<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
( Mark One )
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 1996
- 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 0-14843
DENSE-PAC MICROSYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
CALIFORNIA 33-0033759
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
7321 LINCOLN WAY
GARDEN GROVE, CALIFORNIA, 92641
( Address of Principal Executive Offices )
(714) 898-0007
Issuer's Telephone Number, Including Area Code
Not Applicable
( Former Name, Former Address and
Former Fiscal Year if Changed
Since Last Year )
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months ( or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of common stock, no par value, outstanding as of
outstanding as of September 25, 1996 was 16,949,681.
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DENSE-PAC MICROSYSTEMS, INC.
Balance Sheet
<TABLE>
<CAPTION>
August 31, February 29,
1996 1996
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Curent Assets:
Cash and cash equivalents $ 4,309,478 $ 4,579,840
Accounts receivable, net 2,443,343 3,574,822
Inventories 5,621,295 5,151,106
Deferred income tax 150,000 150,000
Other current assets 300,504 287,075
----------- -----------
Total current assets 12,824,620 13,742,843
Property, net 4,108,137 3,448,860
Net cash provided by operating activities: 372,652 409,048
CASH FLOWS FROM INVESTING ACTIVITIES: 73,948 67,262
----------- -----------
$17,379,357 $17,668,013
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Proceeds from issuance of other
long-term debt
Current portion of long-term debt 390,897 413,851
Accounts payable 1,502,134 1,568,907
Net cash provided by (used in)
financing activities 277,243 572,499
Other accrued liabilities 65,681 61,982
----------- -----------
Total current liabilities 2,235,955 2,617,239
----------- -----------
Net income (loss) per common share 1,900,000 1,900,000
----------- -----------
Other long-term debt 772,678 699,134
----------- -----------
Stockholders' equity
Common stock 16,041,064 15,795,004
Accumlated deficit (3,570,340) (3,343,364)
----------- -----------
Net stockholders' equity 12,470,724 12,451,640
----------- -----------
$17,379,357 $17,668,013
=========== ===========
</TABLE>
2
<PAGE> 3
DENSE-PAC MICROSYSTEMS, INC.
Summary of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Six months ended
August 31, August 31.
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $3,643,713 $4,439,858 $7,708,135 $8,670,171
Cost of Sales 2,894,223 2,972,861 5,841,843 6,125,573
------------ ------------ ------------ ------------
Gross Profit 749,490 1,466,997 1,866,292 2,544,598
------------ ------------ ------------ ------------
Deferred income tax
Operating Expenses:
Selling, general and administrative 789,459 820,159 1,608,006 1,457,587
Research and development 298,873 137,738 425,059 238,153
------------ ------------ ------------ ------------
Net cash provided by operating activities: (338,842) 509,100 (166,773) 848,858
CASH FLOWS FROM INVESTING ACTIVITIES:
Other expenses:
Interest expense, net 32,664 62,833 59,403 122,814
------------ ------------ ------------ ------------
Proceeds from issuance of other long-term
debt tax provision (371,506) 446,267 (226,176) 726,044
Net cash provided by (used in) financing
activities 800 800 800 800
------------ ------------ ------------ ------------
Net income (loss) ($372,306) $445,467 ($226,976) $725,244
============ ============ ============ ============
Net income (loss) per common share ($0.02) $0.03 ($0.01) $0.05
============ ============ ============ ============
Weighted average common and
common equivalent shares
outstanding 16,950,000 15,845,000 16,950,000 15,547,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
------------------------------
August 31, August 31,
1996 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($226,976) $725,244
Adjustments to reconcile net
income (loss) to net
cash provided by operating activities:
Depreciation and amortization 465,830 281,470
Changes in operating assets and liabilites:
Accounts receivable 1,131,479 (145,398)
Inventories (470,189) 117,735
Deferred income tax (13,429) (93,929)
Other assets (6,686)
Accounts payable (66,773) (240,334)
Accrued compensation (295,256)
Accured liabilities 3,699 201,404
Deferred revenue (152,194)
------------- --------------
Net cash provided by operating activities: 521,699 693,998
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (1,088,711) (513,424)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other
long-term debt (105,935) (177,944)
Proceeds from issuance of other
long-term debt 156,525
Proceeds from issuance of common stock 246,060 130,704
------------- --------------
Net cash provided by (used in)
financing activities 296,650 (47,240)
------------- --------------
NET INCREASE (DECREASE) IN CASH (270,362) 133,334
CASH AT BEGINNING OF YEAR 4,579,840 356,787
------------- --------------
CASH AT END OF QUARTER $4,309,478 $490,121
============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $135,567 $125,899
============= ==============
Income taxes paid $800 $0
============= ==============
</TABLE>
See accompanying notes to condensed financial statments.
