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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM l0-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended February 28, 1997,
[ ] Transition report under 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.
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(Name of Small Business Issuer in its Charter)
California 33-0033759
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
7321 Lincoln Way
Garden Grove, California 92841
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(Address of principal executive offices) (Zip Code )
Registrant's telephone number, including area code: (714) 898-0007
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period as the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days: YES X NO
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form l0-KSB or any amendment to
this Form 10-KSB [ ]
The Issuer's revenues for its most recent fiscal year were $14,024,000. The
aggregate market value of the Issuer's Common Stock, no par value, held by
non-affiliates of the Issuer on May 2, 1997 (based on the average bid and asked
price per share on that date as reported on NASDAQ), was $22,076,000.
Issuer's Common Stock outstanding at May 2, 1997: 16,997,681 shares
Documents Incorporated By Reference
Portions of the registrant's Proxy Statement relating to the registrant's 1997
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
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PART 1
ITEM 1: DESCRIPTION OF THE BUSINESS
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's results could differ materially from those
set forth in the forward-looking statements. Certain factors that might cause
such a difference are discussed in the section entitled " Cautionary Statements
" beginning on page 12 of this Form 10-KSB.
General background
Dense-Pac Microsystems, Inc. ("Dense-Pac" or the "Company") designs,
develops and manufactures memory products based on proprietary chip stacking
technology that allows the company's governmental and commercial customers to
pack huge amounts of memory into small spaces. The Company's products are used
in a variety of military, industrial and commercial applications where high
memory density, high performance and high reliability are required. Its memory
technology can be used in such diverse areas as space satellites and space
missiles, high performance auto engines, computer servers, digital cameras and
laptop computers.
The Company's products are designed to improve performance and reliability
at the system level by reducing space, cost, weight and power requirements. The
Company procures plastic memory devices or raw silicon memory from a variety of
semiconductor manufacturers and incorporates the memory devices into high
density products utilizing the latest process technology and the Company's
advanced package designs. The Company's products range from monolithic
semiconductors to patented, high density, three-dimensional plastic or ceramic
memory products.
The majority of the Company's products are memory solution related. A
memory module is a miniaturized memory subsystem which can consist of numerous
memory devices plus support chips in a component only a few times larger than a
conventionally packaged integrated circuit. The Company's proprietary packaging
technology enables memory systems to be designed with significantly more memory
in a given area as can be accomplished with conventional packaging techniques.
For example, a memory system which might require 20 square inches of printed
circuit board using conventional packaging techniques, could be packaged by the
Company in a memory module less than two square inches in size. The module
approach to memory packaging allows the elimination of most of the printed
circuit boards as well as their mating connectors, resulting in smaller, lighter
and less expensive digital systems. Also, since the electrical signals have less
distance to travel, operating speeds are enhanced.
High density packaging is used in numerous applications within the
electronics industry. Improved performance and reliability in increasingly
smaller packages has been a continuous trend in electronics. During the past 20
years, advances have been made in reducing size and increasing performance at
the integrated circuit level (LSI, VLSI, etc.). However, high pin count, complex
semiconductors with adequate test methods have reached levels that are both
difficult and costly to achieve. The Company's packaging technologies address
the market's need to both reduce the size and improve the performance of memory
products.
In addition to improving performance, packaging technology allows the use
of more available, less expensive, lower density chips to achieve the same
performance levels of newer, more expensive high
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density chips. For example, the Company can emulate a 256 Meg DRAM by stacking
four 64 Meg DRAMs to provide the same memory as a single 256 Meg DRAM chip,
which is currently not economically available in the market place. Packaging
technology can thereby reduce the cost of certain products by allowing customers
to use a module consisting of multiple low cost, volume produced memory chips
(e.g., 64 Meg DRAMs) instead of a single potentially unavailable expensive
state-of-the-art semiconductor chip (e.g., 256 Meg DRAM).
Dense-Pac is also able to offer customers leading edge memory products by
packaging the highest memory chips available. For example, the SuperSIMM(TM)(TM)
module can provide a gigabit of memory by stacking 16 Meg DRAM chips, a level of
memory which no single chip can currently provide. Future generations of this
technology using 64 Meg DRAMs could produce four gigabits of memory on a
standard circuit board configuration. Because of the rapid technological
advances in the semiconductor industry, however, the Company's products are
subject to obsolescence or price erosion as new chips with the same or greater
density as the Company modules are continuously introduced. This results in the
Company's products having relatively short life cycles and the need to
continually develop new products which incorporate the latest semiconductor
technologies.
Recent Company Changes
During the first four months of 1997, the company experienced a change in
several key management positions. In January 1997, Uri Levy was named chief
executive officer and later also assumed the position of chairman of the board.
In addition, Gene Phelps and Charles Gamer joined the company as vice president
of operations and vice president sales and marketing, respectively. They
replaced the former vice president of sales and marketing and the vice president
of engineering. The new management team is developing and implementing a new
business strategy which is discussed below.
Business Strategy
The Company's principal business objective is to be the leading
worldwide provider of three-dimensional memory products. Three-dimensional
products incorporating ceramic and plastic devices have only recently been
introduced to the industry as an alternative to increase the efficiency, density
and memory capability of existing technology. The central elements of the
Company's business strategy include:
MAINTAIN TECHNOLOGY LEADERSHIP. The Company believes it is a leader in the
design of three-dimensional memory products. The Company's ceramic stack and
commercial plastic stack products both have patented processes due to their
unique configuration. The Company intends to continue developing these and other
technologies in order to enhance its competitive position.
OFFER COST-EFFECTIVE SOLUTIONS. The Company's stackable product emulators
utilize technology to reduce the size and cost of comparable technology. The
Company believes that by using its three-dimensional technology, customers can
increase the efficiency, density and memory capability of their products. Many
of Dense-Pac's new products have the same "footprint" (space on the memory
board) thereby reducing the need for the customer to re-engineer boards as new
denser memory becomes available.
TARGET HIGH VOLUME OEM CUSTOMERS. The Company believes that its technology
can increase the overall performance of systems and their integrated parts.
Dense-Pac is structuring itself to support OEM opportunities that provide the
best utilization of the technology in today's growing market.
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This restructuring will include a specialized and focused "solution" approach to
sales and marketing to OEM markets and the establishment of a prototype design
team to custom design and quickly deliver prototype products to customers.
PURSUE STRATEGIC RELATIONSHIPS. The Company intends to enter into a number
of development, production, marketing and other strategic relationships in order
to expand sales and broaden its product offerings.
3-D Stacking Products
In September 1990, the Company was awarded a patent on a new packaging
technology which allows use of the "Z" axis (the third dimension) to further
increase density over what was available in the market. In three-dimensional
packaging, individual memory chips are stacked one on the other, and vertically
interconnected. The Company's "stacking" products are to computers what
skyscrapers are to real estate, enabling more efficient use of a given space by
dramatically expanding memory capacity and speed on less circuit board space.
For example, this stacking technology could permit the Company to package 512
megabytes of memory in a three-dimensional package measuring just slightly
larger than a half inch thick business card. This technique increases memory
board density significantly over conventional packaging techniques, has
particular advantages in applications where high memory capacity, efficiencies
and space are critical, such as portable computers and communications devices.
The Company commenced shipments of its three-dimensional ceramic stacked
products in fiscal year 1991. The ceramic stacked products are manufactured on
ceramic substrates to withstand extreme temperature and vibration ranges and
adverse environmental conditions. These products are used primarily in military,
aerospace and high industrial applications such as satellites, deep well drill
bits and engine control blocks. The products are available in multiple speed
ranges of SRAM, flash and DRAM.
In fiscal year 1995 the Company developed a silicon on silicon stacking
product for commercial applications where space, savings and high memory density
are critical, such as cellular telephones, portable and palm-top computers,
interactive communications, and medical instruments. This technology represented
a four times improvement in density and a 75% reduction in manufacturing costs
compared to the first generation products. The second generation products could
be utilized directly in emerging multi-chip MCM module applications or
encapsulated in plastic for use on conventional printed circuit boards. The
Company has not been able to market this technology because the sole supplier
ceased production of the SRAM die that was designed into the product. The
Company believes that this technology remains valid and it may redesign this
product to incorporate new die technology when market conditions are
appropriate.
During fiscal year 1996 the Company introduced a commercial plastic
three-dimensional stacking packaging technology. The main focus of this
technology is to introduce the Company's ability to stack readily available
commercial plastic memory devices to emulate higher density products which are
more expensive and/or in short supply. One of the new products is called the
SuperSIMM(TM)(TM), a super memory board which quadruples the memory available
with a standard SIMM (single inline memory module). The current product offering
in production for the SuperSIMM(TM) is 16 stacks of four standard 16 MEG DRAM
chips, mounted on an industry standard 72 pin substrate. The SuperSIMM(TM)
provides a gigabit of memory when plugged into the same size slot of a high-end
workstation used by a SIMM.
