new and commercially viable products. Thesedelays would provide a competitor a first-to-market opportunity and allow acompetitor to achieve greater market share. Some of our competitors are in abetter financial and marketing position from which to influence industry acceptanceof a particular Flash memory standard or competing technology than we are. Inparticular, a primary source of competition may come from companies that offeralternative technologies such as ferroelectric random access memory products.If a competing technology replaces or takes significant market share from theFlash memory market, we would not be able to sell our Flash products.

 

**Theexecution of our growth strategy depends on our ability to retain keypersonnel, including our executive officers, and to attract qualifiedpersonnel.**

 

Competitionfor employees in our industry is intense. We have had and may continue to havedifficulty hiring the necessary engineering, sales and marketing and managementpersonnel to support our growth. The successful implementation of our businessmodel and growth strategy depends on the continued contributions of our seniormanagement and other key research and development, sales and marketing andoperations personnel, including Manouch Moshayedi, our Chief Executive Officer,Mike Moshayedi, our President, and Mark Moshayedi, our Chief Operating Officer,Chief Technical Officer and Secretary. The loss of any key employee, thefailure of any key employee to perform in his or her current position, or theinability of our officers and key employees to expand, train and manage ouremployee base would prevent us from executing our growth strategy.

 

**Ourproprietary technology and intellectual property may not be adequatelyprotected, which could harm our competitive position.**

** **

**               **Ourproprietary technology and other intellectual property are critical to oursuccess. We protect our intellectual property rights through patents,trademarks, copyrights and trade secret laws, confidentiality procedures andemployee disclosure and invention assignment agreements. It is possible thatour efforts to protect our intellectual property rights may not:

 

•       preventthe challenge, invalidation or circumvention of our existing patents;

 

•       resultin patents that lead to commercially viable products or provide competitiveadvantages for our products;

 

•       preventour competitors from independently developing similar products, duplicating ourproducts or designing around the patents owned by us;

 

•       preventthird-party patents from having an adverse effect on our ability to dobusiness;

 

•       provideadequate protection for our intellectual property rights;

 

19

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•       preventdisputes with third parties regarding ownership of our intellectual propertyrights;

 

•       preventdisclosure of our trade secrets and know-how to third parties or into thepublic domain; and

 

•       resultin patents from any of our pending applications.

 

                As part of our confidentiality procedures, weenter into non-disclosure and invention assignment agreements with all of ouremployees and attempt to control access to and distribution of our technology,documentation and other proprietary information. However, if such agreementsare found to be unenforceable, we may be unable to adequately protect ourintellectual property rights. In addition, despite these procedures, thirdparties could copy or otherwise obtain and make unauthorized use of ourtechnologies or independently develop similar technologies.

 

                We have not applied and do not expect to applyfor patent protection in foreign countries. In addition, the laws of foreigncountries may not adequately protect our intellectual property rights. ManyU.S. companies have encountered substantial infringement problems in someforeign countries. Because we sell some of our products overseas, we haveexposure to foreign intellectual property risks.

 

**Ourindemnification obligations for the infringement by our products of theintellectual property rights of others could require us to pay substantialdamages.**

** **

**               **Wecurrently have in effect a number of agreements in which we have agreed todefend, indemnify and hold harmless certain of our customers and suppliers fromdamages and costs which may arise from the infringement by our products ofthird-party patents, trademarks or other proprietary rights. We mayperiodically have to respond to claims and litigate these types ofindemnification obligations. Any such indemnification claims could require usto pay substantial damages. Our insurance does not cover intellectual propertyinfringement.

 

**Ourindemnification obligations to our customers and suppliers for product defectscould require us to pay substantial damages.**

** **

**               **Anumber of our product sales and product purchase agreements provide that wewill defend, indemnify and hold harmless our customers and suppliers fromdamages and costs which may arise from product warranty claims or claims forinjury or damage resulting from defects in our products. We maintain insuranceto protect against certain claims associated with the use of our products, butour insurance coverage may not be adequate to cover all or any part of theclaims asserted against us. A successful claim brought against us that is inexcess of, or excluded from, our insurance coverage could substantially harmour business, financial condition and results of operations.

 

**Ourlimited experience in acquiring other businesses, product lines andtechnologies may make it difficult for us to overcome problems encountered inconnection with any acquisitions we may undertake.**

** **

**               **Weintend to pursue selective acquisitions to complement our internal growth. Ifwe make any future acquisitions, we could issue stock that would dilute ourshareholders’ percentage ownership, incur substantial debt, reduce our cashreserves or assume contingent liabilities. Although wecompleted the acquisition of assets of Irvine Networks, LLC, a leading-edgeengineering company, in January 2002, our experiencein acquiring other businesses, product lines and technologies is limited. In addition,the attention of our small management team may be diverted from our corebusiness if we undertake an acquisition. Potential acquisitions also involvenumerous risks, including, among others:

 

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•       Problemsassimilating the purchased operations, technologies or products;

 

•       Costsassociated with the acquisition;

 

•       Adverseeffects on existing business relationships with suppliers and customers;

 

•       Risksassociated with entering markets in which we have no or limited priorexperience;

 

•       Potentialloss of key employees of purchased organizations; and

 

•       Potentiallitigation arising from the acquired company’s operations before theacquisition.

 

                Our inability to overcome problemsencountered in connection with such acquisitions could divert the attention ofmanagement, utilize scarce corporate resources and harm our business. Inaddition, we are unable to predict whether or when any prospective acquisitioncandidate will become available or the likelihood that any acquisition will becompleted.

 

**Productreturns, price protection and order cancellations could reduce our revenues.**

 

To the extentwe manufacture products in anticipation of future demand that does notmaterialize, or in the event a customer cancels outstanding orders, we couldexperience an unanticipated increase in our inventory. A lack of consumerdemand for our products may also cause increased product returns. A majority ofour sales through commercial channels include limited rights to return unsoldinventory. In addition, while we may not be contractually obligated to acceptreturned products, we may determine that it is in our best interest to acceptreturns in order to maintain good relations with our customers. Product returnswould increase our inventory and reduce our revenues.  We have had to write-down inventory in the past for reasons suchas obsolescence, excess quantities and declines in market value below ourcosts. These inventory write-downs were approximately $759,000 in 2001 comparedto $2.9 million in 2000. In addition, we offer some of our Commercial Divisioncustomers limited price protection rights for inventories of our products heldby them. If we reduce the list price of our products, these customers mayreceive credits from us. We incurred price protection charges of approximately$1.8 million in 2001 compared to $557,000 in 2000.

 

We are alsosubject to repurchase agreements with various financial institutions inconnection with wholesale inventory financing. Under these agreements, we maybe required to repurchase inventory upon customer default with a financinginstitution and then resell the inventory through normal distribution channels.As of December 31, 2001, we have not been required to repurchase inventory inconnection with the customer default agreements noted above. However, it may bepossible that we will be required to repurchase inventory, upon customerdefault, in the future. Sales under such agreements were approximately $1.1million in 2001 compared to $2.7 million in 2000.

 

We have nolong-term volume commitments from our customers. Sales of our products are madethrough individual purchase orders and, in certain cases, are made under masteragreements governing the terms and conditions of the relationships. Customersmay change, cancel or delay orders with limited or no penalties. We haveexperienced cancellations of orders and fluctuations in order levels fromperiod-to-period and we expect to continue to experience similar cancellationsand fluctuations in the future which could result in fluctuations in ourrevenues.

 

**Wemay not be able to maintain or improve our competitive position because of theintense competition in the memory industry.**

 

We conductbusiness in an industry characterized by intense competition, rapidtechnological change, evolving industry standards, declining average salesprices and rapid product obsolescence. Our 

 

21

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competitors include many largedomestic and international companies that have substantially greater financial,technical, marketing, distribution and other resources, broader product lines,lower cost structures, greater brand recognition and longer-standingrelationships with customers and suppliers. As a result, our competitors may beable to respond better to new or emerging technologies or standards and tochanges in customer requirements. Our competitors may also be able to devotegreater resources to the development, promotion and sale of products, and maybe able to deliver competitive products at a lower price.

 

We expect toface competition from existing competitors and new and emerging companies thatmay enter our existing or future markets with similar or alternative productswhich may be less costly or provide additional features. In addition, some ofour significant suppliers are also our competitors, many of whom have theability to manufacture competitive products at lower costs as a result of theirhigher levels of integration. We also face competition from current andprospective customers that evaluate our capabilities against the merits ofmanufacturing products internally. Competition may arise due to the developmentof cooperative relationships among our current and potential competitors orthird parties to increase the ability of their products to address the needs ofour prospective customers. Accordingly, it is possible that new competitors oralliances among competitors may emerge and rapidly acquire significant marketshare.

 

We expect ourcompetitors will continue to improve the performance of their current products,reduce their prices and introduce new products that may offer greaterperformance and improved pricing, any of which could cause a decline in salesor loss of market acceptance of our products. In addition, our competitors maydevelop enhancements to or future generations of competitive products that mayrender our technology or products obsolete or uncompetitive.

 

**Recentterrorist activities and the continued threat of terrorism could adverselyaffect our business.**

 

Recentterrorist attacks in the United States, as well as continued threats ofterrorism within the United States and abroad and current and future militaryresponses to them, have resulted in delayed and canceled orders and createdmany economic and political uncertainties that make it extremely difficult forus, our customers and our suppliers to accurately forecast and plan futurebusiness activities.  This reduced predictability challenges our abilityto grow our business.  In particular, it is difficult to develop andimplement strategies, efficient operations, and effectively manage capacity andsupply-chain relationships.  In addition, the continued threats ofterrorism and the heightened security measures in response to such threats haveand may continue to cause significant disruption to commerce throughout theworld.  Disruption in air transportation in response to these threats orfuture attacks may result in transportation and supply-chain disruptions, increaseour costs for both receipt of inventory and shipment of products to ourcustomers, and cause customers to defer their purchasing decisions. Disruptions in commerce could also cause consumer confidence and spending todecrease or result in increased volatility in the United States and worldwidefinancial markets and economy.  They could also result in economicrecession in the United States or abroad.  Any of these occurrences couldhave a significant impact on our operating results, revenues and costs and mayresult in the volatility of the market price of our common stock and on thefuture price of our common stock.

 

**Wemay lose our competitive position if we fail to develop new and enhancedproducts and introduce them in a timely manner.**

 

Thehigh-performance computing, networking and communications, consumer electronicsand industrial markets are subject to rapid technological change, productobsolescence, frequent new product introductions and enhancements, changes inend-user requirements and evolving industry standards. Our ability to competein these markets will depend in significant part upon our ability tosuccessfully

 

22

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develop, introduce and sell newand enhanced products on a timely and cost-effective basis, and to respond tochanging customer requirements.

 

We haveexperienced, and may in the future experience, delays in the development andintroduction of new products. Our product development is inherently riskybecause it is difficult to foresee developments in technology, coordinate ourtechnical personnel, and identify and eliminate design flaws. Defects or errorsfound in our products after commencement of commercial shipments could resultin delays in market acceptance of these products. Delays in developing,manufacturing or marketing new or enhanced products could give our competitorsan advantage, hurt our reputation and harm our business, financial conditionand results of operations. Such products, even if introduced, may not gain marketacceptance. In addition, we may not be able to respond effectively to newtechnological changes or new product announcements by others.

 

**Obtainingadditional capital to fund our operations and finance our growth could impairthe value of your investment.**

 

If we expandmore rapidly than currently anticipated or if our working capital needs exceedour current expectations, we may need to raise additional capital throughpublic or private equity offerings or debt financings. Our future capitalrequirements depend on many factors including our research, development, salesand marketing activities. We do not know whether additional financing will beavailable if needed, or will be available on terms favorable to us. If wecannot raise needed funds on acceptable terms, we may not be able to develop orenhance our products, take advantage of future opportunities or respond tocompetitive pressures or unanticipated requirements. To the extent we raiseadditional capital by issuing equity securities, our shareholders mayexperience substantial dilution and the new equity securities may have greaterrights, preferences or privileges than our existing common stock.

 

**Weface risks associated with doing business in foreign countries, includingforeign currency fluctuations and trade barriers, that could lead to a decreasein demand for our products or an increase in the cost of the components used inour products.**

 

The volatilityof general economic conditions and fluctuations in currency exchange ratesaffect the prices of our products and the prices of the components used in ourproducts. International sales of our products accounted for 16.0% and 13.4% ofour revenues in 2001 and 2000, respectively. No single foreign country accounted for more than 10.0% of our revenuesin 2001 or 2000.  For 2001 and 2000,more than 95.0% of our international sales were denominated in U.S. dollars.However, if there is a significant devaluation of the currency in a specificcountry, the prices of our products will increase relative to that country’scurrency and our products maybe less competitive in that country. In addition,we cannot be sure that our international customers will continue to be willingto place orders denominated in U.S. dollars. If they do not, our revenues andresults of operations will be subject to foreign exchange fluctuations whichcould harm our business. We do not hedge against foreign currency exchange raterisks.

 

In addition,we purchase substantially all of the IC devices used in our products from localdistributors of foreign suppliers. Although our purchases of IC devices arecurrently denominated in U.S. dollars, devaluation of the U.S. dollar relativeto the currency of a foreign supplier would likely result in an increase in ourcost of IC devices.

 

Our internationalsales also are subject to certain other risks, including regulatory risks,tariffs and other trade barriers, timing and availability of export licenses,political and economic instability, difficulties in accounts receivablecollections, difficulties in managing distributors, lack of a local salespresence, difficulties in obtaining governmental approvals, compliance with awide variety of complex 

 

23

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foreign laws and treaties andpotentially adverse tax consequences. In addition, the United States or foreigncountries may implement quotas, duties, taxes or other charges or restrictionsupon the importation or exportation of our products, leading to a reduction insales and profitability in that country.

 

**Disruptionof our operations in our Santa Ana, California, manufacturing facility wouldsubstantially harm our business.**

 

All of ourmanufacturing operations are located in our facility in Santa Ana, California.Due to this geographic concentration, a disruption of our manufacturingoperations, resulting from sustained process abnormalities, human error,government intervention or natural disasters such as earthquakes, fires orfloods could cause us to cease or limit our manufacturing operations andconsequently harm our business, financial condition and results of operations.

 

**Compliancewith environmental laws and regulations could harm operating results.**

 

We are subjectto a variety of environmental laws and regulations governing, among other things,air emissions, waste water discharge, waste storage, treatment and disposal,and remediation of releases of hazardous materials. Our failure to comply withpresent and future requirements could harm our ability to continuemanufacturing our products. Such requirements could require us to acquirecostly equipment or to incur other significant expenses to comply withenvironmental regulations. The imposition of additional or more stringentenvironmental requirements, the results of future testing at our facilities, ora determination that we are potentially responsible for remediation at othersites where problems are not presently known to us, could result in expenses inexcess of amounts currently estimated to be required for such matters.

 

**Ourstock price is likely to be volatile and could drop unexpectedly.**

 

Our commonstock has been publicly traded only since September 29, 2000. The market priceof our common stock has been subject to significant fluctuations since the dateof our initial public offering.  Thestock market has from time to time experienced significant price and volumefluctuations that have affected the market prices of securities, particularlysecurities of technology companies. As a result, the market price of our commonstock may materially decline, regardless of our operating performance. In thepast, following periods of volatility in the market price of a particularcompany’s securities, securities class action litigation has often been broughtagainst that company. We may become involved in this type of litigation in thefuture. Litigation of this type is often expensive and diverts management’sattention and resources.

 

**ITEM 2.           PROPERTIES**

 

We occupy twoleased facilities of approximately 24,500 and 48,600 square feet in Santa Ana,California, in which our executive offices, manufacturing, engineering,research and development and testing operations are located. We lease the24,500 square foot facility from MDC Land LLC, a limited liability companyowned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each of whom isan executive officer, director and major shareholder of SimpleTech. This leaseexpires in March 2005 and the base rent is approximately $17,000 per month. Wealso lease the 48,600 square foot facility from MDC Land LLC. This leaseexpires in May 2005, and the base rent is approximately $33,000 per month. Inaddition, we lease a 12,000 square foot research and development facility inIrvine, California. This lease expires in July 2005 and the base rent is approximately$18,000 per month.  We also leasevarious small facilities for our sales offices and storage. We believe that ourexisting leased space is adequate for our current operations and that suitablereplacement and additional spaces will be available in the future oncommercially reasonable terms.

 

24

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**ITEM 3.           LEGALPROCEEDINGS**

 

**DPAC Technologies, Inc.—PatentInfringement**

 

                On September 23, 1998, we filed a lawsuit against DPACTechnologies, Inc., formerly Dense-Pac Microsystems, Inc. ("DPAC"),in the United States District Court for the Central District of California forinfringement of our IC Tower stacking patent, U.S. Patent No. 5,514,907.We sought damages, including prejudgment interest, an injunction againstfurther infringement of our patent by DPAC, treble damages and attorneys’ fees.DPAC filed an answer to our complaint denying our claim of infringement,asserted a defense of patent invalidity against our IC Tower stacking patentand asserted a counterclaim against us alleging infringement of its stackingpatent, U.S. Patent No. 4,956,694. On March 29, 2001, the court entered finaljudgement finding DPAC did not infringe our patent and that we did not infringeDPAC’s patent. We appealed the ruling against us, and that ruling was affirmedMarch 7, 2002. We anticipate that the affirmance will have no materialimpact on our on-going business. DPAC did not appeal the ruling in our favor,and that ruling is now final.

 

                On October 17, 2000, we received a reissue patent of the ‘907 patentfrom the U.S. Patent and Trademark Office. The reissue patent is U.S. PatentNo. Re. 36,916.