4
<PAGE> 5
DENSE-PAC MICROSYSTEMS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Dense-Pac Microsystems, Inc. (the Company) is engaged in the design,
development, manufacture and marketing of a full line of high density,
miniaturized memory surface mount components and subsystems for a variety of
commercial, industrial and military applications.
NOTE 2 - As contemplated by the Securities and Exchange Commission under Item
310(b) of Regulation S-B, the accompanying financial statements and footnotes
have been condensed and therefore do not contain all disclosures required by
generally accepted accounting principles. This report on Form 10-QSB for the
period ended August 31, 1996 should be read in conjunction with the Company's
Annual Report to Shareholders for the previous year.
In the opinion of the Company, the accompanying unaudited condensed
financial statements contain all adjustments (none of which were other than
normal recurring accruals) necessary to present fairly its financial position
as of August 31, 1996, the results of operations and its cash flows for the
periods ended August 31, 1996 and 1995. Results for the interim period are not
necessarily indicative of those to be expected for the full year.
NOTE 3 - Inventories consisted of the following:
<TABLE>
<CAPTION>
August 31, 1996 February 29, 1996
<S> <C> <C>
Raw Materials $ 1,303,247 $ 1,338,472
Work-in-process 3,044,995 2,650,086
Finished Goods 1,273,053 1,162,548
--------------- -----------------
$ 5,621,295 $ 5,151,106
</TABLE>
NOTE 4 - Accounting for Income Taxes
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," effective March 1, 1993.
Deferred income taxes reflect the net tax effect of (a) temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax asset as of February 29, 1996
are as follows:
5.
<PAGE> 6
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards, general
business credits, etc. $ 1,807,810
Inventories 223,384
-----------------
Total gross deferred assets 2,031,194
Deferred tax liability
Depreciation & amortization (527,440)
Valuation allowance (1,353,754)
-----------------
Net deferred income taxes $ 150,000
=================
</TABLE>
There was no change in the valuation allowance as of August 31, 1996.
The Company is unable to determine whether it will be able to further
utilize the gross deferred tax assets in fiscal year 1997. Further evaluation
will be completed as part of the year end evaluation of the Company's income
tax situation for the year ending February 28, 1997.
As of February 29, 1996, the Company had net operating loss
carryforwards of $4,466,000 for regular income tax and $4,557,000 for
alternative minimum tax available to offset future Federal taxable income (a
portion is subject to limitations of approximately $270,600), expiring at
various dates through 2010. As of February 29, 1996, the Company had available
tax credit carryforwards of approximately $164,000 to offset future Federal
income taxes, which expire at various dates through 2006.
NOTE 5 - Net income (loss) per common and common equivalent share is
computed by dividing net income by the weighted average number of common and
common equivalent shares (if applicable) outstanding during the periods. For
the loss periods, common equivalent shares were anti- dilutive and were not
included in the E.P.S. calculation.
NOTE 6 - In October 1994, the Company borrowed $2,000,000 from a principal
shareholder and director evidenced by a five year, interest only, eight percent
note. The note is secured by all of the Company's assets. As consideration
for the loan, the Company issued 1,000,000 warrants exercisable for five years
at $2.00 per share for Company stock. The warrants were callable when the
Company's stock reached a trading price of $4.50 for twenty consecutive days.
On September 25, 2995, the Company called the warrants. On October 23, 1995,
the Company received $1,900,000 for the exercise of the warrants and
extinguished debt for $100,000.
The Company also re-negotiated the interest rate on the $1,800,000 note to a
rate of 5% per annum. In connection with the amended loan agreement, the
Company issued four-year warrants to purchase 375,000 shares of the Company
stock at $7.00 per share. At August 31, 1996, all of the warrants were
outstanding and exercisable.
NOTE 7 - In February 1996, the Company raised $4,297,000, net of offering
costs, from the sale of 900,000 shares of common stock at $5.00 per share to
private investors.
6.