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The commercial plastic stacked technology is targeted at high-end
workstations, network servers, solid state disk and data markets, Internet
applications, electronic organizers, portable computers and memory intensive
software applications such as video on demand, computer automated design,
multimedia and special effects. High-end workstations produced by Sun, IBM,
Hewlett Packard, Digital and Silicon Graphics have multiple slots for SIMM
modules which would also accommodate the Dense-Pac SuperSIMM(TM) module.
The commercial plastic stacking products also have the capability to
combine various types of chips such as SRAMs, DRAMs, flash memory and
microprocessors to improve performance and versatility.
Standard Products
The Company offers a standard product line of ceramic and plastic memory
modules with a variety of capabilities to meet market requirements. The
Company's standard memory modules incorporate static random access memories
(SRAMs), erasable programmable read-only memories (EPROMs) electrically erasable
programmable read-only memories (EEPROM's), including flash technology, and
dynamic random access memories (DRAM). Due to the various configurations and
applications of the Company's products, prices range from less than $50 for
commercial modules to over five thousand dollars for high-end military
specification modules.
Custom Design Capabilities
Many of the Company's customers require product packaging which meets
specialized density, size and performance standards. Accordingly, an important
aspect of the Company's business is its ability to custom design and manufacture
modules to meet a customer's specifications. As part of its new business
strategy, the Company intends to create a specially designated design team to
custom develop and quickly deliver prototype products to customers. In most
cases, the Company retains ownership of the custom designs for prototype
products and therefore is able to offer such designs to other customers as
standard products. Thus, the Company's custom design capabilities also provide
it with an ongoing source of new standard products.
Research and Development; Patents and Technology Rights
The Company is involved in research and development for wafer/die memory
integration, innovative three-dimensional stacking and mixed memory
technologies. The Company's research and development expertise supports its
custom design capabilities as discussed above. The Company's product development
activities are solution driven and the Company's goal is to create technological
advancements by working with customers to develop advanced cost effective
products that solve the customers' specific memory requirements.
The Company's first generation, three-dimensional ceramic stacking
technology is the subject of a United States patent which expires in 2007. In
1993, the Company was awarded a U.S. patent on certain aspects of its second
generation (silicon on silicon) three-dimensional technology which expires in
2010. In 1996, the Company was awarded a U.S. patent on certain aspects of a
plastic commercial three-dimensional technology which expires in 2013. There can
be no assurance that these patents will afford the Company's products any
competitive advantage, that they will not be challenged or circumvented by third
parties, or that patents issued to others will not adversely affect the
development or commercialization of the Company's products.
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The semiconductor packaging industry is characterized by rapid
technological change and is highly competitive with respect to timely product
innovation. Memory products typically have a product life of only three to five
years. The Company's success depends on its ability to develop new products or
product enhancements to keep up with technological advances and to meet customer
needs.
In order to obtain large orders for its products from OEMs, the Company may
be required to provide manufacturing licenses to third parties as second sources
to ensure that the customer's requirements are met. Such second sources could
then compete directly with the Company for customers.
Marketing and Customers
The Company markets its products to military, aerospace and commercial
customers that require high reliability, high density and high performance. The
Company's military/aerospace customers use the Company's products in high
performance weapons, avionics and communications systems. Commercial markets are
in the areas of computers, communications, multimedia and medical instruments.
Compared to the military/aerospace business, the commercial business is
characterized by more competition, a higher risk of inventory obsolescence and
lower margins. The commercial market is also characterized by more rapid product
innovation in response to new technologies and customers' memory requirements.
As a result, commercial products have approximately a two to four-year life,
whereas military/aerospace products have a four to eight-year or longer life. In
addition, the Company is required to carry significant levels of inventory
before orders are received in order to meet the short delivery requirements of
commercial customers.
The Company markets its products throughout the world directly through its
own sales staff and through independent sales representatives. Sales
representatives obtain orders on an agency basis and shipment is made directly
to the customer by the Company. The sales representatives receive a commission
on sales of the Company's products within their territories. In both fiscal
years 1997 and 1996, approximately 23% of the Company's sales were export sales,
primarily to Western Europe.
Foreign sales are in U.S. dollars.
Manufacturing and Supplies
The principal components of a memory module are semiconductor memory chips
and the ceramic or plastic substrates on which they are mounted. The Company
purchases packaged and un-packaged parts from various semiconductor vendors,
depending on the customer's requirements. The semiconductor chips must be packed
in ceramic leadless chip carriers (LCCs) so that they can be soldered onto the
substrate surface. The Company has the un-packaged chips packaged in LCCs by an
assembly house. The Company then performs final product assembly by mounting the
LCCs on the substrate. The substrate performs the same function as a
miniaturized printed circuit board by providing interconnection between the LCCs
and the memory module's contact pins.
Dense-Pac electronically tests its products at various stages in the
assembly process to meet military or other customer specifications and performs
high temperature burn-in on military, avionics and industrial grade products.
Ceramic substrate products are hermetically sealed, resulting in a product
which can withstand extreme temperature ranges and exposure to adverse
environmental conditions such as moisture and corrosives. Ceramic products are
typically used in military and aerospace applications. Plastic substrate
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products, because they use plastic-molded parts, are lower cost, have a shorter
life span and are used in benign environments. Plastic products are typically
used in commercial applications such as robotics, medical instrumentation, test
equipment, portable computers and cellular phones.
The Company purchases raw materials and components from several material
suppliers, but does not have any supply agreements. Although alternative
suppliers are available, a significant unplanned event at a major supplier or
assembly house could have a short-term adverse impact on the Company's
operations. The market for memory devices is characterized by periodic shortages
which can adversely impact the Company's costs and/or ability to timely ship
products.
The Company's manufacturing capacity is not adequate to support large
volume production. Accordingly, the Company will seek to enter into strategic
alliances with reliable manufacturing services which can provide high volume
production capabilities so that the Company's resources can be devoted to
research and development, prototype and custom design services, and expansion of
sales and marketing efforts.
Strategic Alliance
On May 19, 1997, Dense-Pac announced a strategic alliance with SCI
Systems, Inc., for high-volume production and testing of Dense-Pac's proprietary
three-dimensional (3-D) memory modules. Under the terms of the agreement, SCI
will provide electronic manufacturing services for high volume production of
Dense-Pac 3-D memory modules and serve as a strategic volume production partner
in presentations to prospective Dense-Pac customers. SCI Systems, Inc., provides
electronic manufacturing services to companies that out source production of
finished products and subassemblies. SCI has 22 plants worldwide and operates
164 surface-mount technology lines.
Defense-Related Subcontracts
A portion of the Company's sales are derived from defense-related
subcontracts. As a result, the Company is subject to business risks resulting
from federal budgeting constraints, changes in governmental appropriations and
changes in national defense policies and priorities, and termination, reduction
or modification of contracts for the convenience of the government. Many of the
programs in which the Company participates as a subcontractor may extend for
several years, but since the Government funds contracts on a year-to-year basis,
the Company's business is dependent on annual appropriations and funding of new
and existing contracts.
Competition
The Company does not generally compete with chip manufacturers who focus on
the lowest cost consumer markets to keep volumes high. Instead, the Company
focuses on niche markets where the customer's requirements allow the Company to
utilize its unique engineering and packaging skills to maintain a high value
added content. Dense-Pac's direct competition includes specialty memory module
assembly companies such as Electronic Designs, Inc. and Hybrid Memory Products.
Semiconductor firms such as Integrated Device Technology, Inc., Mitsubishi
Corp., Fujitsu Ltd.and Harris semiconductor also compete in the memory module
marketplace. Such companies, however, are not typically direct competition to
the specialty assembly houses such as the Company due to their large production
run requirements (attributable to extensive automation) and the fact that they
use only their own semiconductors. Dense-Pac, on the other hand, manufactures
memory modules which incorporate whichever semiconductor components are best
suited to meet the customer's requirements.
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According to industry sources, there are several companies developing or
marketing three dimensional packaged products, including Irvine Sensors, Texas
Instruments, Thompson CSF, Staktek and Cubic Memory.
The principal competitive factors in the memory module market include
product reliability, product performance characteristics, the ability to meet
the customer's product needs and delivery requirements, and price. Dense-Pac
believes it competes favorably with respect to all of these factors. The
Company's commercial business is characterized by more intense competition, with
the most important factors being price and the ability to meet short development
and delivery schedules. Some of Dense-Pac's competitors have greater financial,
technical and personnel resources than the Company.