 

                On February 21, 2001, we filed a new lawsuit against DPAC in theUnited States District Court for the Central District of California forinfringement of our IC Tower stacking reissue patent, U.S. Patent No. Re.36,916. We are seeking damages and an injunction against infringement of ourpatent by DPAC. On March 13, 2001, DPAC filed an answer to our complaintdenying our claim of infringement, and asserted a defense of patent invalidityagainst our IC Tower stacking reissue patent. In addition, DPAC counterclaimedalleging misappropriation of unspecified technology and the sale of products byus incorporating such technology alleged to have been misappropriated. Thecourt stayed action in the litigation pending the outcome of appeal in theabove-referenced litigation.

 

**Lemelson Medical, Education & ResearchFoundation, LLP — Patent Infringement**

 

                We received notice on November 26, 2001, that the Lemelson Medical,Education & Research Foundation, LLP (“Lemelson Foundation”) filed acomplaint on November 13, 2001, against us and other defendants.  Thecomplaint was filed in the District Court of Arizona and alleges that our manufacturingprocesses infringe several patents that the Lemelson Foundation allegedlyowns.  The complaint also states that these allegedly infringed patentsrelate to machine vision technology and bar coding technology.  On March7, 2002, we were served with the Lemelson Foundation complaint. Additionally, the judge in this case has indicated that he intends to stay thiscase as to any defendant whose alleged infringement concerns only those patentsrelating to machine vision technology and bar coding 

 

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technology, pending resolution of the SymbolTechnologies v. Lemelson case, which involves the same patents.  Because of the preliminary stage of thiscase, an estimate of potential damages, if any, would be premature andspeculative, and we have not made any such estimate at this time.

 

                We are not currently involved in any other material legal proceedings,nor have we been involved in any such proceedings that has had or may have asignificant effect on our company. We are not aware of any other material legalproceedings threatened or pending against us. 

 

**ITEM 4.           SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

26

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**PART II.**

** **

**ITEM 5.           MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS**

 

**MarketInformation**

 

Our common stock has traded on The Nasdaq National Market under thesymbol “STEC.”  Our initial publicoffering of stock occurred on September 29, 2000.  Prior to that time, there was no public market for our commonstock. The following table sets forth the range of high and low intra-day salesprices reported on The Nasdaq National Market for our common stock for theperiods indicated.

 

|                           |   | **Price range of Common Stock** |   |
|--------------------------------|--------|---------------------------------|--------|
|                           |   | **High**                        |   | **Low** |   |
| Year Ended  December 31, 2000: |   |                            |   |   |   |
| Third Quarter                  |   | $                               | 11.53  |   | $ |  9.00 |   |
| Fourth Quarter                 |   | $                               | 9.33   |   | $ |  2.88 |   |

 

|                           |   | **Price range of Common Stock** |   |
|--------------------------------|--------|---------------------------------|--------|
|                           |   | **High**                        |   | **Low** |   |
| Year Ended  December 31, 2001: |   |                            |   |   |   |
| First Quarter                  |   | $                               | 6.00   |   | $ | 2.50 |   |
| Second Quarter                 |   | $                               | 3.49   |   | $ | 2.20 |   |
| Third Quarter                  |   | $                               | 3.15   |   | $ | 1.03 |   |
| Fourth Quarter                 |   | $                               | 3.60   |   | $ | 1.30 |   |

 

**RecentShare Prices**

 

The followingtable sets forth the closing sales prices per share of our common stock on TheNasdaq National Market on (i) December 28, 2001, and (ii) March 14, 2002.  Because the market price of our common stockis subject to fluctuation, the market value of the shares of our common stockmay increase or decrease.

 

|              |   | **Closing Price** |   |
|-------------------|--------|-------------------|--------|
|              |   |              |   |
| December 28, 2001 |   | $                 | 2.95   |   |
| March 14, 2002    |   | $                 | 8.00   |   |

 

**Holders**

 

As of March14, 2002, there were 63 holders of record of our common stock.

 

**DividendPolicy**

 

Prior to ourconversion from an S corporation to a C corporation in September 2000, we paiddistributions to our S corporation shareholders in amounts generally consistentwith their tax liabilities arising from their allocable share of S corporationearnings.  We also made distributions ofnotes to our shareholders of record as of September 20, 2000, in an aggregateamount equal to our total earnings from the date of our formation throughSeptember 26, 2000.

 

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Since becominga C corporation, we have not declared or paid any cash dividends on our commonstock and do not expect to do so in the foreseeable future. We currently intendto retain all available funds for use in the operation and expansion of ourbusiness. Any future determination to pay dividends will be at the discretionof our board of directors and will depend principally upon our results ofoperations, financial conditions, capital requirements, contractual and legalrestrictions and other factors the board deems relevant.

 

Under theterms of our line of credit with Comerica Bank, we have agreed to not declareor pay any cash dividends or make any other cash distributions with respect toshares of our capital stock without the prior written consent of ComericaBank.  See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources” and “Note 6 of the notes to our consolidated financial statements.”

 

**RecentSales of Unregistered Securities**

 

None

 

**Useof Proceeds from Sales of Registered Securities**

 

On October 4,2000, we completed the initial public offering of our common stock pursuant toour Registration Statement on Form S-1 (File No. 333-32478) that was declaredeffective by the Securities and Exchange Commission on September 28, 2000.There has been no material change with respect to our use of proceeds from ourinitial public offering to the information discussed in our Quarterly Report onForm 10-Q for the nine months ended September 30, 2000.

 

**ITEM 6.           SELECTEDFINANCIAL DATA**

 

You shouldread the following selected consolidated financial data in conjunction with ourconsolidated financial statements and related notes and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”appearing elsewhere in this Report. The consolidated statement of operationsdata for the years ended December 31, 1999 through 2001 and the consolidatedbalance sheet data at December 31, 2000 and 2001 were derived from ourconsolidated financial statements that have been audited byPricewaterhouseCoopers LLP, independent accountants, and are included elsewherein this Report. The consolidated statement of operations data for the yearsended December 31, 1997 and 1998 and the consolidated balance sheet data atDecember 31, 1997 through 1999 were derived from our audited consolidatedfinancial statements and are not included in this Report.

 
|                                                          |   | **Year Ended  December 31,**                        |       |
|---------------------------------------------------------------|--------|-----------------------------------------------------|------------|
|                                                          |   | **1997**                                            |       | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
|                                                          |   | **(in thousands, except share and per share data)** |       |
| **Consolidated Statement of  Operations Data:**          |   |                                                |       |   |   |   |   |   |   |   |   |
| Net revenues                                                  |   | $                                                   | 159,088    |   | $ | 122,288 |   | $ | 192,593 |   | $ | 308,316 |   | $ | 164,241 |   |
| Cost of revenues                                              |   | 131,094                                             |       | 97,930 |   | 152,743 |   | 239,964 |   | 127,691 |   |
| Gross profit                                                  |   | 27,994                                              |       | 24,358 |   | 39,850 |   | 68,352 |   | 36,550 |   |
| Operating expenses                                            |   |                                                |       |   |   |   |   |   |   |   |   |
| Sales and marketing                                           |   | 15,971                                              |       | 13,340 |   | 14,150 |   | 21,588 |   | 18,078 |   |
| General and administrative                                    |   | 8,780                                               |       | 9,381 |   | 9,755 |   | 11,853 |   | 11,564 |   |
| Research and development                                      |   | 2,154                                               |       | 2,180 |   | 1,832 |   | 3,745 |   | 4,426 |   |
| Non-recurring expense                                         |   | —                                              |       | — |   | — |   | 1,810 |   | — |   |
| Total operating expenses                                      |   | 26,905                                              |       | 24,901 |   | 25,737 |   | 38,996 |   | 34,068 |   |
| Income (loss) from operations                                 |   | 1,089                                               |       | (543 | ) | 14,113 |   | 29,356 |   | 2,482 |   |
| Interest and other expense (income), net                      |   | 1,713                                               |       | 1,597 |   | 2,128 |   | 1,158 |   | (1,395 | ) |
| Income (loss) before provision (benefit)  for income taxes    |   | (624                                                | )          | (2,140 | ) | 11,985 |   | 28,198 |   | 3,877 |   |
| Provision (benefit) for income taxes                          |   | 2                                                   |       | 23 |   | (518 | ) | 2,838 |   | 1,537 |   |
| Net income (loss)                                             |   | $                                                   | (626       | ) | $ | (2,163 | ) | $ | 12,503 |   | $ | 25,360 |   | $ | 2,340 |   |
|                                                          |   |                                                |       |   |   |   |   |   |   |   |   |
| **Pro Forma Data (1):**                                       |   |                                                |       |   |   |   |   |   |   |   |   |
| Income (loss) before provision (benefit)  for income taxes    |   | $                                                   | (624       | ) | $ | (2,140 | ) | $ | 11,985 |   | $ | 28,198 |   |   |   |
| Pro forma provision (benefit) for income  taxes               |   | (237                                                | )          | (813 | ) | 4,554 |   | 10,883 |   |   |   |
| Pro forma net income (loss)                                   |   | $                                                   | (387       | ) | $ | (1,327 | ) | $ | 7,431 |   | $ | 17,315 |   |   |   |
| Net income (loss) per share (pro forma in  years 1997 - 2000) |   |                                                |       |   |   |   |   |   |   |   |   |
| Basic                                                         |   | $                                                   | (0.01      | ) | $ | (0.04 | ) | $ | 0.24 |   | $ | 0.53 |   | $ | 0.06 |   |
| Diluted                                                       |   | $                                                   | (0.01      | ) | $ | (0.04 | ) | $ | 0.23 |   | $ | 0.50 |   | $ | 0.06 |   |
| Weighted average shares outstanding (2)                       |   |                                                |       |   |   |   |   |   |   |   |   |
| Basic                                                         |   | 30,601,027                                          |       | 30,601,027 |   | 30,601,027 |   | 32,393,218 |   | 38,126,687 |   |
| Diluted                                                       |   | 30,601,027                                          |       | 30,601,027 |   | 32,657,993 |   | 34,593,678 |   | 39,435,505 |   |
|                                                          |   |                                                |       |   |   |   |   |   |   |   |   |
|                                                          |   | **December  31,**                                   | ** ** |
|                                                          |   | **1997**                                            |       | **1998** |   | **1999** |   | **2000** |   | **2001** | ** ** |
|                                                          |   | **(in thousands)**                                  |       |
| **Consolidated Balance Sheet Data:**                          |   |                                                |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                     |   | $                                                   | 2,572      |   | $ | 817 |   | $ | 3,779 |   | $ | 33,747 |   | $ | 51,831 |   |
| Working capital                                               |   | 14,247                                              |       | 11,283 |   | 22,855 |   | 64,300 |   | 64,543 |   |
| Total assets                                                  |   | 41,873                                              |       | 40,087 |   | 55,131 |   | 103,286 |   | 88,710 |   |
| Long-term portion of debt and                                 |   |                                                |       |   |   |   |   |   |   |   |   |
| capital lease obligations                                     |   | 18,401                                              |       | 18,132 |   | 15,681 |   | 1,642 |   | 384 |   |
| Total shareholders’ equity                               |   | 6,862                                               |       | 4,760 |   | 15,780 |   | 69,913 |   | 73,873 |   |

 

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(1) From our formation in March1990 to September 26, 2000, we elected for federal and state income taxpurposes to be treated as an S corporation under Subchapter S of the InternalRevenue Code of 1986 and comparable state tax laws and filed our federal andstate income tax returns on that basis. Accordingly, no provision has been madefor federal or certain state income taxes. Pro forma net income (loss) has beencomputed using an effective tax rate of 38% to reflect the estimated income taxexpense (benefit) as if we had been fully subject to federal and state incometaxes as a C corporation for all periods presented. Subsequent to thetermination of our S corporation status on September 26, 2000, we have paidfederal and state corporate-level income taxes as a C corporation.

 

(2) Reflects a 5.07 for 1 stocksplit of our common stock in September 2000. All share and per share amounts have been adjusted to give retroactiveeffect to the stock split.

 

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**ITEM7.****                                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

*The following discussion of our financialcondition and results of operations should be read in conjunction with ourfinancial statements and the related notes to such financial statementsincluded elsewhere in this Report beginning on page F-1.  The following discussion containsforward-looking statements that involve risks and uncertainties.  The statements are based on currentexpectations and actual results could differ materially from those discussedherein.  Factors that could cause orcontribute to the differences are discussed in “Business — Risk Factors” andelsewhere in this Report.*

 

**Overview**

 

SimpleTechnology, Inc., incorporated in 1990 and renamed SimpleTech, Inc. in May2001, is a technology solutions provider offering products based on DRAM, SRAMand Flash memory technologies. Headquartered in Santa Ana, California, thecompany is a leader in the design, development, manufacturing and marketing ofmemory solutions. In addition, we offer a line of high-density memory productsusing our three-dimensional IC Tower stacking technology that allows multiplememory chips to be stacked together to increase the capabilities of memorymodules without increasing the product footprint.  Our products are used in high-performance computing, networkingand communications, consumer electronics and industrial applications.

 

As a result ofincreased demand for consumer electronics and high-density memory products usedin Internet infrastructure and embedded applications, the percentage of ourrevenues derived from the sale of Flash memory and IC Tower stacking productsincreased from 13.0% in 1998 to 20.8% in 1999 and 40.2% in2000.  However, due to the softeningmacro-economic conditions and excess inventory levels at our IndustrialDivision customers in 2001, the percentage of our revenue derived from the saleof Flash memory and IC tower stacking products decreased to 34.1% in 2001.In 2001, our highest profit margin products were our IC Tower stackingproducts.

 

We sell ourproducts through our Industrial and Commercial Divisions.  Our Industrial Division was created in late1998 to enhance the marketing of our products to original equipmentmanufacturers, or OEMs.  Our CommercialDivision sells our products through the following five channels:  value added reseller, or VAR, mail order,commercial and industrial distribution, and retail. For further details on ourmajor customers, see “Business—Customers.” After experiencing year-over-year total revenue growth of 57.5% from1998 to 1999 and 60.1% from 1999 to 2000, both our Industrial and CommercialDivision revenues were negatively impacted in 2001 due to softeningmacro-economic conditions and severe declines in the price of DRAM and Flashcomponents, which resulted in significantly lower average selling prices.  In addition, our Industrial Divisionrevenues were further impacted by a build-up of inventory by our communicationsand networking customers in 2000.  We donot expect Industrial Division customer inventory levels to return to normallevels until at least the second half of 2002. In 2001, our Industrial Division revenues declined 66.7% and ourCommercial Division revenues declined 29.2%. Our total revenues and earnings bottomed in the third quarter of 2001with total revenues growing 7.2% sequentially in the fourth quarter of 2001.  In 2001, our Commercial Divisionsignificantly expanded our retail presence through the addition of newcustomers, including Sam’s Club and Circuit City.  Commercial Division units shipped increased 42.7% from 2000 to2001. In 2000 and 2001, our highest profit margin division was our IndustrialDivision. Although we began tracking revenues and gross margins on a divisionalbasis in 1999, we have not tracked, and do not intend to track, operatingexpenses on a divisional basis.

 

DRAM priceshave more than quadrupled from November 2001 to March 2002 and appear to havetemporarily stabilized.  Constraintmeasures enacted by suppliers during the second half of 2001, including theclosing of fab lines and consolidation among major DRAM manufacturers, havecontributed to rising DRAM prices and signs of recovery.  We believe these events will translate intoincreased average selling prices, revenues and gross profit dollars.

 

Historically,a relatively small number of customers have accounted for a significantpercentage of our revenues. Our ten largest customers accounted for an aggregateof 56.3% of our total revenues in 2001, 55.8% of our total revenues in 2000,and 44.3% of our total revenues in 1999. Our ten largest Industrial Divisioncustomers accounted for an aggregate of 71.0% of our Industrial Divisionrevenues or 20.8% of our total revenues in 2001, 81.3% of our IndustrialDivision revenues or 37.4% of our total revenues in 2000, and 75.4% of ourIndustrial 

 

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revenues or 19.4% of our totalrevenues in 1999. In 2001, Unisys accounted for 37.6% ofour Industrial Division revenues or 11.0% of our total revenues. In 2000, CiscoSystems accounted for 31.8% of our Industrial Division revenues or 14.6% of ourtotal revenues.  Our ten largestCommercial Division customers accounted for an aggregate of 61.6% of ourCommercial Division revenues or 43.6% of our total revenues in 2001, 50.5% ofour Commercial Division revenues or 27.3% of our total revenues in 2000, and47.6% of our Commercial Division revenues or 35.3% of our total revenues in1999. Our largest Commercial Division customer between 1999 and 2001, CDWComputer Centers accounted for 27.9% of our Commercial Division revenues or19.7% of our total revenues in 2001, 31.2% of our Commercial Division revenuesor 16.8% of our total revenues in 2000 and 26.1% of our Commercial Divisionrevenues or 19.4% of our total revenues in 1999. Other than Unisys and CDWComputer Centers in 2001, Cisco Systems and CDW Computer Centers in 2000 andCDW Computer Centers in 1999, no customer accounted for more than 10.0% of ourtotal revenues in 2001, 2000 or 1999. The composition of our major customerbase changes from quarter to quarter as the market demand for our customers’products changes and we expect this variability will continue in the future. Weexpect that sales of our products to a small number of customers will continueto contribute materially to our revenues in the foreseeable future and believethat our financial results will depend in significant part upon the success ofour customers’ products.