<PAGE> 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net sales for the quarter ended August 31, 1996 decreased $796,145 or
18% from the quarter ended August 31, 1995, and for the six months ended August
31, 1996, sales deceased $962,036 or 11%. The sales decrease can be attributed
to a decrease in sales of the standard 512k x 8 product which was expected. In
the first six months of the previous fiscal year, 40% of sales were represented
by the 512k x 8 or approximately $3,470,000 as compared to 13% or $1,040,000
of sales for the first six months of fiscal year 1997. This represents a
decrease of approximately $2,430,000 in 512k X 8 sales from the previous year
standard product was partially offset by an increase in sales of $392,000 in
sales of the Company's new third generation technology for the six month
period.
The Company has introduced a supermemory board with up to four times
the memory of boards available today known as the SuperSIMTM. The Company is
also marketing the technology in a subsystem arrangement for stackable plastic
memory devices. The Company believes that there is significant market benefit
as this technology becomes known. Expected orders for this product have not
materialized, however, and competitors have begun to enter the market. In
addition, the significant decrease in DRAM prices in the current year has
reduced the expected selling prices of these products by approximately 75%.
Cost of sales as a percentage of sales for the three month period
ended August 31, 1996 increased from 67% in fiscal year 1996 to 79% in fiscal
year 1997 and for the six months increased from 71% in fiscal 1996 to 76% in
fiscal 1997. During the first six months of fiscal year 1997, the Company
recognized inventory writedowns of approximately $570,000. A portion of the
writedowns was associated with the recent decrease in the 16 meg DRAM prices
which affected the entire industry. The balance of the write down was due to a
decrease in SRAM prices for certain inventory of 512K x 32 that the Company
held at the end of the quarter. Beginning in May 1996, the Company's variable
compensation program resulted in a decrease in indirect labor costs included in
cost of sales.
Selling, general and administrative expense decreased slightly in the
second quarter of fiscal 1997 by $30,700 or 4% from the second quarter of the
prior fiscal year. For the six months ended August 31, 1996 these expenses
increased $150,419 or 10%. For four months in the year-to-date results,
payroll costs were reduced as required by the Company's variable compensation
program. The increase in selling, general and administrative expenses is
attributed to an increase in filing fees and maintenance for national NASDAQ
market companies, an increase in selling expenses due to advertising and travel
and an increase in commissions for independent sales representatives as more
territories are being represented by independent sales representative companies
as compared to the previous year.
For the three months ended August 31, 1996, research and development
costs increased $161,135 or 117% from the same quarter in the previous period
and for the six months ended August 31, 1996 expenses have increased $186,906
or 78%. The increase for the six months is due to the efforts on the new
SuperSIMMTM technology and the numerous related products that are being
developed in association with the third generation technology. The Company is
also continuing to develop other new military and commercial products.
For the three months ended August 31, 1996, net interest expense has
decreased $30,169 or 48% from the same quarter in the previous period and for
the six months ended
7.
<PAGE> 8
August 31, 1996 net interest expenses have decreased $63,411 or 52%. This
decrease is due to more invested capital, resulting in interest income of
approximately $90,000 for the six month period ended August 31, 1996, as
compared to approximately $4,000 in the previous six month period. The
offsetting increase in interest expense was due to additional equipment leases
entered into during the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the second quarter of
fiscal 1997 was $4.3 million cash from the private placement of stock completed
in February 1996. The proceeds from the private placement completed in
February 1996, appear to be sufficient to meet the Company's cash needs for the
foreseeable future.
The Company purchased approximately $1.1 million ($225,000 financed)
in capital equipment during the first six months of fiscal year 1997. A
portion of the purchases can be attributed to the setting up of the third
generation product line.
The Company also has a loan from a Belgium bank due November 2000,
which provides for semi-annual principal payments of $70,533. The interest
rate is two points over the LIBOR rate in effect at the time of each principal
payment, and interest is payable semi-annually. At August 31, 1996, the
outstanding principal amount was $634,977.
CAUTIONARY STATEMENT
Statements regarding the Company's expectations about new and existing
products and its future financial performance are forward looking statements
which are subject to various risks and uncertainties, including, without
limitation, demand for and acceptance of new and existing products,
technological advances and product obsolescence availability of semiconductor
devices at reasonable prices, competitive factors and the availability of
capital to finance growth. These and other factors which could cause actual
results to differ materially from those in the forward looking statements are
discussed in greater detail in the Company's Form 10-KSB for the year ended
February 29, 1996.
Item 4 - Submission of Matters to a vote of Security Holders
<TABLE>
1. (a) Annual Shareholders' Meeting - August 12, 1996
(b) Election of Directors: Votes For Withheld
<S> <C> <C>
James G. Turner 14,559,711 129,534
Roger Claes 14,559,711 129,534
Trude C. Taylor 14,559,711 129,534
Bob Southwick 14,559,711 129,534
(c) Amendment to Articles of Incorporation to increase
authorized shares of Common Stock:
<S> <C>
For: 14,111,815
Against 497,865
Abstain 79,565
</TABLE>
8.
