<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended: Commission file number:
June 30, 1995 0-6377
DREXLER TECHNOLOGY CORPORATION
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0176309
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1077 Independence Avenue, Mountain View, CA 94043-1601
(Address of principal executive offices) (Zip Code)
(415) 969-7277
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. /x/ Yes / / No
Number of outstanding shares of Common Stock, $.01 par value, at June 30,
1995: 8,689,179
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. Further, the condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which included only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of and for the periods indicated.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and the notes thereto for the
year ended March 31, 1995, included in the Company's Form 10-K Annual Report.
The results of operations for the three months ended June 30, 1995 are not
necessarily indicative of results to be expected for the entire year ending
March 31, 1996.
On June 30, 1995, an investment company purchased 75,000 shares of
unregistered common stock directly from the Company in a private placement for
$300,000. The cash proceeds from the stock issuance were received on July 6,
1995. Accordingly, at June 30, 1995, a $300,000 receivable for the stock
issuance is included in accounts receivable on the balance sheet.
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<PAGE> 3
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Assets
<TABLE>
<CAPTION>
March 31, June 30,
1995 1995
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,050 $ 1,840
Accounts receivable, net 98 754
Inventories 586 561
Other current assets 139 159
--------- ---------
Total current assets 1,873 3,314
--------- ---------
Property and equipment, at cost 12,773 12,803
Less--accumulated depreciation and amortization (11,189) (11,256)
--------- ---------
Property and equipment, net 1,584 1,547
Patents, net 1,074 1,052
--------- ---------
Total assets $ 4,531 $ 5,913
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 420 $ 633
Accrued payroll costs 222 243
Deferred revenue -- 200
Advance payments from customers 216 92
Other accrued liabilities 137 101
--------- ---------
Total current liabilities 995 1,269
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized--2,000,000 shares
Outstanding--none
Common stock, $.01 par value:
Authorized--15,000,000 shares
Outstanding--8,358,029 shares at March 31, 1995
and 8,689,179 at June 30, 1995 83 86
Additional paid-in capital 27,082 28,640
Accumulated deficit (23,629) (24,082)
--------- ---------
Total stockholders' equity 3,536 4,644
--------- ---------
Total liabilities and stockholders' equity $ 4,531 $ 5,913
========= =========
</TABLE>
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<PAGE> 4
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1994 1995
<S> <C> <C>
Revenues:
Product sales $ 795 $ 762
License fees and royalties 10 207
--------- ---------
Total revenues 805 969
--------- ---------
Costs and expenses:
Cost of product sales 564 534
Selling, general, and administrative expenses 510 560
Research and engineering expenses 560 332
--------- ---------
Total costs and expenses 1,634 1,426
--------- ---------
Operating loss from continuing operations (829) (457)
Other income and expense:
Interest income 13 6
Interest expense (1) (2)
--------- ---------
Total other income, net 12 4
--------- ---------
Loss from continuing operations (817) (453)
Income from discontinued operations 22 --
--------- ---------
Net loss $ (795) $ (453)
========= =========
Income (loss) per share:
Continuing operations $ (.10) $ (.05)
Discontinued operations -- --
--------- ---------
Net loss $ (.10) $ (.05)
========= =========
Weighted average common shares 8,106 8,401
========= =========
</TABLE>
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<PAGE> 5
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1994 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (817) $ (453)
Adjustments to reconcile net loss to net cash used
for operating activities:
Gain from discontinued operations 22 --
Depreciation and amortization 292 107
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 54 (356)
Decrease in inventories 1 25
(Increase) decrease in other assets 26 (20)
Increase in accounts payable and accrued expenses 27 198
(Decrease) increase in advance payments from customers
and deferred revenue (216) 82
Decrease in liabilities related to discontinued operations (54) (6)
--------- ---------
Net cash used for operating activities (665) (423)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (84) (31)
Increase in patents (17) (17)
--------- ---------
Net cash used for investing activities (101) (48)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock 14 1,261
--------- ---------
Net cash provided by financing activities 14 1,261
--------- ---------
Net increase (decrease) in cash and cash equivalents (752) 790
Cash and cash equivalents:
Beginning of period 2,114 1,050
--------- ---------
End of period $ 1,362 $ 1,840
========= =========
Supplemental disclosures--cash payments for the following
items are:
Income taxes $ 3 $ --
========= =========
Interest $ 1 $ 2
========= =========
</TABLE>
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<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--FISCAL 1996 FIRST QUARTER AS COMPARED WITH FISCAL 1995
FIRST QUARTER
Revenues
The Company's total revenues for the first quarter of fiscal 1996 were
$969,000 as compared with $805,000 for last year's first quarter.