 

Internationalsales of our products constituted 16.0% of our revenues in 2001, 13.4% of ourrevenues in 2000 and 15.0% of our revenues in 1999. No single foreign countryaccounted for more than 10.0% of our revenues in 2001, 2000 or 1999. We focusour international sales efforts on Industrial and Commercial Divisioncustomers, with sales to VARs constituting substantially all of ourinternational commercial sales. In 2001, 2000 and 1999, over 95.0% of ourinternational sales were denominated in U.S. dollars. Consequently, if thevalue of the U.S. dollar increases relative to a particular foreign currency,our products could become relatively more expensive, which could result in areduction of sales in a particular country. In addition, we purchasesubstantially all of the IC devices used in our products from localdistributors of Japanese, Korean and Taiwanese suppliers. Although ourpurchases of IC devices are currently denominated in U.S. dollars, devaluationof the U.S. dollar relative to the currency of a foreign supplier would likelyresult in an increase in our cost of IC devices. Our international sales alsocould be adversely affected by risks including regulatory risks, tariffs andother trade barriers.

 

In the past wehave been impacted by seasonal purchasing patterns resulting in higher sales inthe third and fourth quarters of each year. Our ability to adjust ourshort-term operating expenses in response to fluctuations in revenues islimited. As a result, if revenues are lower than expected in any given period,our results of operations could be harmed.

 

Revenues arerecognized at the time of shipment. A majority of our sales through commercialchannels include limited rights to return unsold inventory. In addition, whilewe may not be contractually obligated to accept returned products, we maydetermine that it is in our best interest to accept returns in order tomaintain good relations with our customers. Product returns would increase ourinventory and reduce our revenues. We have had to write-down inventory in thepast for reasons such as obsolescence, excess quantities and declines in marketvalue below our costs. These inventory write-downs were approximately $759,000in 2001, $2.9 million in 2000 and $1.2 million in 1999. Increased inventorywrite-downs in 2000 were primarily attributable to sharp declines in componentprices during the fourth quarter. We also have price protection agreements witha number of our Commercial Division customers in which we retain limited liabilityfor price declines related to unsold inventory. If we reduce the list price ofour products, these customers may receive credits from us. We incurred priceprotection charges of approximately $1.8 million in 2001, $557,000 in 2000 and$367,000 in 1999. Price protection charges increased in 2001 due to increasedcomponent price volatility.

 

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From ourformation in March 1990 through September 26, 2000, we elected for federal andstate income tax purposes to be treated as an S corporation under Subchapter Sof the Internal Revenue Code of 1986 and comparable state tax laws and filedour federal and state income tax returns during that period on that basis.Subsequent to our S corporation termination on September 26, 2000, we have paidfederal and state corporate-level income taxes as a C corporation.

 

**Resultsof Operations**

 

The followingtable sets forth, for the periods indicated, certain consolidated statement ofoperations data reflected as a percentage of revenues.

 
|                                     |   | **Year Ended  December 31,** |   |
|------------------------------------------|--------|------------------------------|--------|
|                                     |   | **2001**                     |   | **2000** |   | **1999** |   |
| Net revenues                             |   | 100.0                        | %      | 100.0 | % | 100.0 | % |
| Cost of revenues                         |   | 77.7                         |   | 77.8 |   | 79.3 |   |
| Gross profit                             |   | 22.3                         |   | 22.2 |   | 20.7 |   |
| Operating expenses                       |   |                         |   |   |   |   |   |
| Sales and marketing                      |   | 11.0                         |   | 7.0 |   | 7.3 |   |
| General and administrative               |   | 7.0                          |   | 3.9 |   | 5.1 |   |
| Research and development                 |   | 2.7                          |   | 1.2 |   | 1.0 |   |
| Non-recurring expense                    |   | 0.0                          |   | 0.6 |   | 0.0 |   |
| Total operating expenses                 |   | 20.7                         |   | 12.7 |   | 13.4 |   |
| Income from operations                   |   | 1.6                          |   | 9.5 |   | 7.3 |   |
| Interest and other expense (income), net |   | (0.8                         | )      | 0.4 |   | 1.1 |   |
| Income before provision for income taxes |   | 2.4                          |   | 9.1 |   | 6.2 |   |
| Provision for income taxes [1]           |   | 1.0                          |   | 3.5 |   | 2.3 |   |
| Net income [1]                           |   | 1.4                          | %      | 5.6 | % | 3.9 | % |

 

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[1]  Pro forma in 1999 and 2000.

 

**Comparisonof the years ended December 31, 2001, 2000 and 1999**

 

*Net Revenues*.  Our revenues were $164.2 million in 2001,$308.3 million in 2000 and $192.6 million in 1999.  Sales of memory products accounted for 90.2% of our revenues in2001, 91.0 % of our revenues in 2000 and 89.8% of our revenues in 1999.   Revenues decreased 46.7% from 2000 to 2001primarily due to a 54.4% decrease in our average sales price from $125 in 2000to $57 in 2001, offset partially by a 16.0% increase in units shipped from 2.5million units in 2000 to 2.9 million units in 2001.  The decrease in our average sales price resulted from significantdeclines in DRAM and Flash component prices from October 2000 through November2001.  The increase in unit volumeresulted from increases of 37.7% for standard memory products and 29.7% forFlash products, partially offset by unit volume decreases of 68.4% for IC Towerstacking products and 41.2% for non-DRAM, non-Flash products such as SRAM, harddrive upgrade kits and connectivity products. Increases in Flash and standard memory units shipped resulted primarilyfrom market share gains achieved during 2001 in the retail channel, includingshipments to new retail customers such as Circuit City and Sam’s Club.  Decreases in IC Tower 

 

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stacking units shipped resultedfrom excess Industrial Division customer inventory levels throughout 2001. Themix of products sold varies from quarter to quarter and may vary in the future,affecting our overall average sales prices and gross margins.

 

Revenuesincreased 60.1% from 1999 to 2000 due to a 54.3% increase in our average salesprice from $81 in 1999 to $125 in 2000 and a 4.2% increase in unit volume from2.4 million units in 1999 to 2.5 million units in 2000. The increase in ouraverage sales price resulted from a shift in product mix to higher capacityDRAM, Flash and IC Tower stacking products. The increase in unit volumeresulted from unit volume increases of 386.4% for IC Tower stacking productsand 63.8% for Flash products, partially offset by unit volume decreases of 2.7%for standard memory products and 45.5% for non-DRAM, non-Flash products such asproducts manufactured on a consignment basis, SRAM, hard drive upgrade kits andconnectivity products. The decrease in unit volume for non-DRAM, non-Flashproducts resulted from a substantial decline in the unit volume of productsmanufactured on a consignment basis from 1999 to 2000.

 

Our IndustrialDivision revenues were $48.0 million in 2001, $144.2 million in 2000 and $49.6million in 1999, compared to our Commercial Division revenues of  $116.2 million in 2001, $164.1 million in2000 and $143.0 million in 1999. Both our Industrial and Commercial Divisionrevenues were negatively impacted in 2001 due to softening macro-economicconditions and severe declines in the price of DRAM and Flash components, whichresulted in significantly lower average selling prices.  Our Industrial Division revenues werefurther impacted by a build-up of inventory by our communications andnetworking customers in 2001.  We do notexpect Industrial Division customer inventory levels to return to normal levelsuntil at least the second half of 2002. Our combined backlog was $4.5 million as of December 31, 2001, $22.4million as of December 31, 2000 and $13.2 million as of December 31, 1999. OurIndustrial Division backlog was $3.8 million as of December 31, 2001, $21.4million as of December 31, 2000 and $12.7 million as of December 31, 1999,compared to our Commercial Division backlog of $721,000 as of December 31, 2001,$1.0 million as of December 31, 2000 and $485,000 as of December 31, 1999. From2000 to 2001, the decrease in Industrial Division backlog resulted from abuild-up of inventory by our Industrial Division customers, which led to asignificant reduction of orders. From 1999 to 2000, the increase in IndustrialDivision backlog was primarily due to increasing Industrial Division orders andthe lengthening of time between our receipt of an Industrial Division order andthe required ship date of the order. Commercial Division backlog is typicallynominal since substantially all commercial orders are filled on a same-day ornext-day basis.

 

*Gross Profit.*  Our gross profit was $36.6 million in 2001,$68.4 million in 2000 and  $39.9 millionin 1999. Gross profit as a percentage of revenues was 22.3% in 2001, 22.2% in2000 and 20.7% in 1999.  Gross profit asa percentage of revenues remained relatively flat from 2000to 2001. Gross profit as a percentage of revenues expanded from 1999 to2000 primarily due to a shift in product mix to a greater concentration ofhigher margin, higher capacity Flash memory and IC Tower stackingproducts.  Gross profit as a percentageof revenues for our Industrial Division was 29.6% in 2001, 26.7% in 2000 and29.4% in 1999, compared to our Commercial Division gross profit as a percentageof revenues of 19.2% in 2001, 18.2% in 2000 and 17.7% in 1999. Gross marginsfor our Industrial Division were greater than for our Commercial Divisionprimarily due to the fact that our Industrial Division sold a larger percentageof higher margin, higher capacity DRAM, Flash memory and IC Tower stackingproducts.

 

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*Sales and Marketing*.  Sales and marketing expenses are comprisedprimarily of personnel costs and travel expenses for our domestic andinternational sales and marketing employees, commissions paid to internalsalespersons and independent manufacturers’ representatives, shipping costs andmarketing programs.  Sales and marketingexpenses were $18.1 million in 2001, $21.6 million in 2000 and $14.2 million in1999.  Sales and marketing expensesdecreased from 2000 to 2001 primarily due to reduced commissions and channelmarketing expenses related to lower revenues. Sales and marketing expenses increased from 1999 to 2000 primarily dueto increases in personnel costs related to the addition of internalsalespersons and increased commissions and channel marketing expenses relatedto higher revenues.  Sales and marketingexpenses as a percentage of revenues were 11.0% in 2001, 7.0% in 2000 and 7.3%in 1999. As a percentage of revenues, sales and marketing expenses increasedfrom 2000 to 2001 primarily due to reduced revenues and were relatively flat in1999 and 2000.

 

*General and Administrative.*  General and administrative expenses arecomprised primarily of personnel costs for our executive and administrativeemployees, professional fees and facilities overhead. General andadministrative expenses were $11.6 million in 2001, $11.9 million in 2000 and $9.8million in 1999.  General andadministrative expenses were relatively flat between 2000 and 2001. General andadministrative expenses increased from 1999 to 2000 primarily due to increasedstaffing and $1.4 million in additional legal costs. General and administrativeexpenses as a percentage of revenues were 7.0% in 2001, 3.8% in 2000 and 5.1%in 1999. As a percentage of revenues, general and administrative expensesincreased from 2000 to 2001 primarily due to reduced revenues. As a percentageof revenues, general and administrative expenses decreased from 1999 to 2000primarily due to increased revenues, partially offset by increased legal costsand expanded staffing.

 

*Research and Development.*  Research and development expenses arecomprised primarily of personnel costs for our engineering and design staff andthe cost of prototype supplies. Research and development expenses were $4.4million in 2001, $3.7 million in 2000 and $1.8 million in 1999. Research anddevelopment expenses as a percentage of revenues were 2.7% in 2001, 1.2% in2000 and 1.0% in 1999. Research and development expenses increasedyear-over-year from 1999 to 2001 primarily due to a significant expansion ofour research and development staff to serve our growing Industrial Division customerbase and to develop new product lines. In January 2002, we completed a $2.3million acquisition of the assets, including intellectual property, of IrvineNetworks, LLC, and hired their engineering staff. Irvine Networks has beendeveloping innovative content processing technology for Web-based serverplatforms. As a result of our acquisition of Irvine Networks, we expect ourresearch and development expenses to increase significantly in 2002 toapproximately $8 to $9 million.

 

*Non-Recurring Expenses.*  We did not havenon-recurring expenses in 2001 and in 1999. Non-recurring expenses were $1.8million in 2000 and were comprised of expenses relatedto a litigation settlement with Interactive Flight Technologies, Inc.  The settlement payment was made in January2001.

 

*Interest and Other Expense (Income),*Net.  Interest and other expense(income), net is comprised of interest expense related to our line of creditand equipment financing, interest income from our cash and cash equivalents andother expenses or income resulting from non-operating transactions .  Interest and other expense (income), net was($1.4) million in 2001, $1.2 million in 2000 and $2.1 million in 1999.  Interest expense was $200,000 in 2001, $1.6million in 2000 and $1.8 million in 1999. In October 2000, we paid down our line of credit balance to zero.  Interest income was $1.6 million in 2001,$407,000 in 2000 and $24,000 in 1999. Interest income increased in 2000 and 2001 due to a higher average cashbalance resulting primarily from initial public offering proceeds received inOctober 2000 and positive cash flow from operations in each quarter from thefourth quarter of 2000 through the fourth quarter of 2001.  In 1999, we contributed land with a costbasis of $325,000 to charity resulting in other expense.

 

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*Net Income.*   Net income was $2.3 million in 2001.  Assuming the termination of our Scorporation status, pro forma net income would have been $17.3 million in 2000and $7.4 million in 1999.

 

**Liquidityand Capital Resources**

 

As of December31, 2001, we had working capital of $64.5 million, including $51.8 million ofcash and cash equivalents, compared to working capital of $64.3 million,including $33.7 million of cash and cash equivalents, as of December 31, 2000.We had no outstanding principal balance under our $27.5 million line of creditwith Comerica Bank at December 31, 2001 and 2000. There is no unused line feeunder our line of credit agreement with Comerica Bank. Following our initialpublic offering, Comerica Bank has the option to reduce our availability underthe line of credit to an amount between $15.0 million and $20.0 million asdetermined by their sole and absolute discretion.  To date, availability under our line of credit has remained at$27.5 million. Current assets were 5.5 times current liabilities at the end of 2001,compared to 3.0 times current liabilities at the end of 2000.

 

Net cashprovided by operating activities was $24.2 million in 2001. Net cash providedby operating activities in 2001 resulted primarily from net income of $2.3million, a decrease in net accounts receivable of $16.0 million and a decreasein net inventory of $21.2 million, partially offset by a decrease in accountspayable of $15.6 million.  Inventory andaccounts payable decreased primarily due to the implementation of consignmentinventory programs with our three largest component suppliers during 2001 and asharp decline in DRAM and Flash pricing during the year.  Accounts receivable decreased due to thedecline in overall revenues.  Net cashprovided by operating activities was $18.1 million in 2000. Net cash providedby operating activities in 2000 resulted primarily from net income of $25.4million, increases in accounts payable and accrued and other liabilities of$8.4 million, and depreciation and amortization of $3.4 million, partiallyoffset by increases in net inventory of $12.8 million, net accounts receivableof $4.4 million and deferred income taxes of $1.6 million.  Inventory increased to support increasedIndustrial Division customer orders and lengthened time between our receipt ofsuch orders and their required ship date. Accounts receivable increased due toincreased overall revenues.

 

Net cash usedin investing activities was $5.4 million in 2001 and $2.4 million in 2000,attributable primarily to purchases of furniture, fixtures and equipment.Although we had no material capital expense commitments as of December 31,2001, we expect to spend approximately $6.0 to $8.0 million during the next 24months, primarily for manufacturing, testing and engineering equipment.

 

Net cash usedin financing activities totaled $674,000 in 2001. Net cash used in financingactivities in 2001 resulted primarily from the repayment of borrowings from abank and capital lease obligations of $1.6 million, partially offset by theissuance of common stock of $1.1 million related to our employee stock purchaseplan and stock option exercises. In 2001, we also repurchased a total of 72,500shares of our common stock under our authorized stock repurchase program at anaverage price of approximately $1.25 per share, resulting in a total cashpayment of approximately $92,000.  Netcash provided by financing activities totaled $14.3 million in 2000. Net cashprovided by financing activities in 2000 resulted primarily from the receipt of$65.1 million in connection with our initial public offering in September 2000,partially offset by distributions of $35.0 million to S Corporationshareholders and line of credit repayments of $12.5 million.

 

In prioryears, we entered into several capital leases and loans to financemanufacturing and testing equipment. Our obligations under capital leases were$554,000 on December 31, 2001 and $1.4 million on December 31, 2000, withinterest rates ranging from 8.1% to 9.6% per annum.  Our equipment financing loan balances were $1.0 million onDecember 31, 2001 and $1.8 million on December 31, 2000, with interest ratesranging from 

 

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7.5% to 9.1% per annum. One ofthe equipment note payable agreements contains various nonfinancial covenantsthat, among other things, limit distributions and dividends to our shareholderswithout the prior written consent of the lender, and requires the equipment toremain unencumbered by other liens. As of December 31 2001, we were incompliance with all covenants under the equipment note payable agreements.

 

We have madecash distributions of a portion of our S Corporation earnings to ourshareholders of record as of September 20, 2000, for reasons including paymentof their overall personal income taxes. On September 26, 2000, we distributedto our shareholders of record as of September 20, 2000, in proportion to theirownership of our shares, notes in an aggregate principal amount of $25.1million, equal to our undistributed earnings from the date of our formationthrough September 26, 2000. We used a portion of the net proceeds from ourinitial public offering to payoff the principal amount of these undistributedearnings notes on October 6, 2000 and November 3, 2000.

 

We believe thenet proceeds from our initial public offering, together with our existingassets, availability under our line of credit and expected cash flow fromoperations will be sufficient to fund our operations for the next 12 months.Thereafter, we may require additional sources of funds to continue to supportour business. Such funds, if needed, may not be available or may not beavailable on terms acceptable to us.

 

**Inflation**

 

Inflation wasnot a material factor in either revenue or operating expenses during the pastthree fiscal years ended December 31, 2001, 2000 and 1999.

 

**SubsequentEvents**

 

In January2002, we completed a $2.3 million acquisition of the assets, includingintellectual property, of Irvine Networks, LLC, and hired their engineeringstaff.  The on-going operation hasbecome our Xiran Division.  For the pasttwo-and-a-half years, Irvine Networks has been developing innovative contentprocessing technology for Web-based server platforms.  The effort is in the final stages of developing a workingprototype.  The completed products,incorporating our patented memory stacking technology, will be inserted intoWeb-based servers to enable the faster transmission of files.