Employees
At May 2, 1997, the Company had 106 full-time employees, of which 13 were
engaged in engineering, 58 in manufacturing, production and testing, 9 in
quality assurance, 14 in marketing/sales and 12 in management and
administration. None of the Company's employees is represented by a labor union
and the Company considers its employee relations to be good.
ITEM 2: PROPERTIES
The Company's executive offices and manufacturing facilities consist of
21,350 square feet in an industrial park in Garden Grove, California. The lease
expires January 31, 2001 and provides for an effective monthly rent of $10,900.
The Company believes that its facilities are adequate to meet its foreseeable
needs.
ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor its properties are currently subject to any
material legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.
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PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Stock
Market on March 14, 1996, under the symbol "DPAC." It previously traded on the
Nasdaq Small Cap Market. The following table sets forth the high and low closing
bid prices of the Common Stock on the Nasdaq Small Cap Market for the periods
through March 13, 1996, and the high and low closing prices on the Nasdaq
National Market for the periods beginning March 14, 1996, as reported by Nasdaq.
Quotations on the Nasdaq Small Cap Market are inter-dealer prices without retail
mark-up, mark-down or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
Fiscal Year ended February 29, 1996:
Quarter Ended
May 31, 1995 2- 7/16 1 - 3/4
August 31, 1995 4- 11/16 1 - 15/16
November 30, 1995 7- 7/16 4 - 3/8
February 29, 1996 6- 11/16 5 - 3/8
Fiscal Year ended February 28, 1997:
Quarter Ended
May 31, 1996 7- 1/8 4 - 7/8
August 31, 1996 5- 3/8 2 - 5/8
November 30, 1996 3- 7/16 1 - 15/16
February 28, 1997 3- 3/16 1 - 1/4
</TABLE>
As of May 2, 1997, the Company had 315 shareholders of record, and over
4,000 beneficial shareholders, based on information provided by the Company's
transfer agent.
The Company has not paid any dividends and it does not expect to pay any
dividends in the foreseeable future. There are currently no contractual or other
restrictions affecting the Company's ability to pay dividends.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Fiscal 1997 Compared to Fiscal 1996.
Fiscal year 1997 net sales of $14,024,000 decreased by $3,983,000 (22%)
from fiscal year 1996 sales of $18,006,000. The decrease was partly due to the
anticipated technology phase out of a standard memory module, the 512k x 8,
which contributed approximately $6,200,000 or 34% of fiscal year 1996 revenues.
For fiscal year 1997, the 512K x 8 represented approximately $1,700,000 or 12%
of total
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revenue. While revenues for this memory module declined, the Company generated
approximately $760,000 in revenue from its high density new commercial plastic
stacked products. Revenue from first generation products composed approximately
24% of revenue for fiscal 1997 as compared to approximately 32% in fiscal year
1996. The decrease in first generation product sales was mainly due to the
decrease in the SRAM memory prices that are used in this technology.
Foreign sales represented 23% of total revenue for fiscal years 1996 and
1997. While the overall sales volume for the 512k x 8 module also decreased for
the foreign marketplace, first generation ceramic stack products sales increased
by 60% due to new opportunities for these products.
The Company was unable to offset the decreased revenues with orders of new
commercial stack products, such as the SuperSIMM(TM), which was introduced in
fiscal year 1996. The Company's new management team is implementing a new
business strategy to target OEM customers as discussed in Item 1 of this report,
with the goal of returning the Company to growth and profitability. See
"Cautionary Statements."
Cost of sales for the fiscal year 1997, excluding the inventory
write-down, was $10,546,000 ( 75% of sales ), as compared to cost of sales for
fiscal year 1996 of $12,936,000 ( 72% of sales). The lower cost of sales for
fiscal year 1996 can be attributed to greater operating efficiencies resulting
from the higher level of sales in 1996. Additionally, for fiscal year 1997,
depreciation expense increased by $560,000, as the first full year of
depreciating tooling and capitalized engineering over a three year period was
recognized as compared to 3-5 years in prior periods.
During fiscal year 1997, the Company experienced market price declines in
inventory. For the fiscal year 1997, approximately $ 2,100,000 of lower of cost
or market adjustments were recognized for inventory. Part of the price
adjustment consisted of declines in the market price of 16 Meg DRAM's from an
average cost of $ 45.00 during fiscal year 1996 to a market value of
approximately $ 9.00 by November 1996. At February 28, 1997, DRAM prices had
stabilized resulting in no additional write-off for the fourth quarter relating
to the 16meg DRAM inventory. Market adjustments relating to SRAM memory
accounted for the remainder of the inventory write-down.
Selling, general and administrative (SG&A) expenses increased by $543,000
(20%) from $2,779,000 in fiscal year 1996 to $3,322,000 in fiscal year 1997. The
fiscal year 1996 SG&A expense included $186,500 related to the management bonus
plan, whereas fiscal year 1997 had no management bonus expense. Excluding the
management bonus expense, SG&A expense increased approximately $730,000 (26%)
for fiscal year 1997. The increase in SG&A expense included increased
administrative salaries and related costs of $285,000, increased sales and
marketing costs of $195,000, additional costs with being listed on the National
NASDAQ Market of approximately $80,000 and patent legal fees of $78,000. The
increase in salaries and sales costs was due mainly to management recruiting,
advertising, salaries for new personnel, outside sales representative
commissions, and related expenses incurred in fiscal year 1997.
During the fourth quarter of fiscal year 1997, the Company recognized
other costs of approximately $961,000, consisting of a $336,000 write-off of
technology and marketing rights, a $291,000 write-off of fixed assets, and
severance costs of $334,000. The write-offs reflected a re-evaluation of the
usefulness of certain assets in light of the Company's new business strategies,
including an evaluation of expected future cash flows from those assets.
Research and development expense increased $291,000 or 56% from the prior
year due to continued work on the commercial plastic stack products. While the
previous year was experiencing growth due to
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the 512K x 8 module sales, additional time was spent during fiscal year 1997 on
perfecting the commercial plastic stack. Research and development represented
approximately 6% of sales for fiscal year 1997 as compared to 3% of sales for
the previous fiscal year.
Interest expense increased slightly, $16,000 or 6% from the previous year
due to several new equipment leases having a full year of interest expense.
Interest income increased by $176,000 due to the interest earned on the net
proceeds from the private placement in February 1996.
In the fourth quarter of fiscal year 1997, the Company reversed $150,000 of
a deferred tax benefit which had been recorded in fiscal year 1996 due to the
uncertainty of the recoverability of such asset due to the loss incurred in
fiscal year 1997.
Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share" (FAS 128). FAS 128 requires the Company to disclose a
basic and diluted earnings per share calculation. Basic earnings per share (EPS)
excludes common stock equivalents for the EPS calculation, while diluted EPS is
calculated consistent with the Company's primary earnings per share calculation.
The Company adopted the provisions of FAS 128 with the fiscal year-end financial
statements. Since there were losses for fiscal years 1995 and 1997, no
calculation was necessary. Basic and diluted EPS, as computed under FAS 128,
would have been $ .11 under both calculations, for the yearend February 29,
1996.
Fiscal 1996 Compared to Fiscal 1995
Fiscal year 1996 net sales of $18,006,091 increased by $6,511,382 (57%)
over fiscal year 1995 sales of $11,494,709. These results reflected an increase
in the first generation stack modules of over $4,000,000 compared to the prior
year due to increased market penetration of these ceramic stackable chip
products as well as new technology and improved density in such product. The
first generation products represented approximately 35% of net sales in fiscal
year 1996 compared to 33% of net sales in fiscal year 1995. Additional sales
also resulted from continued strong demand for the 512kx8 standard commercial
product, which represented approximately 34% of net sales in fiscal year 1996,
compared to approximately 30% in fiscal year 1995. Sales of this product
increased by $2,800,000 due to opportunities generated through new distribution
arrangements and the availability of stock on had to support quick turn
business. Due to technology advances, the Company expects to experience a
significant decline in sales of 512kx8 standard products in fiscal year 1997.
While the Company has developed a replacement product which incorporates the
advanced technology, the market acceptance of such new product cannot be
predicted. Foreign sales increased approximately $1,000,000 as the Company was
successful in obtaining several new representatives to sell the Company's
products into new foreign markets. Foreign sales represented 23% of net sales in
fiscal year 1996 compared to 27% of net sales in fiscal year 1995.