OPTICAL MEMORY CARD PRODUCTS. Sales of optical memory cards and related
products to value-added resellers (VARs), licensees, and end-user customers were
$762,000 for the first three months of fiscal 1996 as compared with $795,000 for
last year's comparable period. Approximately 75% of card shipments in the first
three months of fiscal 1996 were repeat orders from existing customers. In
addition, new customers in the first quarter of fiscal 1996 included five
additional VARs who bought initial systems including cards and equipment.
For the development of commercial market applications for its products, the
Company utilizes VARs as part of its marketing and distribution program for
LaserCard products. Sales to VARs include optical memory cards, the Company's
integration software and device drivers/host adapters, optical card
reader/writers made by a licensee of the Company, and add-on peripherals made by
other companies (such as equipment for adding a digitized photo, fingerprint,
hand template, or signature to the cards). The VARs then may add application
software, personal computers, and other peripherals, and resell these systems
into their end-user markets.
During the first quarter of fiscal 1996, the Company commercially sold
approximately 77,000 LaserCard optical memory cards. Some of the more
significant sales of optical memory cards and reader/writers included: 21,000
cards and 56 reader/writers to VISX, Incorporated, for its laser eye surgery
system for vision correction; 5,000 cards for the Czech Republic; 31,000 cards
and five reader/writers to an Italian customer for several programs; and 10,000
cards to a customer in Brazil for a healthcare/social security program.
There can be no assurances that a VAR company will be successful in its
markets and place follow-on orders with the Company for additional quantities of
cards and systems. To upgrade its VAR customer base, the Company will continue
its efforts to enlist additional VARs and eliminate nonproductive ones. The
Company provides marketing leads, technical support, integration software,
application development software, and demonstration software to assist VARs.
Software is an important factor in developing the commercial markets for
optical cards. The Company's software consists of optical card device driver and
interface software, system software tools, and demonstration programs. The
Company does not provide software for specific applications, but instead depends
on its VARs to either integrate optical card products into existing software
products or to write new application software for specific optical card
programs. Several customers have already written optical card software programs
for applications such as automobile warranty/maintenance, cargo manifesting,
electronic money cards/bank debit cards, optical key systems, and various
medical-related applications (such as optical card systems for prenatal,
vaccination, fetal heart monitoring, and kidney dialysis records; medical image
storage; and patient medical/health history cards). Other application software
development is underway by VARs and their customers.
Optical memory cards are used in conjunction with card reader/writer
equipment connected to personal computers and accessed in the same manner as
floppy disk drives. Such reader/writers are incorporated into LaserCard systems
sold to VARs and other customers of the Company. The principal customers and
unit sales in the first quarter of fiscal 1996 for cards and reader/writers are
shown above. The Company does not manufacture card reader/writers but does
expect to continue purchasing such equipment from its sole-source supplier,
Nippon Conlux Co., Ltd., a Japanese licensee of the Company. The Company
currently maintains an inventory of optical card reader/writers for resale to
VARs and other customers; this inventory level fluctuates based on the timing of
purchases and sales. The price, performance, and availability of such
reader/writers are factors in the commercialization of optical cards. The
Company sells reader/writers at a small mark-up for a few thousand dollars per
unit, and these units generally include the Company's integration software and
device drivers. Sales of a newly developed, smaller, and faster optical card
reader/writer from Nippon Conlux began in early calendar year 1995. The Company
believes that the smaller size and faster read/write speeds of this new model
should have a positive effect on the optical memory card market.