 

# **RecentlyIssued Accounting Standards**

 

In August 2001, the FASBissued Statement of Financial Accounting Standards ("SFAS") No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144addresses financial accounting and reporting for the impairment or disposal oflong-lived assets. SFAS No. 144 develops one accounting model for long-livedassets to be disposed of by sale, requires that long-lived assets to bedisposed by sale be measured at the lower of book value or fair value less costto sell and expands the scope of discontinued operations to include allcomponents of an entity with operations that (a) can be distinguished from therest of the entity and (b) will be eliminated from the ongoing operations ofthe entity in a disposal transaction. SFAS No. 144 is effective for all fiscalyears beginning after December 15, 2001 and is therefore effective for usbeginning with our fiscal quarter ending March 31, 2002. We are currentlyevaluating the impact of the adoption of SFAS No. 144 on our consolidatedfinancial statements.

 

 

**Critical Accounting Policies and Estimates**

 

Our discussion and analysisof our financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amount of assets and liabilities and disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amount of revenues and expenses for each period.  The following represents a summary of ourcritical accounting policies, defined as those policies that we believe are:(a) the most important to the portrayal of our financial condition and resultsof operations, and (b) that require management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about the effectsof matters that are inherently uncertain.

 

• *Reserves for inventory excess, obsolescence and lower of market valuesover costs*—We generally purchase raw materials in quantities that weanticipate will be fully used in the near term. Changes in operating strategyand customer demand, and the somewhat unpredictable fluctuations in marketvalues for such materials, however, can limit our ability to effectivelyutilize all of the raw materials purchased and sold through resulting finishedgoods to customers for a profit.  Weregularly monitor potential inventory excess, obsolescence and lower marketvalues compared to costs and, when necessary, reduce the carrying amount of ourinventory to its market value.

 

• *Allowances for doubtful accounts and price protection*—Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments.  Additionally, we maintain allowances forlimited price protection rights for inventories of our products held by ourcustomers as a result of recent sales transactions to them.  If we reduce the list price of our products,these customers may receive a credit from us. We estimate the impact of such pricing changes on a regular basis andadjust our allowances accordingly.

 

• *Product returns*—We offer a majority of our customers thatpurchase product through our commercial channels limited rights to returnunsold inventory.  In addition, while wemay not be contractually obligated to accept returned products, we maydetermine that it is in our best interest to accept returns in order tomaintain good relationships with our customers. We provide for estimated futurereturns of inventory at the time of sale based on historical experience andactual results have been within our expectations.

 

• *Income taxes*—As part of the process of preparing ourconsolidated financial statements, we are required to estimate our income taxesin each of the jurisdictions in which we operate. The process incorporates anassessment of the current tax exposure together with temporary differencesresulting from different treatment of transactions for tax and financialstatement purposes. Such differences result in deferred tax assets andliabilities, which are included within the consolidated balance sheet.  The recovery of deferred tax assets fromfuture taxable income must be assessed and, to the extent that recovery is notlikely, we establish a valuation allowance. Increases in valuation allowances resultin the recording of additional tax expense. Further, if our ultimate taxliability differs from the periodic tax provision reflected in the consolidatedstatements of operations, additional tax expense maybe recorded.

 

• *Litigation and other contingencies*—Management regularlyevaluates our exposure to threatened or pending litigation and other businesscontingencies. Because of the uncertainties related to the amount of loss fromlitigation and other business contingencies, the recording of losses relatingto such exposures requires significant judgment about the potential range ofoutcomes. As additional information about current or future litigation or othercontingencies becomes available, our management will assess whether suchinformation warrants the recording of additional expense relating to ourcontingencies. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable. The results of theseestimates form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions.

 

• *Valuation of long-lived assets*—We assess the potentialimpairment of long-lived tangible and intangible assets whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. Changes in our operating strategy can significantly reduce theestimated useful life of such assets. (See Note 2 to the notes to our consolidated financial statementsregarding recently issued accounting standards).

 

**ITEM7A.        QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

At any time, fluctuations in interest rates could affect interestearnings on our cash and cash equivalents and interest expense on our existingvariable rate debt.  We believe that the effect, if any, of reasonablypossible near term changes in interest rates on our financial position, resultsof operations, and cash flows would not be material.  Currently, we do not hedge these interest rate exposures. The primary objective of our investment activities is to preserve capital. Wehave not used derivative financial instruments in our investment portfolio.

 

At December31, 2001, our cash and cash equivalents were $51.8 million and our variablerate debt, consisting of term loan borrowing, was $1.0 million.  We havenot utilized our floating rate debt under the revolving credit facility sinceOctober 2000.  At December 31, 2001, ourcash and cash equivalents included $50.8 million invested in money market andother interest bearing accounts and $1.0 

 

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millioninvested in marketable securities, which represents investments in UnitedStates treasury notes and treasury bonds.

 

At December31, 2001, our investment in marketable securities had a weighted-average timeto maturity of approximately 52 days. Marketable securities represent UnitedStates treasury notes and treasury bonds with a maturity of greater than threemonths. These securities are classified as held to maturity because we have theintention and ability to hold the securities to maturity. Gross unrealizedgains and losses on held-to-maturity marketable securities have historicallynot been material. Maturities on held-to-maturity marketable debt securitiesrange from three months to two years.

 

If interestrates were to decrease 1%, the result would be an annual decrease in ourinterest income related to our cash and cash equivalents of approximately$518,000.  Conversely, if interest rates were to increase 1%, the resultwould be an annual increase in our interest expense related to our variablerate debt of approximately $10,000.  However, due to the uncertainty ofthe actions that would be taken and their possible effects, this analysisassumes no such action.  Further, this analysis does not consider theeffect of the change in the level of overall economic activity that could existin such an environment.

 

More than95.0% of our international sales are denominated in U.S. dollars.  Consequently, if the value of the U.S.dollar increases relative to a particular foreign currency, our products couldbecome relatively more expensive.  Inaddition, we purchase substantially all of our IC devices from local distributorsof Japanese, Korean and Taiwanese suppliers. Fluctuations in the currencies of Japan, Korea or Taiwan could have anadverse impact on the cost of our raw materials.  To date, we have not entered any derivative instruments to managerisks related to interest rate or foreign currency exchange rates.

 

**ITEM8.****                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

 

SimpleTech,Inc., consolidated financial statements, schedule and supplementary data, aslisted under Item 14, appear in a separate section of this Report beginning onpage F–1.

 

**ITEM9****                                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None.

 

36

----

 

**PART III.**

 

**ITEM 10.****                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The informationrequired by this Item is included in the Proposal One: Elections of Directors,Management, and Section 16(a) Beneficial Ownership Reporting Compliancesections of our Proxy Statement to be filed in connection with our 2002 AnnualMeeting of Shareholders and is incorporated herein by reference.

 

**ITEM11.****                              EXECUTIVECOMPENSATION**

 

Theinformation required by this Item is included in the Executive Compensation andRelated Information sections of the our Proxy Statement to be filed inconnection with our 2002 Annual Meeting of Shareholders and is incorporatedherein by reference.

 

**ITEM 12.****                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Theinformation required by this Item is included in the Security Ownership ofCertain Beneficial Owners and Management section of our Proxy Statement to befiled in connection with the our 2002 Annual Meeting of Shareholders and isincorporated herein by reference.

 

**ITEM 13.****                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Theinformation required by this Item is included in the Compensation CommitteeInterlocks and Insider Participation and Certain Transactions sections of ourProxy Statement to be filed in connection with the our 2002 Annual Meeting ofShareholders and is incorporated herein by reference.

 

37

----

 

**PARTIV.**

** **

**ITEM14.****                              EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

**(a)****                                                                                                              Documentsfiled as part of this Report:**

 

1.  **Financial Statements. **Thefollowing financial statements of SimpleTech, Inc. are included in aseparate section of this Annual Report on Form 10-K commencing on thepages referenced below: 

 

|                                                                                                                         |   | **Page** |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| **SimpleTech, Inc., Consolidated Financial Statements**                                                                      |   |     |
| Report of Independent Accountants                                                                                            |   | F-2      |
| Consolidated Balance Sheets at December 31,  2001 and 2000                                                                   |   | F-3      |
| Consolidated Statements of Operations for  each of the three years in the period ended December 31, 2001                |   | F-4      |
| Consolidated Statements of Shareholders’  Equity for each of the three years in the period ended December 31, 2001 |   | F-5      |
| Consolidated Statements of Cash Flows for  each of the three years in the period ended December 31, 2001                |   | F-6      |
| Note to Consolidated Financial Statements                                                                                    |   | F-7      |

 

2.  **Financial Statement Schedule. **Thefollowing financial statement schedule is included in a separate section ofthis Annual Report on Form 10-K commencing on the pages referenced below.All other schedules have been omitted because they are not applicable, notrequired, or the information is included in the consolidated financial statementsor notes thereto. 

 
|                                                                            |   | **Page** |
|---------------------------------------------------------------------------------|--------|----------|
| Report of  Independent Accountants on Financial Statement Schedule              |   | S-1      |
| Schedule II  — Consolidated Valuation and Qualifying Accounts and Reserves |   | S-2      |

 

3.  **Exhibits**.  The Exhibitsfiled as part of this Annual Report are listed in Item 14(c) of this AnnualReport on Form 10-K.

 

**(b)****    Reports on Form 8-K:**

 

A CurrentReport on Form 8-K was filed by SimpleTech with the Securities and ExchangeCommission on October 3, 2001, to report under Item 5 the press release issuedto the public on September 27, 2001, announcing a stock repurchase program.

 

38

----

 

**(c)****    Exhibits**

 

The followingexhibits are filed as part of, or are incorporated by reference in, thisReport: 

 
| **Number**    |   | **Description**                                                                                                                                                                |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*          |   | Amended and  Restated Articles of Incorporation                                                                                                                                |
| 3.1.1*        |   | Certificate  of Amendment to the Amended and Restated Articles of Incorporation, dated  August 31, 2000                                                                   |
| 3.1.2‡   |   | Certificate  of Amendment to the Amended and Restated Articles of Incorporation, dated May  1, 2001.                                                                           |
| 3.2*          |   | Amended and  Restated Bylaws                                                                                                                                                   |
| 4.1*          |   | See Exhibits  3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws for  SimpleTech, Inc. defining the rights of holders of common stock of  SimpleTech, Inc. |
| 4.2*          |   | Specimen  Stock Certificate                                                                                                                                                    |
| 10.1*         |   | Amended and  Restated Lease, dated April 1, 2000, by and between MDC Land LLC and  SimpleTech, Inc.                                                                            |
| 10.2*         |   | Amended and  Restated Real Estate Lease, dated June 1, 2000, by and between MDC Land LLC  and SimpleTech, Inc.                                                                 |
| 10.3*         |   | Credit  Agreement, dated August 3, 1999, between SimpleTech, Inc. and Comerica Bank                                                                                            |
| 10.4*         |   | Security  Agreement, dated August 3, 1999, by SimpleTech, Inc. and Comerica Bank                                                                                               |
| 10.5*         |   | First  Amendment to Credit Agreement, dated as of December 29, 1999, by and between  Comerica Bank and SimpleTech, Inc.                                                        |
| 10.6*         |   | Second  Amendment to Credit Agreement, dated as of May 19, 2000, by and between  Comerica Bank and SimpleTech, Inc.                                                            |
| 10.7*         |   | Third  Amendment to Credit Agreement, dated as of May 19, 2000, by and between  Comerica Bank and SimpleTech, Inc.                                                             |
| 10.8*         |   | Fourth  Amendment to Credit Agreement, dated as of June 27, 2000, by and between  Comerica Bank and SimpleTech, Inc.                                                           |
| 10.9*         |   | Fifth  Amendment to Credit Agreement, dated as of June 27, 2000, by and between  Comerica Bank and SimpleTech, Inc.                                                            |
| 10.10**† |   | 2000 Stock  Incentive Plan (as amended and restated)                                                                                                                           |
| 10.11**† |   | 2000  Employee Stock Purchase Plan (as amended and restated)                                                                                                                   |
| 10.12*        |   | Form of  Indemnification Agreement between SimpleTech, Inc. and each of its directors  and officers                                                                            |
| 10.13*†  |   | Form of  Employment Agreement for Executive Officers of SimpleTech, Inc. (including a  schedule of substantially identical agreements)                                         |
| 10.14*        |   | Distribution  and Tax Indemnity Agreement, dated September 26, 2000, by and between  SimpleTech, Inc. and each of the shareholders of SimpleTech, Inc.                         |
| 10.15*        |   | Equipment  Lease, dated June 1, 1996, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                                |
| 10.16*        |   | Equipment  Lease, dated September 1, 1996, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                           |
| 10.17*        |   | Equipment  Lease, dated October 1, 1996, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                             |
| 10.18*        |   | Equipment  Lease, dated January 1, 1997, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                             |
| 10.19*        |   | Equipment  Lease, dated February 1, 1997, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                            |
| 10.20*        |   | Equipment  Lease, dated April 1, 1997, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                               |
| 10.21*        |   | License  Agreement, dated August 22, 2000, by and between Micron Electronics and  SimpleTech, Inc.                                                                             |
| 21.1          |   | List of  Subsidiaries of SimpleTech, Inc.                                                                                                                                      |
| 23.1          |   | Consent of  PricewaterhouseCoopers LLP                                                                                                                                         |

 

----

*              This exhibit was previously filedas an exhibit to the Company’s Registration Statement on Form S-1 declaredeffective September 28, 2000 (File No. 333-32478), and isincorporated by reference herein.

 

‡              This exhibit was previously filedas an exhibit to the Company’s Quarterly Report on Form 10-Q for the QuarterlyPeriod Ended March 31, 2001, with the Securities and Exchange Commission on May14, 2001, and is incorporated by reference herein.

 

**           This exhibit was previously filed asan exhibit to the Company’s Registration Statement on Form S-8 with theSecurities and Exchange Commission on February 9, 2001, and isincorporated by reference herein.

 

†              Indicates a management contract orcompensatory arrangement.

 

**(d)****       Financial StatementSchedule:**

 

The financialstatement schedule for SimpleTech, Inc. is included elsewhere in this Part IVof this Report.

 

39

----

 

**SIMPLETECH, INC.**

** **

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

|                                                                                                                          |   | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| **SimpleTech, Inc., Consolidated Financial Statements**                                                                       |   |     |
| Report of  Independent Accountants                                                                                            |   | F-2      |
| Consolidated  Balance Sheets at December 31, 2001 and 2000                                                                    |   | F-3      |
| Consolidated  Statements of Operations for each of the three years in the period ended  December 31, 2001                |   | F-4      |
| Consolidated  Statements of Shareholders’ Equity for each of the three years in the period  ended December 31, 2001 |   | F-5      |
| Consolidated  Statements of Cash Flows for each of the three years in the period ended  December 31, 2001                |   | F-6      |
| Notes to  Consolidated Financial Statements                                                                                   |   | F-7      |

 

F-1

----

 

**Report of Independent Accountants**

 

TheShareholders and Board of Directors

SimpleTech,Inc.

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations, shareholders’ equity and cash flowspresent fairly, in all material respects, the financial position of SimpleTech,Inc. and its subsidiaries (the “Company”) at December 31, 2001 and 2000, andthe results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2001, in conformity with accountingprinciples generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

PricewaterhouseCoopersLLP

OrangeCounty, California

January31, 2002

 

F-2

----

 

**SimpleTech, Inc.**

**Consolidated Balance Sheets**

**(in thousands, except share and per shareamounts)**

 
|                                                                                                                                                                                                |   | **December  31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                                                                                                                                |   | **2001**          |   | **2000** |   |
| **ASSETS:**                                                                                                                                                                                         |   |              |   |   |   |
| CURRENT ASSETS:                                                                                                                                                                                     |   |              |   |   |   |
| Cash and cash equivalents                                                                                                                                                                           |   | $                 | 51,831 |   | $ | 33,747 |   |
| Accounts receivable, net of allowances of  $1,080 and $972 at December 31, 2001 and 2000, respectively                                                                                              |   | 12,062            |   | 28,103 |   |
| Inventory, net                                                                                                                                                                                      |   | 9,843             |   | 31,052 |   |
| Deferred income taxes                                                                                                                                                                               |   | 786               |   | 2,060 |   |
| Other current assets                                                                                                                                                                                |   | 4,474             |   | 1,069 |   |
| Total current assets                                                                                                                                                                                |   | 78,996            |   | 96, 031 |   |
| Furniture, fixtures and equipment, net                                                                                                                                                              |   | 9,127             |   | 6,926 |   |
| Deferred income taxes                                                                                                                                                                               |   | 587               |   | 329 |   |
| Total assets                                                                                                                                                                                        |   | $                 | 88,710 |   | $ | 103,286 |   |
|                                                                                                                                                                                                |   |              |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY:**                                                                                                                                                      |   |              |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                |   |              |   |   |   |
| Accounts payable                                                                                                                                                                                    |   | $                 | 10,320 |   | $ | 25,950 |   |
| Current maturities of long-term debt                                                                                                                                                                |   | 741               |   | 761 |   |
| Current maturities of capital lease  obligations                                                                                                                                                    |   | 441               |   | 801 |   |
| Accrued and other liabilities                                                                                                                                                                       |   | 2,951             |   | 4,219 |   |
| Total current liabilities                                                                                                                                                                           |   | 14,453            |   | 31,731 |   |
| Long-term debt                                                                                                                                                                                      |   | 271               |   | 1,083 |   |
| Capital lease obligations                                                                                                                                                                           |   | 113               |   | 559 |   |
| Total liabilities                                                                                                                                                                                   |   | 14,837            |   | 33,373 |   |
| Commitments and contingencies (Note 9)                                                                                                                                                              |   |              |   |   |   |
|                                                                                                                                                                                                |   |              |   |   |   |
| SHAREHOLDERS’ EQUITY:                                                                                                                                                                          |   |              |   |   |   |
| Preferred stock, $0.001 par value,  20,000,000 shares authorized, no shares issued and outstanding                                                                                                  |   | —            |   | — |   |
| Common stock, $0.001 par value, 100,000,000  shares authorized, 38,272,050 shares issued and outstanding as of December  31, 2001; 37,572,667 shares issued and outstanding as of December 31, 2000 |   | 38                |   | 38 |   |
| Additional paid-in capital                                                                                                                                                                          |   | 65,484            |   | 63,911 |   |
| Unearned stock based compensation                                                                                                                                                                   |   | (15               | )      | (62 | ) |
| Retained earnings                                                                                                                                                                                   |   | 8,366             |   | 6,026 |   |
| Total shareholders’ equity                                                                                                                                                                     |   | 73,873            |   | 69,913 |   |
| Total liabilities and shareholders’ equity                                                                                                                                                     |   | $                 | 88,710 |   | $ | 103,286 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-3