Costs of sales for fiscal year 1996 was $12,935,789 (72% of sales), an
increase of $3,828,035 (42%) over fiscal year 1995 cost of sales of $9,107,754
(79% of sales). Approximately $1,000,000 of cost of sales in fiscal year 1995
related to pre-production costs associated with the second generation
technology. Without such expenses, cost of sales as a percentage of sales for
fiscal year 1995 would have been approximately 71%. Despite the increased sales
in fiscal year 1996, cost of sales as a percentage of sales in fiscal year 1996
compared to fiscal year 1995 (excluding the effect of the second generation
pre-production costs) did not decrease due to lower margins attributable to
commercial products and
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approximately $80,000 of additional compensation resulting from the Company's
variable compensation plan. See Note 13 of the Financial Statements for a
description of this plan.
Selling, general and administrative expenses increased by $380,744 (16%)
from $2,398,057 in fiscal year 1995 to $2,778,801 in fiscal year 1996. The
increase was due to payments under the variable compensation plan of
approximately $169,000 during fiscal year 1996 compared to no such payments in
the prior fiscal year. In addition, bonuses under the Management Bonus Plan of
approximately $186,500 were accrued for fiscal year 1996 compared to $19,706 in
fiscal year 1995. See Note 13 of the Financial Statements for a description of
the bonus plan. Due to the greater rate of growth of net sales, selling, general
and administrative expenses decreased as a percentage of net sales from 21% of
net sales in fiscal year 1995 to 15% of net sales in fiscal year 1996.
Research and development expense remained essentially unchanged in fiscal
year 1996 as compared to fiscal year 1995.
Net interest expense increased by $28,188 (14%) from $196,167 in fiscal
year 1995 to $224,355 in fiscal year 1996 because a related party note was
outstanding for the entire fiscal year rather than a partial year in fiscal year
1995 and the Company entered into an additional lease relating to new equipment
in fiscal year 1996.
In the fourth quarter of fiscal year 1996 the Company recognized a $150,000
deferred tax benefit as a result of the availability of operating tax loss
carryforwards and the expected utilization of those carryforwards. In the prior
fiscal year, the Company reversed $300,000 of a deferred tax benefit which had
been recorded in fiscal year 1994.
Liquidity and Capital Resources
The Company's sources of liquidity during fiscal year 1997 were cash flow
from operations and $4.3 million net cash proceeds from the sale of 900,000
shares of Common Stock in February 1996. The Company experienced a slight
increase in cash of $81,000, due to the collection of accounts receivable and a
decrease in inventories of $1,620,000. Non-cash items, such as depreciation
expense of $1,095,000 and the impairment loss of $627,000 were offset by
property additions of $1,395,000.
Cash used for investing activities consisted of approximately $491,000 of
capitalized engineering labor and approximately $904,000 for the purchase of
engineering and test equipment, computers, machinery and tooling. The Company
has no material commitments for capital expenditures in fiscal year 1998.
At February 28, 1997, the Company had a $1.8 million loan payable to a
major shareholder with interest at 5% per annum, and a $100,000 loan payable to
a director with interest at 8% per annum, with interest payable quarterly on
both loans and the principal on both loans due in October 1999. These loans are
secured by all of the Company's assets, although the major shareholder has
agreed to subordinate its security interest in accounts receivable in order to
permit the Company to obtain conventional bank financing for accounts
receivable. These loans preclude the Company from incurring additional debt
without the consent of the lenders except for purchase money indebtedness
incurred for the purchase or lease of equipment and machinery.
12
<PAGE> 13
The Company also has a loan from a Belgian 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 semiannually. At February 28, 1997, the outstanding
principal amount was $ 564,424. Principal and interest payments on this loan
totaled $193,221 in fiscal 1997.
Despite a loss of $4,096,000, the Company ended the fiscal year in a
strong financial position. At February 28, 1997, the Company had cash of almost
$4.7 million, working capital of $7.4 million and a current ratio of 4.4 to 1.0.
Management believes that this positive cash position, together with working
capital, will be adequate to implement management's business plan and to meet
the Company's foreseeable needs. See "Cautionary Statements."
CAUTIONARY STATEMENTS
Statements in this Report which are not historical facts, including
statements about the Company's business strategy and expectations about new and
existing products and technologies or market characteristics and conditions, are
forward-looking statements that involve risks and uncertainties. These include,
but are not limited to, the factors described below which could cause actual
results to differ from those contemplated by the forward-looking statements.
Product Development and Technological Change
The semiconductor and memory module industries are characterized by rapid
technological change and are highly competitive with respect to timely product
innovation. The Company's memory products are subject to obsolescence or price
erosion because semiconductor manufacturers are continuously introducing chips
with the same or greater memory density as the Company's modules. As a result,
memory products typically have a product life of only three to five years. For
example, the Company experienced a significant decline in revenues in fiscal
year 1997 due to the technological phase-out of its 512K x 8 standard product.
The Company's future success depends on its ability to develop new products
and product enhancements to keep up with technological advances and to meet
customer needs. Any failure by the Company to anticipate or respond adequately
to technological developments and customer requirements, or any significant
delays in product development or introduction, could have a material adverse
effect on the Company's financial condition and results of operations. For
example, pre-production delays associated with the second generation Dense-Stack
product line caused the Company to lose its source of acceptable SRAM die
because the supplier discontinued production of the die that the second
generation product had been designed for. The Company believes that the second
generation technology remains valid and it may redesign this product to
incorporate new die technology when market conditions are appropriate.
There can be no assurance that the Company will be successful in its
product development or marketing efforts, or that the Company will have adequate
financial or technical resources for future product development and promotion.
13
<PAGE> 14
Uncertainty of Market Acceptance or Profitability of New Products
The introduction of new products will require the expenditure of funds for
research and development, tooling, manufacturing processes, inventory and
marketing. In order to achieve high volume production, the Company will have to
make substantial investments in inventory and capital equipment or, as currently
contemplated, the Company will have to outsource production to third parties.
The Company has limited marketing capabilities and resources and is dependent
upon internal sales and marketing personnel and a network of independent sales
representatives for the marketing and sale of its products. There can be no
assurance that new products will achieve market acceptance, result in increased
revenues, or be profitable. For example, the Company has not been able to book
major orders for the SuperSIMM(TM) product which was introduced in fiscal 1996
and the proposed sales prices for that product were adversely affected by
declines in DRAM prices.
Parts Shortages and Over-Supplies and Dependence on Suppliers
The semiconductor industry is characterized by periodic shortages or
over-supplies of parts which have in the past and may in the future negatively
affect the Company's operations. For example, an over-supply of 16 meg DRAMs in
1996 resulted in significant price declines which required the Company to make
significant inventory reductions in fiscal year 1997. The Company is dependent
on a limited number of suppliers for semiconductor devices used in its products,
but it has no long-term supply contracts with any of them. For example, the
Company was not able to market its second generation Dense-Stack product when it
lost its source of SRAM die.
Due to the cyclical nature of the semiconductor industry and competitive
conditions, there can be no assurance that the Company will not experience
difficulties in meeting its supply requirements in the future. Any inability to
obtain adequate deliveries of parts, either due to the loss of a supplier or
industry-wide shortages, could delay shipments of the Company's products,
increase its cost of goods sold and have a material adverse effect on its
business, financial condition and results of operations.
Dependence on Defense-Related Business
The Company has historically derived a substantial portion of its revenues
from defense-related contracts. As a result, the Company's business has been
impacted by reductions in the federal defense budget and will continue to be
subject to risks affecting the defense industry, including changes in
governmental appropriations and changes in national defense policies and
priorities. The Company has sought to reduce its dependence on defense-related
business by developing products with commercial applications, although such
products generally have lower margins than defense-related products.
Patent Rights
The Company's ability to compete effectively is dependent on its
proprietary know-how, technology and patent rights. The Company holds U.S.
patents on certain aspects of its 3-D stacking technology and has applied for
additional patents. There can be no assurance that the Company's patent
applications will be approved, that any issued patents will afford the Company's
products any competitive advantage or will not be challenged or circumvented by
third parties, or that patents issued to others will not adversely affect the
development or commercialization of the Company's products.
14
<PAGE> 15
Management of Growth
Successful expansion of the Company's operations will depend on, among
other things, the ability to obtain new customers, to attract and retain skilled
management and other personnel, to secure adequate sources of supply on
commercially reasonable terms and to successfully manage growth. To manage
growth effectively, the Company will have to continue to implement and improve
its operational, financial and management information systems, procedures and
controls. As the Company expands, it may from time to time experience
constraints that will adversely effect its ability to satisfy customer demand in
a timely fashion. Failure to manage growth effectively could adversely effect
the Company's financial condition and results of operations.
Competition
There are memory companies are in the process of developing
three-dimensional products, including Irvine Sensors, Staktek, Cubic Memory and
Thompson CSF in France. Some of such companies have greater financial,
manufacturing and marketing capabilities than the Company. The Company could
also experience competition from established and emerging computer memory
companies. There can be no assurance that the Company's products will be
competitive with existing or future products, or that the Company will be able
to establish or maintain a profitable price structure for its products.