Two other licensees of the Company have the capability of producing
LaserCard-compatible reader/writers but are not manufacturing them at this time.
The Company can give no assurance that increased production of card
reader/writers will occur in the near term or that high-volume sales and
correspondingly lower prices will result. The Company expects card-related
revenues to increase more rapidly when optical memory card reader/writers are
produced and sold in volume at lower prices. If market demand increases sharply
over a short period of time, an initial shortage of reader/writers could result.
A delay in commercialization of the Company's optical memory cards and related
products, combined with an absence of an additional license sale or other
revenues, could result in continuing quarterly losses and a requirement for
additional financing, as discussed below under "Liquidity."
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<PAGE> 7
During fiscal 1995, the Company exhibited an optical memory card that also
contains an integrated circuit ("IC"). If orders are received for this hybrid
card, the Company would rely on outside vendors to add a customer-specified IC
to the optical memory card and to provide IC card reader/writers. This
multi-function IC/optical card has the potential to expand the number of card
applications and customers, and therefore the market size, for the Company's
optical memory cards.
LICENSING. Fiscal 1996 first quarter license revenues of $200,000 resulted
from an agreement which includes a trademark license and an installment payment
toward the possible completion of the purchase of a LaserCard distribution
license. There were no license revenues for the first quarter of fiscal 1995.
License fees received by the Company are unconditional and nonrefundable, and no
significant obligations remain unfulfilled by the Company under any of its
licenses. The Company is actively pursuing its efforts to generate additional
license revenues; however, license sales by the Company are sporadic and
unpredictable as to timing and type of license. The magnitude of future license
revenues, if any, cannot be predicted or inferred from past events.
ROYALTIES. Although royalty revenues have not yet reached material amounts,
the Company does anticipate future royalty income on a long-term, continuing
basis from among two royalty-bearing optical memory card manufacturing licenses
and several royalty-bearing, equipment-license upgrades previously sold. The
Company cannot predict whether or when equipment or card sales by its licensees
will result in material royalties to the Company, since the optical memory card
industry is in the early commercial stage. Therefore, the Company is not relying
on royalty income and does not expect it to be a significant factor in the near
term.
BACKLOG. The Company generally fills orders within 30 days of receipt of
purchase order or release order. Therefore, there is not a consistent order
backlog that is material in amount. The Company's quarterly sales are generally
dependent upon new orders placed each quarter. Until a material level of order
backlog is established, the Company's quarterly sales are subject to
fluctuation.
Margins
The gross margin on product sales for the first three months of fiscal 1996
was 30% as compared with 29% for the year-earlier period. Costs related to the
optical memory card facility (depreciation expense, building lease payments, and
other costs) are allocated to cost of sales based upon the level of
manufacturing activity. As the facility is used for research and engineering
purposes when not being used for manufacturing purposes, the remainder of these
expenses are charged to research and engineering expense. For the first three
months of fiscal 1996, facility expenses of $105,000 were allocated to card
manufacturing as compared with $55,000 for last year's comparable period. The
Company anticipates this allocation to increase as production and sales of
optical memory cards increase. Likewise, there will be a decrease in research
and engineering activities and, therefore, a decrease in research and
engineering expenses when the optical memory card facility is used for
manufacturing at a higher degree than at present.
Income and Expenses
The Company recorded a loss on continuing operations of $457,000 for the
first three months of fiscal 1996 as compared with $829,000 for last year's
first quarter. The main difference between the amount for fiscal 1996 as
compared with fiscal 1995 can be attributed to the $200,000 in license revenues
received in the fiscal 1996 first quarter, as discussed above under "Licensing,"
and a $187,000 decrease in depreciation expense, as discussed below under
"Research and Engineering Expenses."