----

** **

**SimpleTech, Inc.**

**Consolidated Statements of Operations**

**(in thousands, except share and per shareamounts)**

 
|                                                |   | **Year Ended  December 31,** |    |
|-----------------------------------------------------|--------|------------------------------|---------|
|                                                |   | **2001**                     |    | **2000** |   | **1999** |   |
| Net revenues                                        |   | $                            | 164,241 |   | $ | 308,316 |   | $ | 192,593 |   |
| Cost of revenues                                    |   | 127,691                      |    | 239,964 |   | 152,743 |   |
| Gross profit                                        |   | 36,550                       |    | 68,352 |   | 39,850 |   |
| Sales and marketing                                 |   | 18,078                       |    | 21,588 |   | 14,150 |   |
| General and administrative                          |   | 11,564                       |    | 11,853 |   | 9,755 |   |
| Research and development                            |   | 4,426                        |    | 3,745 |   | 1,832 |   |
| Non-recurring legal settlement (Note 9)             |   | —                       |    | 1,810 |   | — |   |
| Total operating expenses                            |   | 34,068                       |    | 38,996 |   | 25,737 |   |
| Income from operations                              |   | 2,482                        |    | 29,356 |   | 14,113 |   |
| Interest income                                     |   | (1,595                       | )       | (406 | ) | (24 | ) |
| Interest expense                                    |   | 200                          |    | 1,564 |   | 1,827 |   |
| Other expense                                       |   | —                       |    | — |   | 325 |   |
| Income before provision (benefit) for  income taxes |   | 3,877                        |    | 28,198 |   | 11,985 |   |
| Provision (benefit) for income taxes                |   | 1,537                        |    | 2,838 |   | (518 | ) |
| Net income                                          |   | $                            | 2,340   |   | $ | 25,360 |   | $ | 12,503 |   |
| Pro forma data (Note 2):                            |   |                         |    |   |   |   |   |
| Income before provision for income taxes            |   |                         |    | $ | 28,198 |   | $ | 11,985 |   |
| Provision for income taxes                          |   |                         |    | 10,883 |   | 4,554 |   |
| Pro forma net income                                |   |                         |    | $ | 17,315 |   | $ | 7,431 |   |
|                                                |   |                         |    |   |   |   |   |
| Net income per share:                               |   |                         |    |   |   |   |   |
| Basic                                               |   | $                            | 0.06    |   | $ | 0.53 (a | ) | $ | 0.24 (a | ) |
| Diluted                                             |   | $                            | 0.06    |   | $ | 0.50 (a | ) | $ | 0.23 (a | ) |
|                                                |   |                         |    |   |   |   |   |
| Weighted average shares outstanding:                |   |                         |    |   |   |   |   |
| Basic                                               |   | 38,126,687                   |    | 32,393,218 |   | 30,601,027 |   |
| Diluted                                             |   | 39,435,505                   |    | 34,593,678 |   | 32,657,993 |   |

 

----

(a) Pro forma (Note 2).

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-4

----

 

**SimpleTech, Inc.**

**Consolidated Statements of Shareholders’Equity**

**(in thousands, except share amounts)**

 
|                                                                |   |       |   | **Additional  Paid-In Capital** |   | **Unearned  Stock Based Compensation** |   | **Retained Earnings** |   | **Accumulated  Other Comprehensive Loss** |   | **Total  Shareholders’ Equity** |   |
|---------------------------------------------------------------------|--------|------------|--------|---------------------------------|--------|----------------------------------------|--------|-----------------------|--------|-------------------------------------------|--------|--------------------------------------|--------|
|                                                                |
| **Common  Stock**                                                   |
| **Shares**                                                          |   | **Amount** |
| Balances, December 31, 1998                                         |   | 30,601,027 |   | $                               | 30     |                                   | $      | 3,034                 |   | $                                         | (25    | )                                    | $      | 1,838 |   | $ | (116 | ) | $ | 4,761 |   |
| Comprehensive income:                                               |   |       |   |                            |   |                                   |   |                  |   |                                      |   |                                 |   |   |   |
| Net income                                                          |   |       |   |                            |   |                                   |   |                  |   | 12,503                                    |   |                                 |   | 12,503 |   |
| Foreign currency translation adjustment                             |   |       |   |                            |   |                                   |   |                  |   |                                      |   | 19                                   |   | 19 |   |
| Total comprehensive income                                          |   |       |   |                            |   |                                   |   |                  |   |                                      |   |                                 |   | 12,522 |   |
| Reduction in unearned compensation due to termination of services   |   |       |   |                            |   | (12                                    | )      | 12                    |   |                                      |   |                                 |   | — |   |
| Unearned compensation related to stock options granted to employees |   |       |   |                            |   | 261                                    |   | (261                  | )      |                                      |   |                                 |   | — |   |
| Compensation related to stock options vesting                       |   |       |   |                            |   |                                   |   | 133                   |   |                                      |   |                                 |   | 133 |   |
| Distributions to shareholders                                       |   |       |   |                            |   |                                   |   |                  |   | (1,636                                    | )      |                                 |   | (1,636 | ) |
| Balances, December 31, 1999                                         |   | 30,601,027 |   | 30                              |   | 3,283                                  |   | (141                  | )      | 12,705                                    |   | (97                                  | )      | 15,780 |   |
| Comprehensive income:                                               |   |       |   |                            |   |                                   |   |                  |   |                                      |   |                                 |   |   |   |
| Net income                                                          |   |       |   |                            |   |                                   |   |                  |   | 25,360                                    |   |                                 |   | 25,360 |   |
| Foreign currency translation adjustment                             |   |       |   |                            |   |                                   |   |                  |   |                                      |   | 97                                   |   | 97 |   |
| Total comprehensive income                                          |   |       |   |                            |   |                                   |   |                  |   |                                      |   |                                 |   | 25,457 |   |
| Compensation related to stock options vesting                       |   |       |   |                            |   |                                   |   | 79                    |   |                                      |   |                                 |   | 79 |   |
| Change in par value of common stock                                 |   |       |   | 1                               |   | (1                                     | )      |                  |   |                                      |   |                                 |   | — |   |
| Distributions to shareholders                                       |   |       |   |                            |   | (3,000                                 | )      |                  |   | (32,039                                   | )      |                                 |   | (35,039 | ) |
| Issuance of common shares                                           |   | 6,364,000  |   | 6                               |   | 62,726                                 |   |                  |   |                                      |   |                                 |   | 62,732 |   |
| Exercise of stock options                                           |   | 607,640    |   | 1                               |   | 671                                    |   |                  |   |                                      |   |                                 |   | 672 |   |
| Tax benefits from exercise of stock options                         |   |       |   |                            |   | 232                                    |   |                  |   |                                      |   |                                 |   | 232 |   |
| Balances, December 31, 2000                                         |   | 37,572,667 |   | 38                              |   | 63,911                                 |   | (62                   | )      | 6,026                                     |   | —                               |   | 69,913 |   |
| Net income                                                          |   |       |   |                            |   |                                   |   |                  |   | 2,340                                     |   |                                 |   | 2,340 |   |
| Compensation related to stock options vesting                       |   |       |   |                            |   |                                   |   | 47                    |   |                                      |   |                                 |   | 47 |   |
| Issuance of common shares under employee stock purchase plan        |   | 99,826     |   |                            |   | 327                                    |   |                  |   |                                      |   |                                 |   | 327 |   |
| Stock buyback                                                       |   | (72,500    | )      |                            |   | (92                                    | )      |                  |   |                                      |   |                                 |   | (92 | ) |
| Exercise of stock options                                           |   | 672,057    |   |                            |   | 729                                    |   |                  |   |                                      |   |                                 |   | 729 |   |
| Tax benefits from exercise of stock options                         |   |       |   |                            |   | 609                                    |   |                  |   |                                      |   |                                 |   | 609 |   |
| Balances, December 31, 2001                                         |   | 38,272,050 |   | $                               | 38     |                                   | $      | 65,484                |   | $                                         | (15    | )                                    | $      | 8,366 |   | $ | — |   | $ | 73,873 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-5

----

** **

**SimpleTech, Inc.**

**Consolidated Statements of Cash Flows**

**(in thousands)**

 
|                                                                                                |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                |   | **2001**                     |   | **2000** |   | **1999** |   |
| Cash flows from operating activities:                                                               |   |                         |   |   |   |   |   |
| Net income                                                                                          |   | $                            | 2,340  |   | $ | 25,360 |   | $ | 12,503 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                  |   |                         |   |   |   |   |   |
| Depreciation and amortization                                                                       |   | 3,152                        |   | 3,406 |   | 3,581 |   |
| Loss on sale of furniture, fixtures and  equipment                                                  |   | 50                           |   | 42 |   | 7 |   |
| Charitable contribution of land held for  investment                                                |   | —                       |   | — |   | 325 |   |
| Accounts receivable provisions                                                                      |   | 2,543                        |   | 1,253 |   | 486 |   |
| Inventory excess and obsolescence expense                                                           |   | 759                          |   | 2,940 |   | 1,214 |   |
| Deferred income taxes                                                                               |   | 1,016                        |   | (1,571 | ) | (519 | ) |
| Compensation related to stock options  vesting                                                      |   | 47                           |   | 79 |   | 133 |   |
| Other                                                                                               |   | —                       |   | 97 |   | 20 |   |
| Change in operating assets and liabilities:                                                         |   |                         |   |   |   |   |   |
| Accounts receivable                                                                                 |   | 13,498                       |   | (5,651 | ) | (11,769 | ) |
| Inventory                                                                                           |   | 20,450                       |   | (15,715 | ) | (5,613 | ) |
| Other assets                                                                                        |   | (2,796                       | )      | (524 | ) | 361 |   |
| Accounts payable                                                                                    |   | (15,630                      | )      | 5,917 |   | 6,955 |   |
| Accrued and other liabilities                                                                       |   | (1,268                       | )      | 2,447 |   | 111 |   |
| Net cash provided by operating activities                                                           |   | 24,161                       |   | 18,080 |   | 7,795 |   |
| Cash flows from investing activities:                                                               |   |                         |   |   |   |   |   |
| Purchase of furniture, fixtures and  equipment                                                      |   | (5,796                       | )      | (2,635 | ) | (1,241 | ) |
| Proceeds from sale of furniture, fixtures  and equipment                                            |   | 393                          |   | 229 |   | 35 |   |
| Advances to shareholders                                                                            |   | —                       |   | — |   | (918 | ) |
| Repayment of advances to shareholders                                                               |   | —                       |   | — |   | 1,400 |   |
| Net cash used in investing activities                                                               |   | (5,403                       | )      | (2,406 | ) | (724 | ) |
|                                                                                                |   |                         |   |   |   |   |   |
| Cash flows from financing activities:                                                               |   |                         |   |   |   |   |   |
| Repayments of borrowings from banks                                                                 |   | (832                         | )      | (697 | ) | (467 | ) |
| Payments on capital lease obligations                                                               |   | (806                         | )      | (935 | ) | (1,380 | ) |
| Proceeds from exercise of stock options                                                             |   | 729                          |   | 672 |   | — |   |
| Stock buyback                                                                                       |   | (92                          | )      | — |   | — |   |
| Repayments of line of credit, net                                                                   |   | —                       |   | (12,479 | ) | (697 | ) |
| Repayment of loans to related parties, net                                                          |   | —                       |   | 40 |   | 72 |   |
| Distributions to shareholders                                                                       |   | —                       |   | (35,039 | ) | (1,637 | ) |
| Proceeds from issuance of common stock                                                              |   | 327                          |   | 65,104 |   | — |   |
| Cost of equity issuance                                                                             |   | —                       |   | (2,371 | ) | — |   |
| Net cash (used in) provided by financing  activities                                                |   | (674                         | )      | 14,295 |   | (4,109 | ) |
| Net increase in cash                                                                                |   | 18,084                       |   | 29,969 |   | 2,962 |   |
| Cash and cash equivalents at beginning of  period                                                   |   | 33,747                       |   | 3,778 |   | 817 |   |
| Cash and cash equivalents at end of period                                                          |   | $                            | 51,831 |   | $ | 33,747 |   | $ | 3,779 |   |
| Supplemental disclosure of cash flow  information:                                                  |   |                         |   |   |   |   |   |
| Cash paid during the year:                                                                          |   |                         |   |   |   |   |   |
| Income taxes                                                                                        |   | $                            | 4,025  |   | $ | 3,927 |   | $ | 6 |   |
| Interest                                                                                            |   | $                            | 197    |   | $ | 1,567 |   | $ | 1,605 |   |
| Non-cash transactions:                                                                              |   |                         |   |   |   |   |   |
| Tax benefit from exercise of stock options                                                          |   | $                            | 609    |   | $ | 232 |   | $ | — |   |
| Purchase of furniture, fixtures and  equipment with long-term debt                                  |   | $                            | — |   | $ | — |   | $ | 114 |   |
| Refinance of furniture, fixtures and  equipment under capital lease obligations with long-term debt |   | $                            | — |   | $ | — |   | $ | 1,449 |   |
| Sale of equipment with a note receivable                                                            |   | $                            | — |   | $ | — |   | $ | 672 |   |
| Default on note receivable and return of  equipment                                                 |   | $                            | — |   | $ | — |   | $ | 419 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-6

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**SimpleTech, Inc.**

**Notes to Consolidated Financial Statements**

 

**1.      Company Organization:**

 

SimpleTechnology, Inc., incorporated in 1990 and renamed SimpleTech, Inc. in May2001, designs, manufactures and markets a comprehensive line of memory andstorage products, as well as connectivity products that connect memory cardsand hard drive upgrade kits to PCs. The Company’s memory and storage productsare based on dynamic random access memory, or DRAM, static random accessmemory, or SRAM, and Flash memory technologies. In addition, the Company offersa line of high-density memory products using three-dimensional IC Towerstacking technology that allows multiple memory chips to be stacked together toincrease the capabilities of memory modules without increasing the productfootprint. These products are used in high-performance computing, networkingand communications, consumer electronics and industrial applications.

 

**2.      Summary of Significant AccountingPolicies:**

 

*Basis of Consolidation:*

 

Theaccompanying consolidated financial statements include the accounts ofSimpleTech, Inc. and its subsidiaries in California, Canada and Scotland(collectively, the “Company”). All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

*Cash and Cash Equivalents:*

* *

Cash and cashequivalents consist primarily of cash in banks and money market funds. Allhighly liquid investments with a maturity date of three months or less whenacquired are considered to be cash equivalents. Cash and cash equivalents arecarried at cost, which approximates market.

* *

*Inventory:*

 

Inventory isstated at the lower of cost or market, with cost being determined on thefirst-in, first-out (“FIFO”) method of accounting.

 

*Furniture, Fixtures and Equipment:*

* *

Furniture,fixtures and equipment are stated at cost and depreciated using thestraight-line method. The Company’s estimated useful lives of the assets, otherthan leasehold improvements, range from four to five years for equipment andseven years for furniture and fixtures. Leasehold improvements and assets undercapital leases are amortized using the straight-line method over the shorter ofthe lease term or the estimated useful life of the assets.

 

Expendituresfor major renewals and betterments are capitalized, while minor replacements,maintenance and repairs, which do not extend the asset lives, are charged tooperations as incurred. Upon sale or disposition, the cost and relatedaccumulated depreciation are removed from the accounts and any gain or loss isincluded in operations.

 

The Companycontinually monitors events and changes in circumstances that could indicatethat the carrying balances of its furniture, fixtures and equipment may not berecoverable in accordance with the provisions of Statement of FinancialAccounting Standards (“SFAS”)

 

F-7

----

 

No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.”When such events or changes in circumstances are present, the Company assessesthe recoverability of long-lived assets by determining whether the carryingvalue of such assets will be recovered through undiscounted expected future cashflows. If the total of the future cash flows is less than the carrying amountof those assets, the Company recognizes an impairment loss based on the excessof the carrying amount over the fair value of the assets.

 

*Land Held for Investment:*

 

Land held forinvestment was recorded at the shareholders’ contributed historical cost, whichwas less than or approximated fair market value. Such land, with a cost of$325,000, was contributed to charity in 1999 and was reflected in otherexpense.

 

*Long-Term Debt:*

 

The fairvalues of the Company’s long-term debt have been estimated based on currentrates offered to the Company for debt of the same remaining maturities. Thecarrying amounts of the Company’s loans approximate their fair values.