<PAGE> 9
(d) Approval of 1996 Stock Option Plan:
<TABLE>
<S> <C>
For 7,862,977
Against 1,093,533
Abstain 166,940
Broker
non-votes 5,565,795
</TABLE>
Item 5 - Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 3.1 - Restated Articles of Incorporation
Exhibit 10.1 - 1996 Employee Stock Option Plan
Exhibit 27 - Financial Data Schedule
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.
DENSE-PAC MICROSYSTEMS, INC.
(Small Business Issuer)
- -------------------------- -------------------------------------------
Date James G. Turner, Chairman of the Board
and Chief Executive Officer
- -------------------------- -------------------------------------------
Date William M. Stowell, Chief Financial Officer
9.
<PAGE> 1
Exhibit 3.1
RESTATED ARTICLES OF INCORPORATION
OF
DENSE-PAC MICROSYSTEMS, INC.
James G. Turner and William M. Stowell certify that:
1. They are the Chief Executive Officer and Secretary,
respectively, of Dense-Pac Microsystems, Inc., a California corporation (the
"Corporation").
2. The Articles of Incorporation of the Corporation are amended
and restated to read as follows:
* * * * * *
I
The name of this Corporation is DENSE-PAC MICROSYSTEMS, INC.
II
The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business
or the practice of a profession permitted to be incorporated by the California
Code.
III
This Corporation is authorized to issue two classes of shares to be
designated respectively "Common" and "Preferred." The Corporation shall have
no authority to issue non-voting equity securities.
(a) The number of shares of Common Stock authorized is forty
million (40,000,000).
(b) The number of preferred shares authorized is eight million
(8,000,000). The preferred shares may be issued in one or more series. The
Board of Directors is authorized to fix the number of any such series of
preferred shares and to determine the designation of any such series. The
Board of Directors is further authorized to determine or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any wholly
unissued series of preferred shares and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting every series, to increase or decrease
(but not below the number of such series then outstanding) the number of shares
of any such series subsequent to the issue of that series.
IV
(a) Limitation of Directors' Liability. The liability of the
directors of the Corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
<PAGE> 2
(b) Indemnification of Corporate Agents. The Corporation is
authorized to provide, whether by bylaw, agreement or resolution of the Board
of Directors or shareholders of the Corporation, for the indemnification of
agents (as defined in Section 317 of the California General Corporation Law) of
the Corporation in excess of that expressly permitted by such Section 317, for
breach of duty to the Corporation and its shareholders to the fullest extent
permissible under California law, subject only to the applicable limits set
forth in Section 204 of the California General Corporation Law.
(c) Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article 0 by the shareholders of the Corporation
shall not adversely affect any right or protection of a director or agent of
the Corporation existing at the time of such repeal or modification.
* * * * * *
3. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by Board of Directors.
4. The foregoing amendment to the Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the California Corporations Code. The total number of
outstanding shares of capital stock of the corporation entitled to vote on the
matter is 16,904,681 shares of Common Stock. The number of shares voting in
favor of the foregoing amendment to the Articles of Incorporation equaled or
exceeded the vote required. The percentage vote required was more than 50% of
the outstanding Common Stock.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: August 12, 1996
-------------------------------------------
James G. Turner, Chief Executive Officer
-------------------------------------------
William M. Stowell, Secretary
2
<PAGE> 1
Exhibit 10.1
DENSE-PAC MICROSYSTEMS, INC.
1996 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Dense-Pac Microsystems, Inc. 1996 Stock Option Plan
(the "Plan") is to further the interests of Dense-Pac Microsystems, Inc. (the
"Company") and its Subsidiaries by strengthening the desire of Employees to
continue their relationship with the Company and its Subsidiaries and by
inducing individuals to become Employees of the Company and its Subsidiaries
through stock options to be granted hereunder. Options granted under the Plan
are either options intending to qualify as "incentive stock options" within the
meaning of Section 422 of the Code or non-qualified stock options.
2. DEFINITIONS
Whenever used herein the following terms shall have the following
meanings, respectively:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Committee" shall mean a Committee of at least two directors
appointed by the Board, or if no such committee has been appointed reference to
"Committee" shall be deemed to refer to the Board.