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). For the fiscal 1996
first quarter, SG&A expenses were $560,000 as compared with $510,000 for the
fiscal 1995 first quarter. Most of this difference is attributable to increased
payroll expenses. SG&A spending is expected to continue at current levels for
the short term. The Company's plans include increased marketing activity, which
will be implemented if certain financial goals are achieved.
RESEARCH AND ENGINEERING EXPENSES. Research and engineering expenses were
$332,000 for the fiscal 1996 first quarter as compared with $560,000 for the
fiscal 1995 first quarter. Research and engineering expenses primarily consist
of the majority of the operating costs and depreciation and amortization
expenses on the card facility, which is used both for engineering and for
manufacturing. Depreciation and amortization expenses charged to research and
engineering expenses decreased to $57,000 for the fiscal 1996 first quarter as
compared with $246,000 for last year's comparable period. This was due mainly to
a change in the estimated useful life of the optical card manufacturing
equipment during fiscal 1995.
Because the initial development of the optical card and the design and
construction of the optical card facility are complete, the large initial
development costs are no longer necessary. Therefore, for the short term the
optical card facility expenses are expected to continue at the current level,
except for a possible modest increase. Research and engineering expenses are
expected to decrease as optical card production increases and these resources
are allocated to production to a greater degree than at present. The Company
believes this reduction will not have any negative effect on its optical card
business. It also is possible that future projects may require increased
spending as the optical card industry grows.
OTHER INCOME AND EXPENSE. Interest income for the fiscal 1996 first quarter
was $6,000 as compared with $13,000 for the fiscal 1995 first quarter. The
Company's interest expense on short-
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<PAGE> 8
term loans was $2,000 for the first quarter of fiscal 1996 as compared with
$1,000 for last year's first quarter.
DISCONTINUED OPERATIONS. The Company discontinued its emulsion photoplate
operation during fiscal 1993 because of the limited market for these products,
which was long anticipated by the Company. During fiscal 1995, the Company
completed settlement of its remaining commitments related to its discontinued
emulsion photoplate operation, at an amount lower than its accruals for these
items. Therefore, discontinued operations had income of $22,000 for the first
quarter of fiscal 1995. There was no income of this type for the first quarter
of fiscal 1996.
LIQUIDITY
As of March 31, 1995, the Company had cash and cash equivalents of
$1,840,000 and a current ratio of 2.6 to 1. Cash used for operating activities
was $423,000 for the first quarter of fiscal 1996 as compared with $665,000 for
last year's first quarter. The Company had no long-term debt as of June 30,
1995.
Subsequent to quarter end, during the period from July 1, 1995 through July
12, 1995, the Company received cash payments of $546,000 on its June 30, 1995
accounts receivable and $106,000 in advance payments from customers for future
orders. At July 12, 1995, the Company had cash and cash equivalents of
$2,290,000.
The Company has not established a line of credit. Generally, the Company's
customers make advance payments, in whole or in part, at time of order
placement, because the Company's optical memory cards are usually made to custom
specifications that are specific to each customer, end user, or application.
Therefore, the Company believes that working capital should be sustainable
provided order levels increase. The Company may negotiate a line of credit if
and when it becomes appropriate.
At the current level of product sales, the Company does not generate cash
from operations. To fund its operations, the Company requires either a
substantial increase in order levels of optical cards, sales of additional
licenses, or additional financing. Based on current raw material costs and other
expense calculations, the Company estimates that it will break even on cash flow
if it achieves annual sales in the range of 1.5 to 2 million cards. The Company
would generate cash from operations at this sales level due partly to the
Company's requirements for advance payments from customers at time of order
placement.