* *

*Revenue Recognition:*

 

Product salesand related cost of sales are recognized upon the shipment of product tocustomers provided the Company has received a purchase order, the price isfixed or determinable, collectibility of the resulting receivable is reasonablyassured, returns are reasonably estimable and there are no remainingobligations. The terms of substantially all product sales are FOB shippingpoint. A substantial portion of the Company’s sales through its CommericalDivision includes limited rights to return unsold inventory. In addition, somecustomers have limited price protection rights for inventories of the Company’sproducts held by them. If the Company reduces the list price of their products,these customers may be entitled to receive credits from the Company. TheCompany provides for estimated future returns of inventory, limited priceprotection arrangements and the estimated costs of warranty at the time of salebased on historical experience. Actual results have been within management’sexpectations.

 

*Shipping and Handling Costs:*

 

Shipping andhandling costs incurred in a sales transaction to ship products to a customerare included in sales and marketing. For the years ended December 31, 2001,2000 and 1999, shipping and handling costs were approximately $2,400,000,$2,100,000 and $1,700,000, respectively.

 

*Advertising Costs:*

 

Advertisingcosts, which relate primarily to various print media expenditures, are expensedas incurred. For the years ended December 31, 2001, 2000 and 1999, advertisingcosts were approximately $2,914,000, $3,599,000 and $2,858,000, respectively.

 

*Income Taxes*:

 

Deferredincome taxes are recognized for the tax consequences in future years ofdifferences between the tax bases of assets and liabilities and their financialreporting amounts at each year-end based on enacted tax laws and statutoryrates applicable to the periods in which the differences are expected to affecttaxable income. Valuation allowances are established, when

 

F-8

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necessary, to reduce deferredincome tax assets to the amount expected to be realized. The provision forincome taxes represents the tax payable for the year and the change during theyear in deferred income tax assets and liabilities.

 

*Stock-Based Compensation:*

 

SFAS No. 123,“Accounting for Stock-Based Compensation,” encourages, but does not require,companies to record compensation cost for stock-based employee compensationplans at fair value. The Company has elected to continue to account for stock-basedcompensation using the intrinsic value method prescribed in AccountingPrinciples Board Opinion (“APB”) No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. Accordingly, compensation cost forstock options is measured as the excess, if any, of the estimated market priceof the Company’s underlying stock at the date of grant over the exercise priceof the option, amortized over the vesting period. The Company has adopted thedisclosure-only provisions of SFAS No. 123.

 

*Per Share Information:*

 

In 1997, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 128,“Earnings Per Share,” which established standards for the computation,presentation and disclosure requirements for basic and diluted earnings pershare for entities with publicly held common shares and potential commonshares. Basic earnings per share is computed by dividing net income by theweighted average number of shares outstanding. In computing diluted earningsper share, the weighted average number of shares outstanding is adjusted toadditionally reflect the effect of potentially dilutive securities.

 

For the yearsended December 31, 2001, 2000 and 1999, potentially dilutive securitiesconsisted solely of options and resulted in potential common shares of1,308,818, 2,200,460 and 2,056,966, respectively.

 

InSeptember 2000, the Company effected a 5.07 for 1.0 stock split of alloutstanding common stock and common stock options. All share and per shareamounts have been adjusted to give retroactive effect to the stock split forall periods presented.

 

*Pro Forma Net Income (unaudited):*

 

Pro forma netincome is computed using an effective tax rate of 38% to reflect the estimatedincome tax expense of the Company as if it had been subject to C corporation federaland state income taxes for the period, instead of S corporation income taxes.

 

*Segment Reporting:*

 

In 1997, theFASB issued SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” which supercedes substantially all the reportingrequirements previously required under SFAS No. 14, “Financial Reportingfor Business Segments of an Enterprise,” and establishes standards for the waythe Company reports information about operating segments. It also establishesstandards for related disclosures about products and services, geographic areasand major customers. Under SFAS No. 131, the determination of segments tobe reported in the financial statements is to be consistent with the manner inwhich management organizes and evaluates the internal organization to makeoperating decisions and assess performance. The adoption of this statement didnot have an impact upon the Company’s operating results or financial positionas this statement’s provisions affect only the disclosure of certain segmentinformation in the notes to the consolidated financial statements.

 

F-9

----

 

*Risks and Uncertainties:*

 

Financialinstruments, which potentially subject the Company to a concentration of creditrisk, principally consist of cash and cash equivalents and accounts receivable.As of December 31, 2001 and 2000, approximately 37% and 40%, respectively,of accounts receivable were concentrated with three customers. For the yearsended December 31, 2001, 2000 and 1999, sales to CDW Computer Centerscomprised 20%, 17% and 19%, respectively, of the Company’s revenues. For theyear ended December 31, 2001, sales to Unisys accounted for 11% of theCompany’s revenues. For the year ended December 31, 2000, sales to CiscoSystems accounted for 15% of the Company’s revenues. No other single customeraccounted for more than 10% of accounts receivable or revenues atDecember 31, 2001 and 2000, or for each of the three years in the periodended December 31, 2001. The Company generally does not require collateralon accounts receivable as the majority of the Company’s customers are large,well-established companies. Historically, bad debt provisions have beenconsistent with management’s expectations.

 

AtDecember 31, 2001 and 2000, the Company had amounts on deposit withfinancial institutions that were in excess of the federally insured limit of$100,000.

 

Themanufacturing operations of the Company are concentrated in a facility locatedin Santa Ana, California. As a result of this geographic concentration, adisruption in the manufacturing process resulting from a natural disaster orother unforeseen event could have a material adverse effect on the Company’sfinancial position and results of operations.

 

Certain of theCompany’s products utilize components that are purchased from a small number ofsources with whom the Company has no long-term contracts. An inability toobtain such components in the amounts needed on a timely basis or atcommercially reasonable prices could result in delays in product introductions,interruptions in product shipments or increases in product costs, which couldhave a material adverse effect on the Company’s financial position and resultsof operations.

 

*Management Estimates:*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

*Recently issued accounting standards:*

 

In August 2001, the FASBissued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-LivedAssets.” SFAS No. 144 addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. SFAS No. 144 develops oneaccounting model for long-lived assets that are to be disposed of by sale,requires that long-lived assets that are to be disposed by sale be measured atthe lower of book value or fair value less cost to sell and expands the scopeof discontinued operations to include all components of an entity withoperations that (1) can be distinguished from the rest of the entity and (2)will be eliminated from the on-going operations of the entity in a disposaltransaction. SFAS No. 144 is effective for all fiscal years beginning afterDecember 15, 2001 and is therefore effective for the Company beginning with itsfiscal quarter ending March 31, 2002. The Company is currently evaluating theimpact of the adoption of SFAS No. 144 on its consolidated financialstatements.

 

*Reclassifications:*

 

Certainamounts in the prior year consolidated financial statements have beenreclassified to conform to the current year presentation.

 

**3.             Related Party Transactions:**

 

The Companyoccupies two leased facilities of approximately 24,500 and 48,600 square feetin Santa Ana, California, in which its executive offices, manufacturing,engineering, research and development and testing operations are located. TheCompany leases both facilities from MDC Land LLC (“MDC”), a limited liabilitycompany owned by Manouch Moshayedi, Mike 

 

F-10

----

 

Moshayedi and Mark Moshayedi,each of whom is an executive officer, director and major shareholder ofSimpleTech. MDC has no operations other than leasing transactions with theCompany. An operating lease with MDC for the 24,500 square foot facility wassigned in April 2000. The lease term was decreased from 26 years to5 years, expiring in March 2005, and the monthly base rent waschanged from approximately $19,000 to approximately $17,000. An operating leasewith MDC for the 48,600 square foot facility was signed in June 2000. The48,600 square foot facility lease expires in May 2005, and the base rentis approximately $33,000 per month. Building rent expense for the years endedDecember 31, 2001, 2000 and 1999, amounted to $603,000, $446,000 and$228,000, respectively.

 

In 1996 and1997, the Company entered into equipment leases with MDC Land Corporation, acorporation owned by Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi. Eachlease has a term of five years and is accounted for as a capital lease.Equipment lease payments amounted to $385,000 in 2001, $574,000 in 2000, and$574,000 in 1999. In December 2001, the Company exercised its purchase optionunder the capital leases by purchasing all of the related equipment forapproximately $21,000.

 

During 1999,the Company made non-interest bearing advances to a development stage companyin Houston, Texas owned by Manouch Moshayedi, Mike Moshayedi and MarkMoshayedi, totaling $20,000 to fund working capital needs, at which time theaggregate amount due from the this entity totaled $502,000. Subsequently in1999, $314,000 was repaid by this development stage company and the remainingamount of these advances, $188,000, was repaid in conjunction with shareholderdistributions in December 1999.

 

During 1999,the Company made non-interest bearing advances totaling $898,000 to adevelopment stage company in Irvine, California owned by Manouch Moshayedi,Mike Moshayedi and Mark Moshayedi, to finance the development and fund theworking capital needs of this development stage company. In December 1999,these advances were repaid in full in conjunction with shareholderdistributions.

 

**4.             Inventory:**

 

Inventory consists of thefollowing:

 

|                 |   | **December  31,** |      |
|----------------------|--------|-------------------|-----------|
|                 |   | **2001**          |      | **2000** |   |
| Raw materials        |   | $                 | 5,421,000 |   | $ | 24,768,000 |   |
| Work-in-progress     |   | 927,000           |      | 759,000 |   |
| Finished goods       |   | 4,785,000         |      | 9,652,000 |   |
|                 |   | 11,133,000        |      | 35,179,000 |   |
| Valuation allowances |   | (1,290,000        | )         | (4,127,000 | ) |
|                 |   | $                 | 9,843,000 |   | $ | 31,052,000 |   |

 

F-11

----

 

**5.             Furniture, Fixtures and Equipment:**

 

Furniture, fixtures andequipment consist of the following:

 

|                                      |   | **December  31,** |      |
|-------------------------------------------|--------|-------------------|-----------|
|                                      |   | **2001**          |      | **2000** |   |
| Furniture and fixtures                    |   | $                 | 299,000   |   | $ | 294,000 |   |
| Equipment                                 |   | 21,557,000        |      | 16,769,000 |   |
|                                      |   | 21,856,000        |      | 17,063,000 |   |
| Accumulated depreciation and amortization |   | (12,729,000       | )         | (10,137,000 | ) |
|                                      |   | $                 | 9,127,000 |   | $ | 6,926,000 |   |

 

For the yearsended December 31, 2001, 2000 and 1999, the Company recorded depreciationand amortization expense of approximately $3,152,000, $3,406,000 and$3,581,000, respectively.

 

AtDecember 31, 2001 and 2000, furniture, fixtures and equipment includedapproximately $1,978,000 and $6,946,000, respectively, of assets under capitalleases with associated accumulated amortization of approximately $1,486,000 and$5,446,000, respectively. As discussed in Note 3, such amounts in 2000include approximately $2,304,000 of assets under capital leases with a relatedparty with associated accumulated amortization of approximately $1,981,000. InDecember 2001, the Company exercised its purchase option under the capitalleases with a related party by purchasing all of the related equipment forapproximately $21,000.

 

**6.             Line of Credit:**

 

EffectiveAugust 3, 1999, the Company entered into a line of credit agreement, asamended. Amounts borrowed thereunder are collateralized by substantially all ofthe Company’s assets. Terms of the agreement include a maximum borrowing amountof $27,500,000, subject to eligible accounts receivable and inventory balances,bearing interest at the prime rate and expiring in August 2002, unlessrenewed. There were no borrowings on this line of credit at December 31,2001 and 2000.

 

The provisionsof the line of credit agreement contain various nonfinancial and financialcovenants that, among other things, require the Company to maintain a minimumtangible net worth amount and a maximum debt to tangible net worth ratio. Thecovenants also limit capital expenditures, distributions and dividends that canbe made by the Company. As of December 31, 2001, the Company was incompliance with all such covenants.

 

**7.             Long-Term Debt:**

 

Long-term debtconsists of the following:

 

|                                                                                                                                                                                                                |   | **December  31,** |      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|
|                                                                                                                                                                                                                |   | **2001**          |      | **2000** |   |
| Equipment notes payable, principal and  interest payable in monthly installments of $70,671, maturing at various  dates through December 2004, collateralized by equipment, interest ranging  between 8.4% and 9.1% |   | $                 | 1,012,000 |   | $ | 1,738,000 |   |
| Other notes payable to a bank                                                                                                                                                                                       |   |              |      |   |   |
|                                                                                                                                                                                                                |   | –—      |      | 106,000 |   |
|                                                                                                                                                                                                                |   | 1,012,000         |      | 1,844,000 |   |
| Less current portion                                                                                                                                                                                                |   | (741,000          | )         | (761,000 | ) |
|                                                                                                                                                                                                                |   | $                 | 271,000   |   | $ | 1,083,000 |   |

 

F-12

----

 

The equipmentnotes payable agreements contain various nonfinancial covenants that, amongother things, limit distributions and dividends to shareholders and require theequipment to remain unencumbered by other liens.

 

Scheduledprincipal payments during each of the years ending December 31 are asfollows:

 

| 2002   |   | $       | 741,000   |   |
|--------|--------|---------|-----------|--------|
| 2003   |   | 129,000 |      |
| 2004   |   | 142,000 |      |
|   |   | $       | 1,012,000 |   |

 

**8.             Income Taxes:**

 

From formationin March 1990 to September 26, 2000, the Company had elected for U.S.federal income tax purposes to be treated as an S corporation underSubchapter S of the Internal Revenue Code. Under this election, the Company’sshareholders, rather than the Company, were subject to federal income taxes ontheir respective share of the Company’s taxable income. The Company had alsoelected similar treatment for California franchise tax purposes which, inaddition, requires a state income tax at the Company-level of 1.5%. OnSeptember 26, 2000, the Company terminated its Subchapter S election.Subsequent to the termination, the Company has paid federal and state corporate-level income taxes. In 1999 and 2000,pro forma net income has been computed as if the Company had been fully subjectto federal and state income taxes as a C corporation for all periodspresented.

 

The provision(benefit) for income taxes consists of the following: 

 
|                                       |   | **December  31,** |      |
|--------------------------------------------|--------|-------------------|-----------|
|                                       |   | **2001**          |      | **2000** |   | **1999** |   |
| Current                                    |   |              |      |   |   |   |   |
| Federal                                    |   | $                 | 527,000   |   | $ | 3,544,000 |   | $ | — |   |
| State                                      |   | (6,000            | )         | 496,000 |   | 1,000 |   |
| Foreign                                    |   | —            |      | 369,000 |   | — |   |
|                                       |   | 521,000           |      | 4,409,000 |   | 1,000 |   |
| Deferred                                   |   |              |      |   |   |   |   |
| Federal                                    |   | 948,000           |      | (1,752,000 | ) | — |   |
| State                                      |   | 68,000            |      | 181,000 |   | (519,000 | ) |
|                                       |   | 1,016,000         |      | (1,571,000 | ) | (519,000 | ) |
| Total provision (benefit) for income taxes |   | $                 | 1,537,000 |   | $ | 2,838,000 |   | $ | (518,000 | ) |

 

For 2001, thedifference between the effective rate and the expected U.S. federal tax rate isdue primarily to state taxes and other permanent differences between tax andfinancial reporting income.  For 2000,the difference between the effective tax rate and the expected U.S. federal taxrate is due primarily to an increase in deferred tax assets as a result ofterminating the Company’s S corporation status and income taxed at theshareholder level. For 1999, the 

 

F-13

----

 

difference between theeffective tax rate and the expected California tax rate is due primarily tostate tax credits and decreases in the valuation allowance.

 

The provision(benefit) for income taxes differs from the amount that would result fromapplying the federal statutory rate as follows:

 

|                                                                              |   | **2001** |   | **2000** |   | **1999** |   |
|-----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory regular federal income tax                                              |   | 35.0     | %      | 35.0     | %      | —   | %      |
| State taxes, net of federal benefit                                               |   | 1.1      |   | 2.3      |   | (4.3     | )      |
| Income taxed at shareholder level prior to  termination of S-Corporation election |   | —   |   | (21.9    | )      | —   |   |
| Increase in deferred tax benefits from  termination of S-corporation election     |   | —   |   | (5.9     | )      | —   |   |
| Other                                                                             |   | 3.5      |   | 0.6      |   | —   |   |
|                                                                              |   | 39.6     | %      | 10.1     | %      | (4.3     | )%     |

 

The components of deferred taxassets and (liabilities) are as follows: 

 

|                                       |   | **December  31,** |      |
|--------------------------------------------|--------|-------------------|-----------|
|                                       |   | **2001**          |      | **2000** |   |
| Current deferred tax assets (liabilities): |   |              |      |   |   |
| Financial statement reserves               |   | $                 | 798,000   |   | $ | 1,914,000 |   |
| Accrued expenses                           |   | 137,000           |      | 184,000 |   |
| State taxes                                |   | (149,000          | )         | (55,000 | ) |
| Other                                      |   | —            |      | 17,000 |   |
| Total current                              |   | 786, 000          |      | 2,060,000 |   |
| Noncurrent deferred tax assets:            |   |              |      |   |   |
| Depreciation and amortization              |   | 430,000           |      | 54,000 |   |
| Operating loss carryforwards               |   | 715,000           |      | 900,000 |   |
| Credit carryforwards                       |   | 147,000           |      | — |   |
| Stock options                              |   | —            |      | 267,000 |   |
| Other                                      |   | 10,000            |      | 8,000 |   |
|                                       |   | 1,302,000         |      | 1,229,000 |   |
| Valuation allowance                        |   | (715,000          | )         | (900,000 | ) |
| Total noncurrent                           |   | 587,000           |      | 329,000 |   |
|                                       |   | $                 | 1,373,000 |   | $ | 2,389,000 |   |

 

For income taxpurposes, the Company’s foreign subsidiary, Simple Technology Limited, istreated as a separate entity and, therefore, is not subject to U.S. taxation.