(d) "Common Stock" shall mean the Company's Common Stock, no par
value per share, as described in the Company's Articles of Incorporation, as
amended.
(e) "Company" shall mean Dense-Pac Microsystems, Inc., a
California corporation.
(f) "Employee" shall mean in connection with Non-Qualified
Options, any officer, employee, consultant or advisor of the Company or any
Subsidiary or Parent Corporation of the Company, and any director of the
Company who is not an employee of the Company or any Subsidiary or Parent
Corporation of the Company, it being understood that the Committee may in its
discretion also grant Options to induce individuals to become and remain as
Employees and that such persons, for purposes of receiving Non-Qualified
Options hereunder, shall be deemed "Employees." In connection with Incentive
Options under this Plan, the term Employee shall mean any individual who is
employed, within the meaning of Section 3401 of the Code, by the Company or any
Subsidiary or Parent Corporation of the Company.
(g) "Fair Market Value Per Share" of the Company's Common Stock
shall mean if the Company's Common Stock is publicly traded the mean between
the highest and lowest quoted selling prices of the Common Stock on the date of
the grant of the Option or, if not available, the mean between the bona fide
bid and asked prices of the Common Stock on the date of the grant of the
Option. In any situation not covered above or if there were no sales on the
date of the grant of an Option, the Fair Market Value Per Share shall be
determined by the Committee in good faith based on uniform principles
consistently applied.
(h) "Incentive Option" shall mean an Option granted under the Plan
which is designated as and qualifies as an incentive stock option within the
meaning of Section 422 of the Code.
(i) "Non-Qualified Option" shall mean an Option granted under the
Plan which is designated as a non-qualified stock option or which does not
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(j) "Option" shall mean an Incentive Option or a Non-Qualified
Option. Each Option shall be evidenced by a written agreement executed by the
Company which shall set forth the terms and conditions of such Option.
(k) "Optionee" shall mean any Employee who has been granted an
Option under the Plan.
(l) "Parent Corporation" shall have the meaning set forth in
Section 425(e) of the Code.
(m) "Permanent Disability" shall mean termination of employment
with the Company or any Subsidiary or Parent Corporation of the Company with
the consent of the Company or such Subsidiary by reason of permanent and total
disability within the meaning of Section 22(e)(3) of the Code.
(n) "Plan" shall mean the Dense-Pac Microsystems, Inc. 1996 Stock
Option Plan, as from time to time amended.
1
<PAGE> 2
(o) "Subsidiary" shall have the meaning set forth in Section
425(f) of the Code.
3. ADMINISTRATION
(a) The Plan shall be administered either by the Board or, in the
discretion of the Board, by a Committee. The Board may from time to time
appoint members of the Committee in substitution for or in addition to members
previously appointed and may fill vacancies.
(b) Any action of the Committee with respect to the administration
of the Plan shall be taken by majority vote or by unanimous written consent of
its members.
(c) Subject to the provisions of the Plan, the Committee shall
have the authority to construe and interpret the Plan, to define the terms used
herein, to determine the Optionees, the time or times an Option may be
exercised and the number of shares which may be exercised at any one time, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
approve and determine the duration of leaves of absence which may be granted to
participants without constituting a termination of their employment for
purposes of the Plan, and to make all other determinations necessary or
advisable for the administration of the Plan. The Committee's authority shall
include, without limitation, the right, in its discretion, to accelerate the
exercisability of Options or re-price or exchange Options with the consent of
the Optionee. All determinations and interpretations made by the Committee
shall be conclusive and binding on all Employees and on their guardians, legal
representatives and beneficiaries.
(d) The Company will indemnify and hold harmless the members of
the Board and the Committee from and against any and all liabilities, costs and
expenses incurred by such persons as a result of any act, or omission to act,
in connection with the performance of such persons' duties, responsibilities
and obligations under the Plan, other than such liabilities, costs and expenses
as may result from the gross negligence, bad faith, willful misconduct and/or
criminal acts of such persons.
4. NUMBER OF SHARES SUBJECT TO PLAN
The stock to be offered under the Plan shall consist of up to
2,000,000 shares of the Company's Common Stock. If any Option granted
hereunder shall expire or terminate for any reason without having been
exercised in full, the unpurchased shares subject thereto shall again be
available for purposes of this Plan.
5. ELIGIBILITY AND PARTICIPATION
(a) The Committee shall determine the Employees to whom Options
shall be granted, the time or times at which such Options shall be granted and
the number of shares to be subject to each Option. An Employee who has been
granted an Option may, if he is otherwise eligible, be granted an additional
Option or Options if the Committee shall so determine. An Employee may be
granted Incentive Options or Non-Qualified Options or both under the Plan.