In order to obtain large orders for the its commercial products from OEMs,
the Company may be required to provide royalty-free manufacturing licenses to
third parties as second sources to ensure that the customer's requirements are
met. Such second sources could then compete directly with the Company for
customers. As a result, the Company could become dependent on the efforts and
abilities of its licensees, if any, to manufacture and market its products.
ITEM 7: FINANCIAL STATEMENTS
The Company's Financial Statements are included in this report
commencing at page F-l.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
<PAGE> 16
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The required information is incorporated herein by reference to the
sections entitled "Election of Directors", "Executive Officers" and "Ownership
of Common Stock - Section 16 (a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders.
ITEM 10: EXECUTIVE COMPENSATION
The required information is incorporated herein by reference to the
sections entitled "Executive Compensation" and "Election of Directors -
Directors' Compensation" in the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information is incorporated herein by reference to the section
entitled "Ownership of Common Stock" in the Company's Proxy Statement for the
1997 Annual Meeting of Shareholders.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information is incorporated herein by reference to the section
entitled "Certain Transactions" in the Company's Proxy Statement for the 1997
Annual Meeting of Shareholders.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
3.1 Articles of Incorporation, as amended (1)
3.2 By-laws, as amended (1)
10.1 Letter dated December 4, 1990 from Kreidietbank regarding
$1,270,000 loan (2)
10.2 Lease for Premises at 7321 Lincoln Way, Garden Grove,
California, dated June 19, 1997. (7)
10.3 1996 Stock Option Plan (7) *
10.4 1985 Stock Option Plan, as amended (3) *
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
10.5 Form of Indemnification Agreement with officers and
directors (3) *
10.6 Loan Agreement and Security Agreement dated October 12,
1994 between the Company and Euroventures Benelux II B.V.
and Trude C. Taylor (4)
10.7 Form of Warrant Agreement dated November 14, 1994, between
the Company and each of Euroventures Benelux II B.V. and
Trude C. Taylor (5)
10.8 Warrant Agreement and Addendum to Loan Agreement effective
as of October 23, 1995, between the Company and
Euroventures Benelux II B.V. (6)
10.9 Management Bonus Plan for fiscal year 1997 (7) *
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
</TABLE>
- ----------
* Management contracts, compensation plans and arrangements.
(1) Incorporated by reference to Registrant's Current Report on
Form 8-K, Date of Event July 11, 1988.
(2) Incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1990.
(3) Incorporated by reference to Registrant's Annual Report on Form
l0-KSB for the year ended February 28, 1994
(4) Incorporated by reference to Registrant's Quarterly Report on
Form l0-Q for the quarter ended November 30, 1994.
(5) Incorporated by reference to the Registrant's Registration
Statement on Form S-3 (No. (33-87704) filed on December 22,
1994.
(6) Incorporated by reference to Registrant's Form 8-K, Date of
Event October 23, 1995.
(7) Incorporated by reference to Registrants' Annual Report on Form
l0-KSB for the year ended February 29, 1996.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K, date of report
February 6, 1997, to report in Item 5 with respect to a press release issued on
February 6, 1997.
17
<PAGE> 18
PART IV
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: May 28, 1997 DENSE-PAC MICROSYSTEMS, INC.
By: /s/ James G. Turner By: /s/ Aaron Uri Levy
------------------------------ -----------------------------
James G. Turner Aaron Uri Levy
Chief Executive Officer Chief Executive Officer
(April 1, 1987 - January 6, 1997)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ Aaron Uri Levy May 28, 1997
- ----------------------------------------------
Aaron Uri Levy, Chairman of the Board,
Chief Executive Officer
and President
(Principal Executive Officer)
/s/ William M. Stowell May 28, 1997
- ----------------------------------------------
William M. Stowell, Vice President-Finance
Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
/s/ James G. Turner May 28, 1997
- ----------------------------------------------
James G. Turner, Director
(Chairman of the Board
April 1987 - January 21, 1997)
/s/ Roger Claes May 28, 1997
- ----------------------------------------------
Roger Claes, Director
/s/ Robert Southwick May 28, 1997
- ----------------------------------------------
Robert Southwick, Director
/s/ Trude C. Taylor May 28, 1997
- ----------------------------------------------
Trude C. Taylor, Director
18
<PAGE> 19
DENSE-PAC MICROSYSTEMS, INC.
FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997
AND INDEPENDENT AUDITORS' REPORT
<PAGE> 20
DENSE-PAC MICROSYSTEMS, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Balance sheets as of February 28, 1997 and February 29, 1996 2
Statements of operations for each of the three years in the period
ended February 28, 1997 4
Statements of stockholders' equity for each of the three years
in the period ended February 28, 1997 5
Statements of cash flows for each of the three years in the period
ended February 28, 1997 6
Notes to financial statements for each of the three years in the period
ended February 28, 1997 8
</TABLE>
<PAGE> 21
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Dense-Pac Microsystems, Inc.:
We have audited the accompanying balance sheets of Dense-Pac Microsystems, Inc.
(the Company) as of February 28, 1997 and February 29, 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended February 28, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Dense-Pac Microsystems, Inc. as of February
28, 1997 and February 29, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended February 28, 1997 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
April 11, 1997
<PAGE> 22
DENSE-PAC MICROSYSTEMS, INC.
BALANCE SHEETS
AS OF FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 4,660,769 $ 4,579,840
Accounts receivable, net of allowance for doubtful accounts
of $50,000 and $40,000 in 1997 and 1996 1,245,685 3,574,822
Inventories (Notes 1 and 2) 3,530,648 5,151,106
Deferred income taxes (Note 8) 150,000
Prepaid expenses and other current assets 122,988 287,075
----------- -----------
Total current assets 9,560,090 13,742,843
PROPERTY, net (Notes 1, 3 and 4) 3,907,105 3,448,860
TECHNOLOGY AND MARKETING RIGHTS, net (Note 1) 409,048
OTHER ASSETS 14,360 67,262
----------- -----------
$13,481,555 $17,668,013
=========== ===========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 23
DENSE-PAC MICROSYSTEMS, INC.