 

The Company’sforeign subsidiary, SimpleTech Europe, is treated as a branch partnership forincome tax purposes and, therefore, is subject to U.S. taxation. AtDecember 31, 2001 and 2000, this entity had U.K. net operating losscarryforwards of $2,300,000 and $3,000,000, respectively. The losses carry overindefinitely, unless certain changes in business operations, as defined, occurduring the carryover period. The Company has established a valuation allowanceagainst these deferred tax assets since it cannot be established that thisforeign subsidiary’s U.K. net operating loss carryforwards will be fullyutilized.

 

F-14

----

 

**9.             Commitments and Contingencies:**

** **

**DPACTechnologies, Inc.—Patent Infringement**

 

OnSeptember 23, 1998, the Company filed a lawsuit against DPAC Technologies,Inc., formerly Dense-Pac Microsystems, Inc. (“DPAC”), in the United StatesDistrict Court for the Central District of California for infringement of theCompany’s IC Tower stacking patent, U.S. Patent No. 5,514,907. The Company isseeking damages, including prejudgment interest, an injunction against furtherinfringement of the Company’s patent by DPAC, treble damages and attorneys’fees. DPAC filed an answer to the Company’s complaint denying the Company’sclaim of infringement, asserted a defense of patent invalidity against the Company’sIC Tower stacking patent and asserted a counterclaim against the Companyalleging infringement of its stacking patent, U.S. Patent No. 4,956,694. OnMarch 29, 2001, the court entered final judgement finding DPAC did not infringethe Company’s patent and that the Company did not infringe DPAC’s patent.  The Company anticipates that the affirmancewill have no material impact on its on-going business. DPAC did not appeal theruling in the Company's favor, and that ruling is now final.

 

*Unaudited update:*TheCompany appealed the ruling in DPAC's favor, and that ruling was affirmed March7, 2002.

 

OnOctober 17, 2000, the Company received a reissue patent of the ‘907 patentfrom the U.S. Patent and Trademark Office. The reissue patent is U.S. PatentNo. Re. 36,916.

 

OnFebruary 21, 2001, the Company filed a new lawsuit against DPAC in theUnited States District Court for the Central District of California forinfringement of the Company’s IC Tower stacking reissue patent, U.S. Patent No.Re. 36,916. The Company is seeking damages and an injunction againstinfringement of the Company’s patent by DPAC. On March 13, 2001, DPACfiled an answer to the Company’s complaint denying the Company’s claim ofinfringement, and asserted a defense of patent invalidity against the Company’sIC Tower stacking reissue patent. In addition, DPAC counterclaimed allegingmisappropriation of unspecified technology and the sale of products by theCompany incorporating such technology alleged to have been misappropriated. TheCourt stayed action in the litigation pending the outcome of appeal in theabove-referenced litigation.

 

**LemelsonMedical, Education & Research Foundation, LLP — Patent Infringement**

 

The Companyreceived notice on November 26, 2001, that the Lemelson Medical, Education& Research Foundation, LLP (“Lemelson Foundation”) filed a complaint onNovember 13, 2001, against the Company and other defendants.  Thecomplaint was filed in the District Court of Arizona and alleges that theCompany’s manufacturing processes infringe several patents that the LemelsonFoundation allegedly owns.  The complaint also states that these allegedlyinfringed patents relate to machine vision technology and bar codingtechnology.  

 

*Unaudited update:*OnMarch 7, 2002, the Company was served with the Lemelson Foundationcomplaint.  Additionally, the judge in this case has indicated that heintends to stay this case as to any defendant whose alleged infringementconcerns only those patents relating to machine vision technology and bar codingtechnology, pending resolution of the Symbol Technologies v. Lemelsoncase, which involves the same patents. Because of the preliminary stage of thiscase, an estimate of potential damages, if any, would be premature andspeculative, and the Company has not made any such estimate at this time.

* *

**InteractiveFlight Technologies, Inc.**

 

OnJune 8, 1998, Interactive Flight Technologies, Inc. filed a lawsuitagainst Avnet, Inc. in the Superior Court of Maricopa County, Arizonaseeking an award for direct and consequential damages arising from theCompany’s sale of allegedly defective hard disk drives to Avnet for inclusionin an in-flight entertainment system manufactured by Interactive Flight. TheCompany purchased the hard disk drives from Integral Peripherals, Inc.,the manufacturer, through its distributor, Bell Microsystems, Inc.Integral has since declared bankruptcy and was not a party to this lawsuit. OnJune 8, 1999, Avnet filed a cross claim against the Company seekingindemnification.

 

F-15

----

 

All partiesentered into a settlement agreement that settled all claims between them. Underthe terms of the settlement, the Company made a total payment of $1,810,000 toInteractive Flight and the other parties. On January 23, 2001, the courtentered its Order of Dismissal dismissing all remaining claims between theparties.

 

**OtherLegal Proceedings**

 

The Company iscurrently not a party to any other material legal proceedings. However, theCompany is involved in other suits and claims in the ordinary course ofbusiness, and the Company may from time to time become a party to other legalproceedings arising in the ordinary course of business.

 

As is commonin the industry, the Company currently has in effect a number of agreements inwhich the Company has agreed to defend, indemnify and hold harmless certain ofits suppliers and customers from damages and costs which may arise from theinfringement by the Company’s products of third-party patents, trademarks orother proprietary rights. The scope of such indemnity varies, but may, in someinstances, include indemnification for damages and expenses, includingattorneys’ fees. The Company’s insurance does not cover intellectual propertyinfringement.

 

**LeaseCommitments**

* *

As discussedin Note 3, the Company leases its corporate office facilities fromaffiliates of Manouch Moshayedi, Mike Moshayedi and Mark Moshayedi, each ofwhom is an executive officer, director and major shareholder of the Company. Inaddition, the Company leases from unaffiliated third parties under capitalleases, manufacturing equipment with initial noncancellable lease terms rangingfrom 4 to 5 years. Future scheduled minimum annual lease payments for theyears ending December 31 are as follows: 

 

|                                                       |   | **Capital Leases** |    | **Operating  Leases (Related Party)** |      |
|------------------------------------------------------------|--------|--------------------|---------|---------------------------------------|-----------|
| 2002                                                       |   | $                  | 466,000 |                                  | $         | 603,000 |   |
| 2003                                                       |   | 115,000            |    | 603,000                               |      |
| 2004                                                       |   | —             |    | 603,000                               |      |
| 2005                                                       |   | —             |    | 217,000                               |      |
| Net minimum lease payments                                 |   | 581,000            |    | $                                     | 2,026,000 |   |
| Less, amounts representing interest                        |   | (27,000            | )       |                                  |      |
| Present value of future minimum capital  lease obligations |   | 554,000            |    |                                  |      |
| Less, current portion                                      |   | (441,000           | )       |                                  |      |
| Capital lease obligations, less current  portion           |   | $                  | 113,000 |                                  |      |   |

 

Rent expense for the yearsended December 31, 2001, 2000 and 1999 was approximately $783,000,$772,000 and $802,000, respectively, inclusive of related party balances.

 

F-16

----

 

 

**RepurchaseAgreements**

* *

The Company iscontingently liable at December 31, 2001, to various financialinstitutions on repurchase agreements in connection with wholesale inventoryfinancing. In general, inventory would be repurchased by the Company uponcustomer default with a financing institution and then resold through normaldistribution channels. The amount of potential product returns is estimated andprovided for in the period of the sale for financial reporting purposes. As ofDecember 31, 2001, the Company has never been required to repurchaseinventory in connection with the customer default agreements noted above. However,there can be no assurance that the Company will not be required to repurchaseinventory, upon customer default, in the future. Sales under such agreementswere approximately $1,100,000, $2,700,000 and $2,000,000 for the years endedDecember 31, 2001, 2000 and 1999, respectively.

 

**401(k)Plan**

 

The Companyhas a 401(k) profit sharing plan covering employees with at least six months ofservice. Employees may make voluntary contributions of up to 20% of theirannual pre-tax compensation to the plan, subject to the maximum limit allowedby the IRS guidelines. The Company makes matching contributions equal toone-half of each participating employee’s matchable contributions to the planwhich cannot exceed 10% of their salary. The Company’s matching contributionsto the plan are subject to vesting at the rate of 20% per year beginning afterthe employee’s second year of employment. For the years ended December 31,2001, 2000 and 1999, the Company made matching contributions of approximately$424,000, $369,000 and $339,000, respectively.

 

**CompanyStock Buy Back**

 

In September2001, the Company’s Board of Directors authorized a stock repurchase programunder which the Company could repurchase up to 1,800,000 shares of theCompany’s common stock over an 18-month period. The shares may be purchasedfrom time to time, at prevailing market prices, through open market orunsolicited negotiated transactions, depending on market conditions and otherconsiderations, until March 31, 2003. During fiscal 2001, the Company repurchased 72,500 shares of its commonstock for a total of $92,000 under this program. Shares of common stockrepurchased have been returned to the status of authorized but unissued sharesof common stock and may be issued by the Company in the future.

 

**10.          Stock Option Plan:**

 

The 2000 StockIncentive Plan (the “Plan”) is intended to serve as the successor equityincentive program to the 1996 Stock Option Plan (the “Predecessor Plan”). ThePlan was adopted by the Company’s board of directors and approved by itsshareholders in June 2000. In September 2000, the Plan becameeffective, and all outstanding options under the Predecessor Plan weretransferred into the Plan. No further option grants will be made under thePredecessor Plan. The transferred options will continue to be governed by theirexisting terms, unless the compensation committee of the Board of Directorselects to extend one or more features of the Plan to those options.

 

The Planprovides for the direct sale of shares and the grant of options to purchaseshares of the Company’s common stock to officers and other employees,non-employee board members and consultants. Under the Plan, eligibleparticipants may be granted options to purchase shares of common stock at anexercise price not less than 100% of the fair market value of those shares onthe grant date. The compensation committee of the Board of Directors has theauthority to determine the time or times at which options become exercisableunder the Plan. Options expire within a period of not more than ten years fromthe date of grant. 

 

On October 29,2002, the compensation committe of the Board of Directors authorized theCompany to implement an option exchange program pursuant to which the Company'scurrent employees, including executive officers, were given the opportunity toexchange their outstanding options to purchase shares of the Company's commonstock for new stock options for the same number of shares to be granted to themat a later date. At the conclusion of the option exchange program on December20, 2001, the Company accepted for exchange and cancelled options to purchasean aggregate of 2,309,500 shares of the Company's common stock. As a result,the Company expects to issue new replacement options under the Plan for 2,309,500shares of common stock on or after June 21, 2002 in exchange for thosecancelled options. The exercise price of each replacement option will be equalto the closing price per share of the Company's common stock on the new grantdate.

 

F-17

----

 

AtDecember 31, 2001, the Plan provided for the issuance of up to 8,535,911shares of common stock, including 2,777,471 shares subject to optionstransferred from the Predecessor Plan. The number of shares of common stockreserved for issuance under the Plan will automatically increase on the firsttrading day in January in each calendar year by an amount equal to 4% of thetotal number of shares of common stock outstanding on the last trading day inDecember of the prior calendar year, but in no event will exceed 2,500,000shares.

 

A summary ofthe option activity under the Plan is as follows:

 
|                    |   | **Shares  Under Option** |   | **Weighted  Average Exercise Price** |   |
|-------------------------|--------|--------------------------|--------|--------------------------------------|--------|
| Balances at 12/31/98    |   | 3,026,865                |   | $                                    | 1.07   |   |
| Granted                 |   | 518,960                  |   | $                                    | 1.18   |   |
| Exercised               |   | —                   |   | $                                    | — |   |
| Canceled                |   | (160,764                 | )      | $                                    | 1.11   |   |
|                    |   |                     |   |                                 |   |
| Balances at 12/31/99    |   | 3,385,061                |   | $                                    | 1.08   |   |
| Granted                 |   | 3,569,000                |   | $                                    | 10.97  |   |
| Exercised               |   | (607,641                 | )      | $                                    | 1.11   |   |
| Canceled                |   | (77,949                  | )      | $                                    | 11.00  |   |
|                    |   |                     |   |                                 |   |
| Balances at 12/31/00    |   | 6,268,471                |   | $                                    | 6.58   |   |
| Granted                 |   | 1,583,550                |   | $                                    | 2.60   |   |
| Exercised               |   | (672,057                 | )      | $                                    | 1.08   |   |
| Canceled                |   | (3,434,850               | )      | $                                    | 9.95   |   |
|                    |   |                     |   |                                 |   |
| Balances at 12/31/01    |   | 3,745,114                |   | $                                    | 2.78   |   |
|                    |   |                     |   |                                 |   |
| Exercisable at 12/31/99 |   | 3,113,069                |   | $                                    | 1.06   |   |
| Exercisable at 12/31/00 |   | 2,658,820                |   | $                                    | 1.07   |   |
| Exercisable at 12/3101  |   | 2,044,720                |   | $                                    | 1.80   |   |
|                         |        |                          |        |                                      |        |  |  |

 

F-18

----

 

At December31, 2001, 5,041,981 options were available for grant under the Plans. 

 
| **Options  Outstanding**                                                                                |   | **Exercisable**             |   |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
| **Range of  Exercise  Prices**                                                                     |   | **Number  of  Shares** |   | **Weighted  Average Exercise Price** |   | **Weighted  Average Remaining Life (Years)** |   | **Number of  Shares** |   | **Weighted  Average Exercise Price** |   |
| $1.06   to  $1.18                                                                             |   | 1,886,939                   |   | $ | 1.07 |   | 4.73 |   | 1,864,020 |   | $ | 1.07 |   |
| $1.50   to  $2.51                                                                             |   | 366,875                     |   | 1.79 |   | 9.72 |   | — |   | — |   |
|                   $2.74 |   | 912,900                     |   | 2.74 |   | 9.33 |   | — |   | — |   |
|                  $3.38  |   | 134,500                     |   | 3.38 |   | 9.17 |   | 4,400 |   | 3.38 |   |
| $6.50   to  $8.13                                                                             |   | 115,000                     |   | 7.77 |   | 8.77 |   | 95,000 |   | 8.04 |   |
|                  $11.00 |   | 328,900                     |   | 11.00 |   | 8.75 |   | 81,300 |   | 11.00 |   |
|                                                                                                    |   | 3,745,114                   |   |   |   |   |   | 2,044,720 |   |   |   |
|                                                                                                         |        |                             |        |  |  |  |  |  |  |  |  |  |  |

 

Nocompensation expense was recorded as a result of stock options granted toemployees through December 31, 1998 or in the years endedDecember 31, 2001 and 2000 as the fair market value approximated the pershare exercise price of the respective options granted. With respect to optionsgranted to employees in 1999, there were 446,459 shares under options grantedin January 1999 with an estimated fair market value of $1.58 per share,65,910 granted in April 1999 and 6,591 granted in May 1999 with anestimated fair market value of $2.37 per share, all of which were granted at anexercise price of $1.18 per share. The difference between the exercise priceand the fair market value at the date of grant of $262,000 is accounted for asunearned compensation and is being amortized to expense over the relatedservice period. The Company recorded a total of approximately $47,000, $79,000and $120,000 as compensation expense for the years ended December 31,2001, 2000 and 1999, respectively, related to options granted to employees.

 

Pursuant toSFAS No. 123, “Accounting for Stock-Based Compensation,” the Company haselected to continue the intrinsic value method of accounting for stock optionsgranted to employees and directors in accordance with APB Opinion No. 25and related interpretations in accounting for stock option plans. Accordingly,no compensation cost has been recognized for its Plan other than that describedabove. Had compensation cost been determined based on the fair value at the grantdates for stock options under the Plan consistent with the method promulgatedby SFAS No. 123, the Company’s net income for the years endedDecember 31, 2001, 2000 and 1999 would have resulted in the pro formaamounts below:

 
|                                                                 |   | **Year Ended  December 31,** |      |
|----------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                 |   | **2001**                     |      | **2000** |   | **1999** |   |
| Income before income taxes, as reported                              |   | $                            | 3,877,000 |   | $ | 28,198,000 |   | $ | 11,985,000 |   |
| Additional compensation expense per SFAS  No. 123                    |   | (3,992,000                   | )         | (946,000 | ) | (107,000 | ) |
| Pro forma (loss) income before (benefit)  provision for income taxes |   | (115,000                     | )         | 27,252,000 |   | 11,878,000 |   |
| Pro forma (benefit) provision for income  taxes                      |   | (45,000                      | )         | 2,649,000 |   | (513,000 | ) |
| Pro forma net (loss) income                                          |   | $                            | (70,000   | )  | $ | 24,603,000 |   | $ | 12,391,000 |   |
| Net income as reported                                               |   | $                            | 2,340,000 |   | $ | 17,315,000 | (a) | $ | 7,431,000 | (a) |
| Basic net (loss) income per share:                                   |   |                         |      |   |   |   |   |
| Pro forma                                                            |   | $                            | —    |   | $ | 0.76 |   | $ | 0.40 |   |
| As reported                                                          |   | $                            | 0.06      |   | $ | 0.53 | (a) | $ | 0.24 | (a) |
| Diluted net (loss) income per share:                                 |   |                         |      |   |   |   |   |
| Pro forma                                                            |   | $                            | —    |   | $ | 0.71 |   | $ | 0.38 |   |
| As reported                                                          |   | $                            | 0.06      |   | $ | 0.50 | (a) | $ | 0.23 | (a) |
| Weighted average shares outstanding:                                 |   |                         |      |   |   |   |   |
| Basic                                                                |   | 38,126,687                   |      | 32,393,218 |   | 30,601,027 |   |
| Diluted                                                              |   | 39,435,505                   |      | 34,593,678 |   | 32,657,993 |   |

 

----

(a) Pro forma (Note 2).