(b) In no event shall the aggregate fair market value (determined
as of the time an Incentive Option is granted) of shares subject to Incentive
Options held by an Optionee (granted under the Plan or under any other plan of
the Company) that first become exercisable in any calendar year exceed
$100,000. The portion of any purported Incentive Option which exceeds such
limitation shall be deemed to be a Non- Qualified Option.
6. PURCHASE PRICE
The purchase price of each share covered by an Option shall be
determined by the Committee on the date of grant; provided, however, that the
purchase price of each share covered by each Incentive Option shall not be less
than 100% of the Fair Market Value Per Share of the Common Stock of the Company
on the date the Incentive Option is granted; and provided, further, that if at
the time an Incentive Option is granted the Optionee owns or would be
considered to own by reason of Section 424(d) of the Code more than 10% of the
total combined voting power of all classes of stock of the Company or any
Subsidiary or Parent Corporation of the Company, the purchase price of the
shares covered by such Incentive Option shall not be less than 110% of the Fair
Market Value Per Share of the Common Stock on the date the Incentive Option is
granted.
2
<PAGE> 3
7. DURATION OF OPTIONS
The expiration date of an Option shall not exceed 10 years from the
date on which the Option was granted, and shall be subject to earlier
termination as provided herein; provided, however, that if at the time an
Incentive Option is granted the Optionee owns or would be considered to own by
reason of Section 424(d) of the Code more than 10% of the total combined voting
power of all classes of stock of the Company or any Subsidiary or Parent
Corporation of the Company, such Incentive Option shall expire not more than 5
years from the date the Incentive Option is granted.
8. EXERCISE OF OPTIONS
An Option shall be exercisable in installments or otherwise upon such
terms as the Committee shall in its discretion determine. An Optionee may
purchase less than the total number of shares for which the Option is
exercisable, provided that the exercise of an Option shall not include any
fractional shares. As a condition to the exercise, in whole or in part, of any
Option, the Committee may in its sole discretion require the Optionee to pay,
in addition to the purchase price of the shares covered by the Option, an
amount equal to any federal, state and local taxes that the Committee has
determined are required to be paid in connection with the exercise of such
Option in order to enable the Company to claim a deduction or otherwise.
Furthermore, if any Optionee disposes of any shares of stock acquired by
exercise of an Incentive Option prior to the expiration of either of the
holding periods specified in Section 422(a)(1) of the Code, the Optionee shall
pay to the Company, or the Company shall have the right to withhold from any
payments to be made to the Optionee, an amount equal to any federal, state and
local taxes that the Committee has determined are required to be paid in
connection with the exercise of such Option in order to enable the Company to
claim a deduction or otherwise.
9. METHOD OF EXERCISE
(a) To the extent that the right to purchase shares has accrued,
Options may be exercised from time to time by giving written notice to the
Company stating the number of shares with respect to which the Option is being
exercised, accompanied by payment in full of the purchase price for the number
of shares being purchased and, if applicable, any federal, state or local taxes
required to be paid in accordance with the provisions of Section 0 hereof.
(b) Payment of the purchase price for any shares pursuant to the
exercise of an Option may be made in cash or by check or, where expressly
approved for the Optionee by the Committee, in its discretion, and where
permitted by law:
(i) by cancellation of indebtedness of the Company to the
Optionee;
(ii) by surrender of shares of Common Stock that are owned by
the Optionee;
(iii) by tender of a full recourse promissory note, which
note shall be secured by the shares being purchased, contain such
terms as may be approved by the Committee and bear interest at a rate
sufficient to avoid imputation of income under Sections 483 and 1274
of the Code;
(iv) by waiver of compensation due or accrued to the Optionee
for services rendered;
(v) provided that a public market for the Company's Common
Stock exists:
(1) through a "same day sale" commitment from the
Optionee and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby
the Optionee irrevocably elects to exercise the Option and to
sell a portion of the shares so purchased to pay for the
purchase price, and whereby the NASD Dealer irrevocably
commits to forward the purchase price directly to the Company;
or
(2) through a "margin" commitment from the
Optionee and a NASD Dealer whereby the Optionee irrevocably
elects to exercise the Option and to pledge the shares so
purchased to the NASD Dealer in a margin account as security
for a loan from the NASD Dealer in the amount of the purchase
price, and whereby the NASD Dealer irrevocably commits to
forward the purchase price directly to the Company; or
(vi) by any combination of the foregoing.