BALANCE SHEETS
AS OF FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 407,254 $ 413,851
Accounts payable 1,074,263 1,568,907
Accrued compensation 636,455 572,499
Other accrued liabilities 73,048 61,982
------------ ------------
Total current liabilities 2,191,020 2,617,239
NOTES PAYABLE DUE TO RELATED PARTIES (Note 5) 1,900,000 1,900,000
LONG-TERM DEBT (Note 4) 764,489 699,134
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 5, 7, 9 and 11):
Common stock, no par value; authorized, 40,000,000 shares;
issued and outstanding, 16,997,681 and 16,748,831 shares
in 1997 and 1996, respectively 16,065,404 15,795,004
Accumulated deficit (7,439,358) (3,343,364)
------------ ------------
Net stockholders' equity 8,626,046 12,451,640
------------ ------------
$ 13,481,555 $ 17,668,013
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 24
DENSE-PAC MICROSYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES (Notes 1 and 10) $ 14,023,528 $ 18,006,091 $ 11,494,709
COST OF SALES (Note 1):
Cost of sales 10,546,101 12,935,789 9,107,754
Inventory write-down 2,111,171
------------ ------------ ------------
Total cost of sales 12,657,272 12,935,789 9,107,754
GROSS PROFIT 1,366,256 5,070,302 2,386,955
COSTS AND EXPENSES (Notes 1, 6 and 11):
Selling, general and administrative 3,321,741 2,778,801 2,398,057
Research and development 810,059 518,665 582,993
Other costs 961,147 1,668,638
------------ ------------ ------------
Total costs and expenses 5,092,947 3,297,466 4,649,688
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,726,691) 1,772,836 (2,262,733)
OTHER EXPENSE AND (INCOME) (Notes 4 and 5):
Interest expense 258,823 243,029 209,805
Interest income (195,001) (18,674) (13,638)
Loss on property disposal 154,681
------------ ------------ ------------
Total other expense and (income) 218,503 224,355 196,167
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) (3,945,194) 1,548,481 (2,458,900)
INCOME TAX PROVISION (BENEFIT) (Note 8) 150,800 (149,200) 280,606
------------ ------------ ------------
NET INCOME (LOSS) $ (4,095,994) $ 1,697,681 $ (2,739,506)
============ ============ ============
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 1) $ (0.24) $ 0.11 $ (0.19)
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 16,918,725 15,729,864 14,605,802
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 25
DENSE-PAC MICROSYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
<S> <C> <C> <C> <C>
BALANCE, March 1, 1994 14,581,281 $ 9,201,178 $ (2,301,539) $ 6,899,639
Exercise of warrants to purchase
common stock (Note 7) 4,000 4,000 4,000
Issuance of common stock upon
exercise of stock options (Note 9) 40,250 35,858 35,858
Net loss (2,739,506) (2,739,506)
---------- ------------ ------------ ------------
BALANCE, February 28, 1995 14,625,531 9,241,036 (5,041,045) 4,199,991
Sale of common stock, net (Note 7) 900,000 4,297,200 4,297,200
Exercise of warrants to purchase
common stock, net (Notes 5 and 7) 1,056,700 2,024,913 2,024,913
Issuance of common stock upon
exercise of stock options (Note 9) 166,600 231,855 231,855
Net income 1,697,681 1,697,681
---------- ------------ ------------ ------------
BALANCE, February 29, 1996 16,748,831 15,795,004 (3,343,364) 12,451,640
Issuance of common stock upon
exercise of stock options (Note 9) 248,850 297,972 297,972
Additional issuance costs related to
sale of common stock during fiscal 1996
(Note 7) (27,572) (27,572)
Net loss (4,095,994) (4,095,994)
---------- ------------ ------------ ------------
BALANCE, February 28, 1997 16,997,681 $ 16,065,404 $ (7,439,358) $ 8,626,046
========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 26
DENSE-PAC MICROSYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(4,095,994) $ 1,697,681 $(2,739,506)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,095,140 534,812 988,653
Change in deferred income taxes 150,000 (150,000) 300,000
Loss on disposal of property 154,681
Write-off of property and technology and marketing
rights 627,154 535,810
Changes in operating assets and liabilities:
Accounts receivable 2,329,137 (1,673,060) 242,950
Inventories 1,620,458 (803,901) (288,778)
Prepaid expenses and other assets 216,989 (164,852) 94,546
Accounts payable (494,644) 397,910 (146,146)
Income taxes payable (21,000)
Deferred revenue (717,023) 717,023
Accrued compensation 63,956 276,211 (53,668)
Other accrued liabilities 11,066 25,315 22,989
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,677,943 (576,907) (337,127)
CASH FLOWS FROM INVESTING ACTIVITIES -
Property additions (1,395,168) (1,282,738) (781,833)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment of short-term bank borrowings (683,149)
Proceeds (repayment) from note payable due to
related parties (100,000) 2,000,000
Principal payments on long-term debt (472,246) (371,270) (319,590)
Net proceeds from issuance of common stock 270,400 6,553,968 39,858
----------- ----------- -----------
Net cash (used in) provided by financing activities (201,846) 6,082,698 1,037,119
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 27
DENSE-PAC MICROSYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH $ 80,929 $4,223,053 $ (81,841)
CASH, beginning of year 4,579,840 356,787 438,628
---------- ---------- ----------
CASH, end of year $4,660,769 $4,579,840 $ 356,787
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 223,105 $ 255,631 $ 187,817
========== ========== ==========
Income taxes paid $ 800 $ 800 $ 800
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of property for note payable $ 442,536 $ 115,501 $ 206,655
========== ========== ==========
Acquisition of property under capital leases $ 88,468 $ - $ 89,484
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 28
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Dense-Pac Microsystems, Inc. (the Company), a
California corporation, designs and manufactures proprietary chip-stacking
components and subsystems. The Company's revenues are generated primarily
from manufacturers of electronic components, as well as from subcontracts
where the primary contractor is the United States government. The Company
grants credit to customers included in the military, aerospace and a
variety of commercial industries.
Fair Value of Financial Instruments - The Company's balance sheets
includes the following financial instruments: cash, accounts receivable,
accounts payable, accrued liabilities and debt. The Company considers the
carrying value of cash, accounts receivable, accounts payable and accrued
liabilities in the financial statements to approximate fair value for
these financial instruments because of the relatively short period of time
between origination of the instruments and their expected realization. The
Company believes the carrying value of its long-term debt approximates its
fair value or the interest rate approximates a rate the Company could
obtain under similar terms at the balance sheet date. Based on borrowing
rates currently available to the Company for loans with similar terms, the
fair value of notes payable to related parties at February 28, 1997 is
approximately $1,720,000.
Inventories - Inventories (Note 2) are stated at the lower of first-in,
first-out cost or market. Market is based upon estimated realizable value
reduced by normal gross margin. The Company regularly monitors inventory
for excess or obsolete items and makes any necessary adjustments when such
adjustments are needed. During the fiscal year ended February 28, 1997,
the Company incurred inventory write-downs of $2,111,171 associated with a
decrease in semiconductor prices.
Long-Lived Assets - The Company accounts for the impairment and
disposition of long-lived assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In
accordance with SFAS No. 121, long-lived assets to be held are reviewed
for events or changes in circumstances which indicate that their carrying
value may not be recoverable. The Company will periodically review the
carrying value of long-lived assets to determine whether or not an
impairment to such value has occurred.
Property - Property is stated at cost less accumulated depreciation and
amortization (Note 3). Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets, generally
ranging from three to twelve years. Leasehold improvements are amortized
on a straight-line basis over the shorter of the useful lives of the
improvements or the term of the related lease. Direct costs associated
with the development of software and test boards used for internal product
testing are capitalized and amortized on a straight-line basis over three
years. During the
8
<PAGE> 29
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
fourth quarter of fiscal year 1997, certain property with a net book value
of $290,898 was written off in accordance with SFAS No. 121 as a result of
a decrease in the expected sales of products to which the property is
related. This amount has been included in other costs in the accompanying
financial statements.
Technology and Marketing Rights - During the fourth quarter of fiscal year
1997, the remaining unamortized marketing and technology rights were
written off. A decrease in the expected volume of the related products
being sold into the European market resulted in the write-off of $336,256
which is included in other costs in the accompanying financial statements.
Accumulated amortization was $465,385 at February 29, 1996.
Severance Costs - Included in other costs is $333,993 of severance costs
related to termination of certain employees during the fourth quarter of
fiscal year 1997.
Revenue Recognition - Revenues are recognized upon shipment of the related
products. The Company records an accrual for estimated returns at the time
of product shipment based on historical experience.
Income Taxes - Income taxes are recorded in accordance with SFAS No. 109,
Accounting for Income Taxes.
Net Income (Loss) Per Common and Common Equivalent Share - Net income
(loss) per common and common equivalent share is computed by dividing net
income (loss), by the weighted average number of common and common
equivalent shares (if applicable) outstanding during the years. Common
equivalent shares relate to stock options and warrants (Notes 9 and 11).
In fiscal 1997 and 1995, common equivalent shares were antidilutive and
not included.
Fiscal Year 1995 Fourth Quarter Write-off - During the fourth quarter of
fiscal year 1995, certain assets associated with certain product lines
were written-off. The costs associated with the product lines totaled
$1,668,638, consisting primarily of the write-down of fixed assets and
inventories associated with those product lines.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Actual
results could differ from these estimates.
9
<PAGE> 30
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
Significant Concentrations - The semiconductor industry is highly cyclical
and has been subject to significant downturns at various times that have
been characterized by diminished product demand, production over capacity
and accelerated erosion of average selling prices. Therefore, the average
selling price the Company receives for products is dependent on
industry-wide demand and capacity, and such prices have historically been
subject to rapid change.
The Company is dependent on a limited number of suppliers for
semiconductor devices used in its products but has no long-term supply
contracts with any of them. Due to the cyclical nature of the
semiconductor industry and competitive conditions, there can be no
assurance that the Company will not experience difficulties in meeting its
supply requirements in the future. Any inability to obtain adequate
deliveries of parts, either due to the loss of a supplier or industry-wide
shortages, could delay shipments of the Company's products, increase its
cost of goods sold and have a material adverse effect on its business,
financial condition and results of operations.
The Company has historically derived a substantial portion of its revenues
from defense-related contracts. As a result, the Company's business has
been impacted by reductions in the federal defense budget and will
continue to be subject to risks affecting the defense industry, including
changes in governmental appropriations and changes in national defense
policies and priorities. The Company has sought to reduce its dependence
on defense-related business by developing products with commercial
applications, although such products generally have lower margins than
defense-related products.
Other Information - In February 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 128, Earnings Per Share, which is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. Early adoption of the statement is not permitted. The
Company has determined that the adoption of this statement would not have
had a material impact on the earnings per share calculation for the
periods presented.
Reclassifications - Certain reclassifications have been made to the prior
year's financial statements to conform with the current year presentation.