The Company's card manufacturing facility has a designed production capacity
of 25 million to 40 million cards per year, depending on card type and color
printing requirements. To implement this capacity, some portions of the card
facility require additional equipment or upgrades; for example, in-process QA
inspection equipment. The Company has prepared an incremental plan for this
equipment and upgrades and for adding production employees when large quantities
of cards are ordered. This plan requires an estimated $3 million in capital
improvements to attain the 25 million card production level and would be
implemented in stages. For example, the Company's optical card manufacturing
facility currently has an annualized machine capacity to produce approximately 3
million cards. The estimated incremental capital equipment expenditures required
for the following production capacities are: 6 million cards annually, $500,000;
10 million cards annually, $400,000; 15 million cards annually, $400,000; 25
million cards annually, $1.7 million. The incremental stages would be
implemented as customer orders and customer financial commitments are of a
sufficient magnitude to justify each step.
At June 30, 1995, the Company had an accumulated deficit of $24,082,000. The
Company anticipates that the size of its losses will decrease due to anticipated
increases in sales of optical memory cards and related products. However, if
increased commercialization is delayed and the Company does not realize such
increased sales, its losses will remain at previous levels, except in the event
of sporadic sales of licenses which range in price from approximately $1 million
for a card distribution license to over $10 million for a card manufacturing
license.
During the first quarter of fiscal 1996, the Company had cash receipts, net
of expenses, of $457,000 from the private placement of 115,000 shares of its
common stock. These shares have not been registered under the Securities Act of
1933 and cannot be offered or sold in the United States absent registration or
an applicable exemption from registration requirements. The Company has agreed
to file an S-3 registration statement covering certain of the shares sold by the
Company under private placements in fiscal years 1994, 1995, and 1996. At such
time as the SEC approves the registration, the shareholders may resell the
shares. Also, Company employees and consultants purchased from the Company
216,150 shares of registered common stock, at an average price of $5.11 per
share, through the exercise of stock options under the Company's 1991 Stock
Option Plan, which resulted in additional cash receipts to the Company of
$1,104,000.
During the first quarter of fiscal 1996, the Company received a
non-refundable $200,000 payment from an existing licensee of the Company,
representing a partial payment toward a potential $1,000,000 license upgrade
fee. This $200,000 payment was recorded by the Company as "Deferred revenue" at
June 30, 1995. In the event that the remaining $800,000 license upgrade fee is
received by the Company, the $1,000,000 in license revenues will be recognized.
The Company will vigorously continue its marketing and licensing efforts and
will consider opportunities for additional equity financing in order to fund
operations, to accelerate its marketing and sales activities, and to add
software and manufacturing capabilities to more rapidly build sales of optical
memory cards. The Company is not aware of any material adverse trends that would
limit its ability to finance operations through additional equity placements, if
required.
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<PAGE> 9
Stock Price Volatility
The Company's common stock price is subject to significant volatility due to
fluctuations in revenues, earnings, capitalization, liquidity, press coverage,
and financial market interest. Some of these factors may be exacerbated because
the Company operates solely in the optical memory card products industry, which
is in the early stage of commercialization.
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<PAGE> 10
DREXLER TECHNOLOGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
- - ------------------- Chairman of the Board of July 19, 1995
/s/Jerome Drexler Directors and President
(Principal Executive Officer)
- - ------------------- Vice President of Finance and Treasurer July 19, 1995
/s/Steven G. Larson (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1995 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE
30, 1995 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,840
<SECURITIES> 0
<RECEIVABLES> 754
<ALLOWANCES> 0
<INVENTORY> 561
<CURRENT-ASSETS> 3,314
<PP&E> 12,803
<DEPRECIATION> 11,256
<TOTAL-ASSETS> 5,913
<CURRENT-LIABILITIES> 1,269
<BONDS> 0
<COMMON> 28,726
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,913
<SALES> 762
<TOTAL-REVENUES> 969
<CGS> 534
<TOTAL-COSTS> 534
<OTHER-EXPENSES> 892
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (453)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