If payment is made with shares of Common Stock, the Optionee, or other
person entitled to exercise
3
<PAGE> 4
the Option, shall deliver to the Company certificates representing the number
of shares of Common Stock in payment for the shares being purchased, duly
endorsed for transfer to the Company and, if requested by the Committee, a
representation and warranty in writing that he has good and marketable title to
the shares represented by the certificate(s), free and clear of all liens and
encumbrances. The value of the shares of Common Stock tendered in payment for
the shares being purchased shall be their Fair Market Value Per Share on the
date of the Optionee's exercise.
(c) Notwithstanding the foregoing, the Company shall have the
right to postpone the time of delivery of the shares for such period as may be
required for it to comply, with reasonable diligence, with any applicable
listing requirements of any national securities exchange or any federal, state
or local law. If an Optionee, or other person entitled to exercise an Option,
fails to accept delivery of or fails to pay for all or any portion of the
shares requested in the notice of exercise, upon tender of delivery thereof,
the Committee shall have the right to terminate his Option with respect to such
shares.
10. NON-TRANSFERABILITY OF OPTIONS
No Option granted under the Plan shall be assignable or transferable
by the Optionee, either voluntarily or by operation of law, otherwise than by
will or the laws of descent and distribution, and shall be exercisable during
his lifetime only by the Optionee.
11. CONTINUANCE OF EMPLOYMENT
Nothing contained in the Plan or in any Option granted under the Plan
shall confer upon any Optionee any rights with respect to the continuation of
his status as an Employee of the Company or any Subsidiary or Parent
Corporation of the Company or interfere in any way with the right of the
Company or any Subsidiary or Parent Corporation of the Company at any time to
terminate such relationship or to increase or decrease the compensation of the
Optionee from the rate in existence at the time of the grant of an Option.
12. TERMINATION OF EMPLOYEE STATUS OTHER THAN BY DEATH OR PERMANENT
DISABILITY
Except as the Committee may determine otherwise with respect to any
Non-Qualified Options granted hereunder, if an Optionee ceases to be an
Employee for any reason other than his death or Permanent Disability, any
Options granted to him under the Plan shall terminate not later than three
months from the date on which such Optionee ceases to be an Employee unless
such Optionee has been rehired by the Company and is an Employee on such date.
Until the termination of the Option, the Optionee may exercise any Option
granted to him but only to the extent such Option was exercisable on the date
he ceased to be an Employee and provided that such Option has not expired or
otherwise terminated as provided herein. A leave of absence approved in
writing by the Committee shall not be deemed a termination for purposes of this
Section, but no Option may be exercised during any such leave of absence,
except during the first 90 days thereof. The fact that the Optionee may
receive payment from the Company or any Subsidiary of the Company after
termination of Employee status for vacation pay, for services rendered prior to
termination, for salary in lieu of notice, or for other benefits shall not
affect the termination date.
13. DEATH OR PERMANENT DISABILITY OF OPTIONEE
Except as the Committee may determine otherwise with respect to any
Non-Qualified Options granted hereunder, if an Optionee shall die at a time
when he is an Employee or if the Optionee shall cease to be an Employee by
reason of Permanent Disability, any Options granted to him under this Plan
shall terminate not later than one year after the date of his death or
termination of Employee status due to Permanent Disability unless by its terms
it shall expire before such date or otherwise terminate as provided herein, and
shall only be exercisable to the extent that it would have been exercisable on
the date of his death or termination due to Permanent Disability. In the case
of death, the Option may be exercised by the person or persons to whom the
Optionee's rights under the Option shall pass by will or by the laws of descent
and distribution.
14. STOCK PURCHASE NOT FOR DISTRIBUTION
Each Optionee shall, by accepting the grant of an Option under the
Plan, represent and agree, for himself and his transferees by will or the laws
of descent and distribution, that all shares of stock purchased upon exercise
of the Option will be received and held without a view to distribution except
as may be permitted by the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder. After each notice of exercise of any
portion of an Option, if requested by the Committee, the person entitled to
exercise the Option must agree in writing that the shares of stock are being
acquired in good faith without a view to distribution.
4
<PAGE> 5
15. PRIVILEGES OF STOCK OWNERSHIP
No person entitled to exercise any Option granted under the Plan shall
have any of the rights or privileges of a shareholder of the Company with
respect to any shares of Common Stock issuable upon exercise of such Option
until such person has become the holder of record of such shares. No
adjustment shall be made for dividends or distributions of rights in respect of
such shares if the record date is prior to the date on which such person
becomes the holder of record, except as provided in Section 0 hereof.