10
<PAGE> 31
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 772,615 $1,338,472
Work-in-process 2,022,493 2,650,086
Finished goods 735,540 1,162,548
---------- ----------
Total inventories $3,530,648 $5,151,106
========== ==========
</TABLE>
3. PROPERTY
Property consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Machinery and equipment $ 4,818,590 $ 4,700,253
Furniture and fixtures 151,864 143,074
Leasehold improvements 300,980 156,406
Computer software and equipment financed
under capital leases 177,952 89,484
----------- -----------
5,449,386 5,089,217
Less accumulated depreciation and amortization (1,542,281) (1,640,357)
----------- -----------
Property, net $ 3,907,105 $ 3,448,860
=========== ===========
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Note payable to bank, collateralized by substantially all of the Company's
assets, payable in 20 semi-annual principal payments - four of $35,288 and 16
of $70,553, plus interest commencing in July 1991; interest rate determined as
LIBOR rate on payment dates, plus 2% $564,424 $705,530
</TABLE>
11
<PAGE> 32
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Notes payable to finance company, collateralized by fixed assets, bearing
interest at rates ranging from 8.5% to 10.1%, payable in monthly installments
of principal and interest, maturing at various dates through April 1999 $ 520,686 $ 380,792
Obligations under capital leases, bearing interest at rates ranging from 11.1%
to 14.6%, maturing at various dates through May 2001 86,633 26,663
----------- -----------
1,171,743 1,112,985
Less current portion of other long-term debt (407,254) (413,851)
----------- -----------
$ 764,489 $ 699,134
=========== ===========
</TABLE>
Long-term debt at February 28, 1997 matures as follows:
<TABLE>
<S> <C>
Fiscal year ending:
1998 $407,254
1999 351,712
2000 252,012
2001 156,614
2002 4,151
----------
$1,171,143
==========
</TABLE>
Interest expense related to long-term debt was $160,823, $105,561 and
$114,264 for fiscal years 1997, 1996 and 1995, respectively.
5. RELATED-PARTY BORROWINGS
On October 12, 1994, the Company entered into a loan agreement with
related parties whereby the Company could borrow up to $2,000,000, with
interest at 8% per annum, due on October 12, 1999. The Company borrowed
$1,200,000 against such agreement in October 1994 and $800,000 in November
1994. Interest expense related to the agreement was $98,000 and $137,468
for the years ended February 28, 1997 and February 29, 1996, respectively.
In November 1994, in conjunction with the loan agreement, the Company
issued five-year warrants to purchase 1,000,000 shares of the Company's
common stock at $2.00 per share. In October 1995, all the warrants were
exercised and the Company issued 1,000,000 shares of common stock.
12
<PAGE> 33
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
In conjunction with the exercise of the warrants, the Company amended the
terms of one of the loan agreements. Under the terms of the amended loan
agreement, $1,800,000 of the principal amount accrues interest at 5% per
annum with interest-only payments due quarterly and principal due on
October 12, 1999. In connection with the amended loan agreement, the
Company issued four-year warrants to purchase 375,000 shares of the
Company's common stock at a price to be determined on the occurrence of
certain future events. Effective April 1, 1996, the warrant price was
established at $7.00 per share.
Under the terms of the warrant agreement, if at any time after April 1,
1996 the Company sells any common stock, other than pursuant to employee
benefit plans or warrants outstanding as of April 1, 1996, at a price
which is less than $7.00 per share, the exercise price of the warrants is
subject to adjustment. At February 28, 1997, all the warrants were
outstanding and exercisable.
Interest expense related to related-party borrowings was $98,000, $137,468
and $54,371 for fiscal years 1997, 1996 and 1995, respectively.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its office and manufacturing facility under an
operating lease arrangement which expires on January 31, 2001. The
facility lease requires additional payments for property taxes, insurance
and maintenance costs. The following table summarizes the future minimum
payments under the Company's operating leases at February 28, 1997:
<TABLE>
<S> <C>
1998 $136,260
1999 141,041
2000 145,822
2001 133,670
--------
Total future minimum lease payments $556,793
========
</TABLE>
Rent expense relating to the operating lease was approximately $162,000,
$138,000 and $174,000 for fiscal 1997, 1996 and 1995, respectively.
The Company has an insignificant amount of capital lease obligations at
February 28, 1997 (Note 4).
The Company, in the normal course of business, is subject to various legal
matters. However, management believes that none of these matters will have
an adverse effect on the Company's financial statements.
13
<PAGE> 34
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
7. STOCKHOLDERS' EQUITY
During fiscal years 1996 and 1995, 56,700 and 4,000 warrants issued in
connection with the March 1993 common stock offering were exercised and
the Company issued 56,700 and 4,000 shares of common stock, respectively.
None of the warrants issued in connection with the March 1993 offering
were outstanding at February 28, 1997.
In February 1996, the Company raised $4,297,200, net of offering costs,
from the sale of 900,000 shares of common stock at $5.00 per share to
private investors. During fiscal 1997, additional offering costs of
$27,572 were incurred related to such financing.
In January 1995, the Company issued warrants to purchase 12,000 shares of
the Company's common stock at $2.25 per share, as additional compensation
for services rendered. Under the terms of the warrant agreement, the
warrants become exercisable in four installments of 3,000 warrants each in
six-month intervals commencing July 1, 1995, provided that the vendor's
services are still being utilized by the Company. Each installment is
exercisable for a period of 32 months. At February 28, 1997, all of the
warrants were outstanding and exercisable.
In March 1996, the Company issued additional warrants to purchase 15,000
shares of the Company's common stock at $7.00 per share to the same vendor
as additional compensation for services rendered. Under the terms of the
warrant agreement, the warrants become exercisable in four installments of
3,750 warrants each in one-year intervals commencing March 18, 1997,
provided that the services are still being utilized by the Company. Each
installment is exercisable until March 2001. None of the warrants were
exercisable at February 28, 1997, and compensation expense related to the
warrants was not material.
14
<PAGE> 35
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
8. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ - $ - $ (14,000)
State 800 800 (5,394)
----------- ----------- -----------
800 800 (19,394)
Deferred:
Federal (1,303,219) 496,890 (849,634)
State (393,316) 149,964 (256,423)
----------- ----------- -----------
(1,696,535) 646,854 (1,106,057)
Change in valuation allowance 1,846,535 (796,854) 1,406,057
----------- ----------- -----------
Total net change for deferrals 150,000 (150,000) 300,000
----------- ----------- -----------
Total income tax provision (benefit) $ 150,800 $ (149,200) $ 280,606
=========== =========== ===========
</TABLE>
15
<PAGE> 36
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and
income tax purposes. The income tax effects of these temporary differences
representing significant portions of the deferred tax assets and deferred
tax liabilities at February 28, 1997 and February 29, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Inventories $ 239,422 $ 223,384
Other reserves 174,842 45,484
State taxes 272 272
Net operating loss carryforwards, general business
credit carryforwards and AMT credit carryforwards 3,023,441 1,762,054
----------- -----------
Total gross deferred assets 3,437,977 2,031,194
Deferred tax liability - depreciation and amortization (237,688) (527,440)
----------- -----------
3,200,289 1,503,754
Valuation allowance (3,200,289) (1,353,754)
----------- -----------
Net deferred income taxes $ - $ 150,000
=========== ===========
</TABLE>
As of February 28, 1997, a valuation allowance of $3,200,289 has been
provided based upon the Company's assessment of the future realizability
of certain deferred tax assets, as it is more likely than not that
sufficient taxable income will not be generated to realize these temporary
differences.
Additionally, at February 28, 1997, approximately $235,000 of the
valuation allowance was attributable to the potential tax benefit of stock
option transactions which will be credited directly to additional paid-in
capital, if realized.
16
<PAGE> 37
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory rate (35)% 35 % (35)%
Limitation on utilization of operating loss 34
Change in valuation allowance 38 (45) 10
Other 1 1
--- --- ---
4 % (10)% 10 %
=== === ===
</TABLE>
As of February 28, 1997, the Company had net operating loss carryforwards
of $7,711,000 for regular income tax and $7,802,000 for alternative
minimum tax available to offset future federal taxable income (a portion
of the net operating losses are subject to annual limitations of
approximately $270,600), expiring at various dates through 2011. As of
February 28, 1997, the Company had available tax credit carryforwards of
approximately $164,000 to offset future federal income taxes, which expire
at various dates beginning 2006 and available California tax credit
carryforwards of approximately $149,000 which expire at various dates
beginning 2004.
9. EMPLOYEE STOCK OPTION PLAN
At February 28, 1997, options to purchase 846,200 shares of the Company's
common stock were outstanding under the Company's 1985 Stock Option Plan,
of which options to purchase 506,450 shares were exercisable. Options
issued under this plan are granted at fair market value and generally vest
at a rate of 25% per year and expire within ten years from the date of
grant or upon 90 days after termination of employment. At February 28,
1997, no shares were available for future grants under the Plan.