 

F-19

----

 

The fair valueof each option grant under the Predecessor Plan was estimated on the date ofthe grant using the minimum value method as the Company was a nonpublic entitywhile this plan was in effect. This value was the current stock price less thepresent value of the exercise price for a stock that does not pay dividends.The assumptions used for the period from January 1, 2000 through the dateof the Company’s initial public offering on September 28, 2000 and for theyears ended December 31, 1999 and 1998 were as follows: the risk-freeinterest rate ranged from 4.39% to 6.41%; generally the exercise price wasequal to the fair market value of the underlying common stock at the grant dateafter consideration of any related unearned compensation recorded in the consolidatedfinancial statements; the expected life of the option is 5 years; theforfeiture rate is estimated at 8.0%; and the common stock is not expected topay dividends.

 

The fair valueof each option grant under the 2000 Stock Incentive Plan and subsequent to theCompany’s 2000 initial public offering was estimated on the date of the grantusing the Black-Scholes option-pricing model. The assumptions used for theperiod from September 28, 2000 through December 31, 2001, were asfollows: the risk-free interest rate ranged from 5.73% to 5.92%; generally theexercise price was equal to the fair market value of the underlying commonstock at the grant date; the expected life of the option is 5 years; theforfeiture rate is estimated at 8.0%; expected volatility is estimated to be65% and the common stock is not expected to pay dividends.

 

The weightedaverage grant date fair value per share of shares under option was $1.47, $5.32and $3.27 for the years ended December 31, 2001, 2000 and 1999,respectively.

 

 

F-20

----

 

**11.          Segment Information:**

 

The Companydesigns, manufactures and markets a comprehensive line of memory, storage andconnectivity products used in high-performance computing, networking andcommunications, consumer electronics and industrial applications. The Companyprovides memory solutions for two reportable operating segments, Industrial andCommercial, based on dynamic random access memory, static random access memoryand Flash memory technologies. The accounting policies for each of thereportable operating segments are the same as those described in Note 2.

 

The Companyuses net sales and gross profit as the basis for evaluating the performance ofits operating segments. The Company does not allocate operating expenses,interest or income taxes to operating segments. Due to the similarity ofproducts manufactured for customers within each operating segment, the Companydoes not maintain separate records to identify assets by operating segment.

 

F-21

----

 

                Summarized financial information regardingthe Company’s reportable segments is shown in the following table:

 
|             |   | **Year Ended  December 31, 2001** |       | **Year Ended  December 31, 2000** |   | **Year Ended  December 31, 1999** |   |
|------------------|--------|-----------------------------------|------------|-----------------------------------|--------|-----------------------------------|--------|
|             |   | **Industrial**                    |       | **Commercial**                    |   | **Consolidated**                  |   | **Industrial** |   | **Commercial** |   | **Consolidated** |   | **Industrial** |   | **Commercial** |   | **Consolidated** |   |
| Net revenues     |   | $                                 | 48,037,000 |                              | $      | 116,204,000                       |   | $ | 164,241,000 |   | $ | 144,178,000 |   | $ | 164,138,000 |   | $ | 308,316,000 |   | $ | 49,601,000 |   | $ | 142,992,000 |   | $ | 192,593,000 |   |
| Cost of revenues |   | 33,818,000                        |       | 93,873,000                        |   | 127,691,000                       |   | 105,650,000 |   | 134,314,000 |   | 239,964,000 |   | 35,018,000 |   | 117,725,000 |   | 152,743,000 |   |
| Gross 

profit   |   | $                                 | 14,219,000 |                              | $      | 22,331,000                        |   | $ | 36,550,000 |   | $ | 38,528,000 |   | $ | 29,824,000 |   | $ | 68,352,000 |   | $ | 14,583,000 |   | $ | 25,267,000 |   | $ | 39,850,000 |   |

 

For the yearsended December 31, 2001, 2000 and 1999, international sales comprised 16%,13% and 15% of the Company’s revenues, respectively.  During these periods, no single foreign country accounted formore than 10% of total revenues. Substantially all of the Company’sinternational sales are export sales, which are shipped domestically to theCompany’s foreign customers.

 

**12.          Selected Quarterly Financial Data(unaudited):**

 
|                                    |   | **Quarter  Ended** |       |
|-----------------------------------------|--------|--------------------|------------|
|                                    |   | **Mar. 31,  2001** |       | **Jun. 30,  2001** |   | **Sept.  30, 2001** |   | **Dec. 31,  2001** |   |
| **Fiscal Year Ended December 31, 2001** |   |               |       |   |   |   |   |   |   |
| Net revenues                            |   | $                  | 58,715,000 |   | $ | 36,768,000 |   | $ | 33,177,000 |   | $ | 35,581,000 |   |
| Gross profit                            |   | 15,462,000         |       | 5,619,000 |   | 5,651,000 |   | 9,818,000 |   |
| Income (loss) from operations           |   | 6,149,000          |       | (3,589,000 | ) | (1,744,000 | ) | 1,666,000 |   |
| Net income (loss)                       |   | $                  | 3,959,000  |   | $ | (1,934,000 | ) | $ | (843,000 | ) | $ | 1,158,000 |   |
| Net income (loss) per share:            |   |               |       |   |   |   |   |   |   |
| Basic                                   |   | $                  | 0.10       |   | $ | (0.05 | ) | $ | (0.02 | ) | $ | 0.03 |   |
| Diluted                                 |   | $                  | 0.10       |   | $ | (0.05 | ) | $ | (0.02 | ) | $ | 0.03 |   |

 
|                                    |   | **Quarter  Ended** |       |
|-----------------------------------------|--------|--------------------|------------|
|                                    |   | **Mar. 31,  2000** |       | **Jun. 30,  2000** |   | **Sept.  30, 2000** |   | **Dec. 31,  2000** |   |
| **Fiscal Year Ended December 31, 2000** |   |               |       |   |   |   |   |   |   |
| Net revenues                            |   | $                  | 57,835,000 |   | $ | 75,136,000 |   | $ | 84,879,000 |   | $ | 90,466,000 |   |
| Gross profit                            |   | 12,822,000         |       | 16,913,000 |   | 18,470,000 |   | 20,147,000 |   |
| Income from operations                  |   | 5,171,000          |       | 7,001,000 |   | 7,640,000 |   | 9,544,000 |   |
| Pro forma net income                    |   | $                  | 3,029,000  |   | $ | 4,019,000 |   | $ | 4,324,000 |   | $ | 5,943,000 |   |
| Pro forma net income per share:         |   |               |       |   |   |   |   |   |   |
| Basic                                   |   | $                  | 0.10       |   | $ | 0.13 |   | $ | 0.14 |   | $ | 0.16 |   |
| Diluted                                 |   | $                  | 0.10       |   | $ | 0.12 |   | $ | 0.13 |   | $ | 0.15 |   |

 
|                                    |   | **Quarter  Ended** |       |
|-----------------------------------------|--------|--------------------|------------|
|                                    |   | **Mar. 31,  1999** |       | **Jun. 30,  1999** |   | **Sept.  30, 1999** |   | **Dec. 31,  1999** |   |
| **Fiscal Year Ended December 31, 1999** |   |               |       |   |   |   |   |   |   |
| Net revenues                            |   | $                  | 41,951,000 |   | $ | 41,327,000 |   | $ | 53,007,000 |   | $ | 56,308,000 |   |
| Gross profit                            |   | 7,191,000          |       | 7,736,000 |   | 13,102,000 |   | 11,821,000 |   |
| Income from operations                  |   | 1,199,000          |       | 1,424,000 |   | 7,310,000 |   | 4,180,000 |   |
| Pro forma net income                    |   | $                  | 458,000    |   | $ | 566,000 |   | $ | 4,250,000 |   | $ | 2,157,000 |   |
| Pro forma net income per share:         |   |               |       |   |   |   |   |   |   |
| Basic                                   |   | $                  | 0.01       |   | $ | 0.02 |   | $ | 0.14 |   | $ | 0.07 |   |
| Diluted                                 |   | $                  | 0.01       |   | $ | 0.02 |   | $ | 0.13 |   | $ | 0.07 |   |

 

**13.          Subsequent Events (unaudited):**

 

*Acquisition of Irvine Networks*

 

In January2002, the Company completed a $2.3 million acquisition of the assets, includingintellectual property, of Irvine Networks and hired their engineeringstaff.  The on-

 

F-22

----

 

going operation has become theXiran Division of the Company.  For thepast two-and-a-half years, Irvine Networks has been developing innovativecontent processing technology for Web-based server platforms.  The effort is in the final stages ofdeveloping a working prototype.  Thecompleted products, incorporating the Company’s patented memory stackingtechnology, is expected to be inserted into Web-based servers to enable thefaster transmission of files.

 

F-23

----

 

**REPORT OF INDEPENDENT ACCOUNTANTS ONCONSOLIDATED**

**FINANCIAL STATEMENT SCHEDULE**

 

The Shareholders and Board ofDirectors

SimpleTech, Inc.

 

Our audits ofthe consolidated financial statements of SimpleTech, Inc. referred to inour report dated January 31, 2002 appearing in this Annual Report on Form10-K also included an audit of the consolidated financial statement schedulelisted in Item 14(a)2 of this Form 10-K. In our opinion, this financialstatement schedule presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidated financialstatements.

 

PricewaterhouseCoopers LLP

Orange County, California

January 31, 2002

 

S-1

----

 

**SimpleTech, Inc.**

 

**Schedule II-Consolidated Valuation andQualifying Accounts and Reserves**

 

**For the Years Ended December 31, 1999,2000 and 2001**

 

|                       |   | **Accounts  Receivable Allowances** |      | **Inventory  Valuation Allowances** |   |
|----------------------------|--------|-------------------------------------|-----------|-------------------------------------|--------|
| Balance, December 31, 1998 |   | $                                   | 726,000   |                                | $      | 1,490,000 |   |
| Charged to operations      |   | 486,000                             |      | 1,214,000                           |   |
| Write-offs                 |   | (440,000                            | )         | (624,000                            | )      |
| Balance, December 31, 1999 |   | 772,000                             |      | 2,080,000                           |   |
| Charged to operations      |   | 1,253,000                           |      | 2,940,000                           |   |
| Write-offs                 |   | (1,053,000                          | )         | (893,000                            | )      |
| Balance, December 31, 2000 |   | 972,000                             |      | 4,127,000                           |   |
| Charged to operations      |   | 2,543,000                           |      | 759,000                             |   |
| Write-offs                 |   | (2,435,000                          | )         | (3,596,000                          | )      |
| Balance, December 31, 2001 |   | $                                   | 1,080,000 |                                | $      | 1,290,000 |   |

 

S-2

----

 

**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this Annual Report on Form 10-K to be signed onits behalf by the undersigned, thereunto duly authorized, in the City of SantaAna, State of California, on the 12th day of March, 2002.

 
|   | SimpleTech,  Inc. |
|--------|-------------------|
|   |              |
|   | By:               | /s/ Manouch  Moshayedi |   |
|   | Name:             | Manouch  Moshayedi |
|   | Title:            | Chief  Executive Officer and 

Chairman of  the Board of Directors |

 

**POWER OF ATTORNEY**

 

KNOW ALL MENBY THESE PRESENTS, the undersigned hereby constitute and appoint ManouchMoshayedi and Dan Moses, and each of them, as his true and lawful attorney-in-factand agent, with full power of substitution and resubstitution, for him and inhis name, place and stead, in any and all capacities, to sign any and allamendments to this report on Form 10-K, and to file the same, with exhibitsthereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto said attorney-in-fact and agent, full powerand authority to do and perform each and every act and thing requisite ornecessary to be done in connection therewith, as fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming allthat said attorney-in-fact and agent, or his substitute or substitutes, maylawfully do or cause to be done by virtue hereof.

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this Report has beensigned by the following persons in the capacities and on the dates indicated:

 
| **Signature**          |   | **Title**                                                                          | **Date**              |
|------------------------|--------|------------------------------------------------------------------------------------|-----------------------|
|                   |   |                                                                               |                  |
| /s/ Manouch  Moshayedi |   | Chief  Executive Officer and and Chairman of the Board of Directors                | March   12, 2002 |
| Manouch  Moshayedi     |   |                                                                               |                  |
|                   |   |                                                                               |                  |
| /s/ Mike  Moshayedi    |   | President  and Director                                                            | March   12, 2002 |
| Mike  Moshayedi        |   |                                                                               |                  |
|                   |   |                                                                               |                  |
| /s/ Mark  Moshayedi    |   | Chief  Operating Officer, Chief Technical Officer, Secretary and Director          | March   12, 2002 |
| Mark Moshayedi         |   |                                                                               |                  |
|                   |   |                                                                               |                  |
| /s/ Dan  Moses         |   | Chief  Financial Officer (Principal Financial and Accounting Officer) and Director | March   12, 2002 |
| Dan Moses              |   |                                                                               |                  |
|                   |   |                                                                               |                  |
| /s/ F.  Michael Ball   |   | Director                                                                           | March   12, 2002 |
| F. Michael  Ball       |   |                                                                               |                  |
|                   |   |                                                                               |                  |
| /s/ Thomas  A. Beaver  |   | Director                                                                           | March   12, 2002 |
| Thomas A.  Beaver      |   |                                                                               |                  |
|                   |   |                                                                               |                  |
| /s/ Mark R.  Hollinger |   | Director                                                                           | March   12, 2002 |
| Mark R.  Hollinger     |   |                                                                               |                  |

 

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EXHIBIT INDEX

 
| **Number**    |   | **Description**                                                                                                                                                                 |
|---------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*          |   | Amended and  Restated Articles of Incorporation                                                                                                                                 |
| 3.1.1*        |   | Certificate  of Amendment to the Amended and Restated Articles of Incorporation, dated  August 31, 2000                                                                    |
| 3.1.2‡   |   | Certificate  of Amendment to the Amended and Restated Articles of Incorporation, dated May  1, 2001.                                                                            |
| 3.2*          |   | Amended and  Restated Bylaws                                                                                                                                                    |
| 4.1*          |   | See Exhibits  3.1 and 3.2, for provisions of the Articles of Incorporation and Bylaws for  SimpleTech, Inc. defining the rights of holders of common stock of  SimpleTech, Inc. |
| 4.2*          |   | Specimen  Stock Certificate                                                                                                                                                     |
| 10.1*         |   | Amended and  Restated Lease, dated April 1, 2000, by and between MDC Land LLC and SimpleTech,  Inc.                                                                             |
| 10.2*         |   | Amended and  Restated Real Estate Lease, dated June 1, 2000, by and between MDC Land LLC  and SimpleTech, Inc.                                                                  |
| 10.3*         |   | Credit  Agreement, dated August 3, 1999, between SimpleTech, Inc. and Comerica Bank                                                                                             |
| 10.4*         |   | Security  Agreement, dated August 3, 1999, by SimpleTech, Inc. and Comerica Bank                                                                                                |
| 10.5*         |   | First  Amendment to Credit Agreement, dated as of December 29, 1999, by and between  Comerica Bank and SimpleTech, Inc.                                                         |
| 10.6*         |   | Second  Amendment to Credit Agreement, dated as of May 19, 2000, by and between  Comerica Bank and SimpleTech, Inc.                                                             |
| 10.7*         |   | Third  Amendment to Credit Agreement, dated as of May 19, 2000, by and between  Comerica Bank and SimpleTech, Inc.                                                              |
| 10.8*         |   | Fourth  Amendment to Credit Agreement, dated as of June 27, 2000, by and between  Comerica Bank and SimpleTech, Inc.                                                            |
| 10.9*         |   | Fifth  Amendment to Credit Agreement, dated as of June 27, 2000, by and between  Comerica Bank and SimpleTech, Inc.                                                             |
| 10.10**† |   | 2000 Stock  Incentive Plan (as amended and restated)                                                                                                                            |
| 10.11**† |   | 2000  Employee Stock Purchase Plan (as amended and restated)                                                                                                                    |
| 10.12*        |   | Form of  Indemnification Agreement between SimpleTech, Inc. and each of its directors  and officers                                                                             |
| 10.13*†  |   | Form of  Employment Agreement for Executive Officers of SimpleTech, Inc. (including a  schedule of substantially identical agreements)                                          |
| 10.14*        |   | Distribution  and Tax Indemnity Agreement, dated September 26, 2000, by and between  SimpleTech, Inc. and each of the shareholders of SimpleTech, Inc.                          |
| 10.15*        |   | Equipment  Lease, dated June 1, 1996, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                                 |
| 10.16*        |   | Equipment  Lease, dated September 1, 1996, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                            |
| 10.17*        |   | Equipment  Lease, dated October 1, 1996, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                              |
| 10.18*        |   | Equipment  Lease, dated January 1, 1997, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                              |
| 10.19*        |   | Equipment  Lease, dated February 1, 1997, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                             |
| 10.20*        |   | Equipment  Lease, dated April 1, 1997, by and between MDC Land Corporation and  SimpleTech, Inc.                                                                                |
| 10.21*        |   | License  Agreement, dated August 22, 2000, by and between Micron Electronics and  SimpleTech, Inc.                                                                              |
| 21.1          |   | List of  Subsidiaries of SimpleTech, Inc.                                                                                                                                       |
| 23.1          |   | Consent of  PricewaterhouseCoopers LLP                                                                                                                                          |

 

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*              This exhibit was previously filedas an exhibit to the Company’s Registration Statement on Form S-1 declaredeffective September 28, 2000 (File No. 333-32478), and isincorporated by reference herein.

 

‡                              This exhibit waspreviously filed as an exhibit to the Company’s Quarterly Report on Form 10-Qfor the Quarterly Period Ended March 31, 2001, with the Securities and ExchangeCommission on May 14, 2001, and is incorporated by reference herein.

 

**           This exhibit was previously filed asan exhibit to the Company’s Registration Statement on Form S-8 with theSecurities and Exchange Commission on February 9, 2001, and isincorporated by reference herein.

 

†              Indicates a management contract orcompensatory arrangement.

 

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