16. ADJUSTMENTS
(a) If the number of outstanding shares of Common Stock of the
Company are increased or decreased, or if such shares are exchanged for a
different number or kind of shares or securities of the Company through
reorganization, merger, recapitalization, reclassification, stock dividend,
stock split, combination of shares, or other similar transaction, the aggregate
number of shares of Common Stock subject to the Plan as provided in Section 0
hereof and the shares of Common Stock subject to issued and outstanding Options
under the Plan shall be appropriately and proportionately adjusted by the
Committee. Any such adjustment in the outstanding Options shall be made
without change in the aggregate purchase price applicable to the unexercised
portion of the Option but with an appropriate adjustment in the price for each
share or other unit of any security covered by the Option.
(b) Notwithstanding the provisions of subsection (a) of this
Section, the Plan and each outstanding Option shall terminate on the effective
date of the dissolution or liquidation of the Company or any reorganization,
merger or consolidation with one or more corporations or entities as a result
of which the Company is not the surviving corporation, or any sale of all or
substantially all the assets of the Company, or the sale of more than 80% of
the then outstanding Common Stock, unless the surviving or acquiring
corporation or other entity agrees to assume all outstanding Options; provided
that the Committee may, in its sole discretion, accelerate the vesting of any
outstanding Option or give notice of such event to Optionees prior to the
effective date of such event.
(c) Adjustments under this Section shall be made by the Committee,
whose determination as to what adjustments shall be made, and the extent
thereof, shall be final, binding and conclusive. No fractional shares of stock
shall be issued under the Plan or in connection with any such adjustment.
17. AMENDMENT AND TERMINATION OF PLAN
(a) The Board of Directors of the Company may from time to time,
with respect to any shares at the time not subject to Options, suspend or
terminate the Plan or amend or revise the terms of the Plan; provided that any
amendment of the Plan shall be approved by the shareholders of the Company if
the amendment would (i) increase the number of shares of Common Stock which may
be issued under the Plan, except as permitted under the provisions of Section 0
hereof, or (ii) materially modify the requirements as to eligibility for
participation in the Plan.
(b) No amendment, suspension or termination of the Plan shall,
without the consent of the Optionee, alter or impair any rights or obligations
under any Option theretofore granted to such Optionee under the Plan.
(c) The terms and conditions of any Option granted to an Optionee
under the Plan may be modified or amended only by a written agreement executed
by the Optionee and the Company.
18. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon adoption by the Board of
Directors of the Company and approval by the Company's shareholders; provided,
however, that prior to approval of the Plan by the Company's shareholders, but
after adoption by the Board of Directors, Options may be granted under the Plan
subject to obtaining the shareholders' approval of the adoption of the Plan.
Notwithstanding the foregoing, shareholders' approval must occur no later than
12 months after the date of adoption of the Plan by the Board of Directors.
19. TERM OF PLAN
No Option shall be granted pursuant to the Plan after 10 years from
the earlier of the date of adoption of the Plan by the Board of Directors of
the Company or the date of approval of the Plan by the Company's shareholders.
5
<PAGE> 6
The Plan was adopted by the Board on January 17, 1996. The Plan was
approved by the shareholders on September 12, 1996.
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET & STATEMENT OF OPERATIONS FOR THE PERIOD ENDING AUGUST 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB-QUARTERLY REPORT
PURSUANT TO SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
AUGUST 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-1-1996
<PERIOD-END> AUG-31-1996
<CASH> 4,309,478
<SECURITIES> 0
<RECEIVABLES> 2,483,343
<ALLOWANCES> 40,000
<INVENTORY> 5,621,295
<CURRENT-ASSETS> 12,824,620
<PP&E> 6,177,929
<DEPRECIATION> 2,069,792
<TOTAL-ASSETS> 17,379,357
<CURRENT-LIABILITIES> 2,235,955
<BONDS> 0
0
0
<COMMON> 16,041,064
<OTHER-SE> (3,570,340)
<TOTAL-LIABILITY-AND-EQUITY> 17,379,357
<SALES> 3,643,713
<TOTAL-REVENUES> 3,643,713
<CGS> 2,894,223
<TOTAL-COSTS> 2,894,223
<OTHER-EXPENSES> 1,088,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,664
<INCOME-PRETAX> (371,506)
<INCOME-TAX> 800
<INCOME-CONTINUING> (371,506)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (372,306)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