In January 1996, the Company adopted the 1996 Stock Option Plan. Under the
terms of the Plan, options to purchase 2,000,000 shares of the Company's
common stock are available for issuance to employees, officers, directors
and consultants.
At February 28, 1997, options to purchase 1,243,800 shares of the
Company's common stock were outstanding under the 1996 Stock Option Plan,
of which options to purchase 179,064 shares were exercisable. Options
issued under this Plan are granted at fair market value and generally vest
at a rate of 25% per year and expire within ten years from the date of
grant or upon 90 days after termination of employment. At February 28,
1997, 756,200 shares were available for future grants under the Plan.
17
<PAGE> 38
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
A summary of activity for the stock option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
<S> <C> <C>
OUTSTANDING, March 1, 1994 1,183,250 41.83
Granted 278,750 $1.61
Exercised (40,250) $0.89
Canceled (299,750) $2.90
---------
OUTSTANDING, February 28, 1995 1,122,000 $1.52
Granted (weighted average fair value of $1.68) 431,000 $4.15
Exercised (166,600) $1.39
Canceled (31,350) $1.86
---------
OUTSTANDING, February 29, 1996 1,355,050 $2.37
Granted (weighted average fair value of $1.18) 1,382,800 $2.27
Exercised (248,850) $1.20
Canceled (399,000) $5.75
---------
OUTSTANDING, February 28, 1997 2,090,000 $1.79
=========
</TABLE>
Additional information regarding options outstanding as of February 28,
1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$0.24 -$1.00 125,250 4.3 $0.26 125,250 $0.26
$1.00 -$2.00 1,033,575 8.5 $1.45 236,200 $1.60
$2.00 -$3.00 912,675 8.8 $2.34 319,439 $2.28
$3.00 -$4.41 18,500 8.6 $4.41 4,625 $4.41
--------- -------
2,090,000 685,514
========= =======
</TABLE>
18
<PAGE> 39
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
Additional Stock Plan Information - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and its related
interpretations. No compensation expense has been recognized in the
financial statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1996. Under
SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option-pricing models, even though such
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option-pricing
model with the following weighted average assumptions: weighted average
expected life, 42 months; stock volatility, 85% in 1997 and 60% in 1996;
risk-free interest rates, 6.06% in 1997 and 5.12% in 1996; and no
dividends during the expected term. The Company's calculations are based
on a single option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the 1996 and 1997 awards had
been amortized to expense over the vesting period of the awards, pro forma
net income would have been $1,592,264 ($0.10 per share) in 1996 and pro
forma net loss would have been $4,572,794 ($0.27 per share) in 1997.
However, the impact of outstanding nonvested stock options granted prior
to 1996 has been excluded from the pro forma calculation; accordingly, the
1996 and 1997 pro forma adjustments are not indicative of future period
pro forma adjustments, when the calculation will apply to all applicable
stock options.
10. CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION
For fiscal 1996, one customer accounted for approximately 10% of net
sales. The Company had export sales (primarily to Western European
customers) accounting for approximately 23%, 23% and 27% of net sales for
fiscal 1997, 1996 and 1995, respectively.
11. BENEFIT AND COMPENSATION PLANS
During fiscal 1991, the Company instituted a variable compensation plan.
Under the plan, all employees with a base salary of $30,000 or greater
received reduced salary during each quarter that the Company's income
before taxes represented less than 2% of beginning stockholders' equity.
In each quarter in which income before taxes exceeded 2% of beginning
stockholders' equity, the Company was required to pay additional salary up
to a maximum of 100% of each employee's base salary.
19
<PAGE> 40
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
In accordance with the terms of the plan, the Company recorded additional
salary in fiscal 1996 of $361,147. Amounts withheld or paid in fiscal 1995
were immaterial.
During fiscal 1997, the Company discontinued the plan, and participating
employees were repaid any amounts withheld during fiscal 1997 and received
stock options based upon, among other factors, length of participation in
the plan. The Company issued 204,800 stock options under the 1996 Stock
Option Plan with an exercise price equal to fair market value at date of
issuance, in connection with the Plan discontinuance.
The Management Bonus Plan provides for a bonus of up to 50% of base salary
based on three performance criteria. The bonus is an amount equal to the
sum of (i) 2% of base salary for every $1.5 million of fiscal year
bookings that exceeded the prior fiscal year bookings (maximum 15% of base
salary), (ii) 2% of base salary for every $1.2 million of fiscal year
shipments that exceeded the prior year fiscal year shipments (maximum 15%
of base salary), and (iii) 2% of base salary for every $250,000 of fiscal
year profits. The Company paid $206,236 and $19,706 under this plan for
fiscal 1996 and 1995, respectively. No amounts were paid in fiscal 1997
under the plan.
The Company has a contributory 401(k) plan for all eligible employees. The
Company matches up to 50% of an employee's contribution to the 401(k)
plan, up to 4% of the employee's eligible salary, subject to certain
limitations. The Company contributed $47,800, $46,400 and $34,600 to the
401(k) plan during fiscal 1997, 1996 and 1995, respectively.
The Company has an employee profit-sharing plan in which all employees
except officers participate. The amount of the profit sharing is
determined by the Board of Directors on a quarterly basis. No profit
sharing expense was recorded in fiscal 1997, 1996 or 1995.
20
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Articles of Incorporation, as amended (1)
3.2 By-laws, as amended (1)
10.1 Letter dated December 4, 1990 from Kreidietbank regarding $1,270,000
loan (2)
10.2 Lease for Premises at 7321 Lincoln Way, Garden Grove, California, dated
June 19, 1997 (7)
10.3 1996 Stock Option Plan (7) *
10.4 1985 Stock Option Plan, as amended (3) *
10.5 Form of Indemnification Agreement with officers and directors (3) *
10.6 Loan Agreement and Security Agreement dated October 12, 1994 between
the Company and Euroventures Benelux II B.V. and Trude C. Taylor (4)
10.7 Form of Warrant Agreement dated November 14, 1994, between the Company
and each of Euroventures Benelux II B.V. and Trude C. Taylor (5)
10.8 Warrant Agreement and Addendum to Loan Agreement effective as of
October 23, 1995, between the Company and Euroventures Benelux II B.V.
(6)
10.9 Management Bonus Plan for fiscal year 1997 (7) *
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
</TABLE>
- ----------
* Management contracts, compensation plans and arrangements.
(1) Incorporated by reference to Registrant's Current Report on Form 8-K,
Date of Event July 11, 1988.
(2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1990.
(3) Incorporated by reference to Registrant's Annual Report on Form l0-KSB
for the year ended February 28, 1994.
(4) Incorporated by reference to Registrant's Quarterly Report on Form l0-Q
for the quarter ended November 30, 1994.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 33-87704) filed on December 22, 1994.
19
<PAGE> 42
(6) Incorporated by reference to Registrant's Form 8-K, Date of Event October
23, 1995.
(7) Incorporated by reference to Registrants' Annual Report on Form l0-KSB
for the year ended February 29, 1996.
20
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-6659, 33-29615, 33-44807, 33-72922 and 333-14733 on Form S-8 and in
Registration Statement Nos. 33-87704 and 333-1847 on Form S-3 of our report,
dated May 2, 1997, appearing in this Annual Report on Form 10-KSB of Dense-Pac
Microsystems, Inc. for the year ended February 28, 1997.
/s/ Deloitte & Touche LLP
- ----------------------------
Deloitte & Touche LLP
Costa Mesa, California
May 28, 1997
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT - FORM 10-KSB FOR YEAR ENDED FEBRUARY 28, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB FOR YEAR ENDED FEBRUARY 28, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 4,660,769
<SECURITIES> 0
<RECEIVABLES> 1,295,685
<ALLOWANCES> 50,000
<INVENTORY> 3,530,648
<CURRENT-ASSETS> 9,560,090
<PP&E> 5,449,386
<DEPRECIATION> 1,542,281
<TOTAL-ASSETS> 13,481,555
<CURRENT-LIABILITIES> 2,191,020
<BONDS> 0
0
0
<COMMON> 16,065,404
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,481,555
<SALES> 14,023,528
<TOTAL-REVENUES> 14,023,528
<CGS> 12,657,272<F1>
<TOTAL-COSTS> 17,750,219
<OTHER-EXPENSES> 218,503
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 258,823
<INCOME-PRETAX> (3,945,194)
<INCOME-TAX> 150,800
<INCOME-CONTINUING> (4,095,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,095,994)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
<FN>
<F1>Included in cost of sales of 12,657,272 is inventory
write-down of $2,111,171
</FN>
</TABLE>
