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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, 1998
[ ] 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or 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
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock
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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 [ ]
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 $13,464,000.
The aggregate market value of the Issuer's Common Stock, no par value, held by
non-affiliates of the Issuer on April 21, 1998 (based on the average bid and
asked price per share on that date as reported on NASDAQ), was $25,250,000.
Number of shares of Issuer's Common Stock outstanding at April 21, 1998:
17,755,400 shares
Documents Incorporated By Reference
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Portions of the registrant's Proxy Statement relating to the registrant's 1998
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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DENSE-PAC MICROSYSTEMS, INC.
FORM 10-KSB
FOR THE YEAR ENDED FEBRUARY 28, 1998
I N D E X
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PART I
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Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 10
Item 3. Legal Proceedings....................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders..................................... 10
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters................ 11
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 17
Item 7. Financial Statements and Supplementary Data............................................. 17
Item 8. Changes in and Disagreements with Accountants on Accounting............................. 17
PART III
Item 9. Directors and Executive Officers of the Registrant...................................... 18
Item 10. Executive Compensation.................................................................. 18
Item 11. Security Ownership of Certain Beneficial Owners and Management.......................... 18
Item 12. Certain Relationships and Related Transactions.......................................... 18
PART IV
Item 13. Exhibits, Financial Statement Schedule, and Reports on Form 8-K......................... 19
Signatures.......................................................................................... 22
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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, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 13 of this Form 10-KSB.
General background
Dense-Pac Microsystems, Inc. ("Dense-Pac" or the "Company") designs and
manufactures proprietary and patented three-dimensional high-density memory
products. The Company was formed as a California corporation on September 7,
1983. The high-density memory products enable the Company's commercial,
industrial and military customers to stack large amounts of memory into small
spaces. The Company's web site is at www.dense-pac.com.
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 than 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.
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.
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.
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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 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, a gigabit of
memory can be obtained 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.
In September 1997, Dense-Pac acquired substantially all the assets of
TypeHaus, Inc. (a Texas corporation) for $305,000 including acquisition cost,
consisting of $130,000 in cash and $175,000 in common stock of the Company. A
wholly owned subsidiary of Dense-Pac, named TypeHaus, Inc. (a California
corporation) was formed to purchase the assets. TypeHaus provides printer media
devices, printer memory and electronic laser printer products to a variety of
OEM customers. TypeHaus also supplies custom memory sub-systems and support
software for OEM manufacturers of laser printers.
During February, 1998, the Company commenced operations of an Internet
Information Technology division to offer innovative new software and hardware
product solutions that will increase the speed and accessibility to the Internet
for security transaction-oriented businesses and to offer Internet commerce
interactive solutions. Dense-Pac expanded the hardware concept of high density
memory to Internet communication applications with several new products.
Recent Company Changes
During the Fiscal Year ended February 28, 1998 ("Fiscal Year 1998"), the
Company a changed several key management positions. Several new employees have
joined the Company as vice presidents of newly formed divisions. Dan Jakle, and
Avram Grossman joined Dense-Pac as vice presidents to further products into new
markets. The management team of the Company has developed and currently is
implementing a new business strategy which is discussed below. Dan Jakel joined
the Company as a vice president of marketing and business development. His
responsibilities include the identification of new potential commercial markets
that the Company could penetrate as well as furthering the business of the
Company's wholly owned subsidiary, TypeHaus, Inc. Avram joined the Company as
vice president of
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information technology. His responsibilities include exploring the opportunities
for entry into the internet arena with new and specialized products.
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. This
structuring 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 pursue entering
into a number of development, production, marketing and other strategic
relationships in order to expand sales and broaden its product offerings.
QUICKLY DELIVER PROTOTYPE PRODUCTS TO CUSTOMERS. The Company will be
responsive to its potential customers by offering the most unique design that
will solve the customer's needs. Dense-Pac will continue to offer quick
solutions working with a staff of specially designated design team.
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
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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 and 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 the Fiscal Year ended February 28,1991. 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.
During the Fiscal Year ended February 28, 1996 ("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.
During the Fiscal Year 1998, the Company introduced several new products
designed around the patented stacking process. The technology is known as
"M-Densus". The "M-Densus", a family of interchangeable memory modules that,
regardless of their density or size, fit in the same space, or footprint, on the
memory board. The M-Densus modules, which derive their name from the Latin word
for density, enable design engineers to upgrade TSOP ( thin small outline
package) memory in their products without redesigning the memory board. This
reduces both the time and expense associated with memory enhancement. The
Company also introduced a Low Profile PC100 Compliant 256 Megabyte Synchronous
DRAM. The Company also introduced several other high-density products,
applicable for the military market and the commercial market.
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.
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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. The
Company applied for several new patents during Fiscal Year 1998. 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.
These new patent pending cover new processes in automating the
high-density commercial product as well as a patent pending on a new ball grid
array stacking technology. To protect its intellectual properties, the Company
will continue to pursue patents on its processes and technologies.
Simultaneously, as an integral part of the Company's strategic plan, Dense-Pac
expects to create new business opportunities through the licensing of these
patents.
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 or indirectly with the Company for customers
depending on the scope of their license.
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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 Fiscal Year
1998, approximately 15% of the Company's sales were export sales, primarily to
Western Europe as compared to 23% in the fiscal year ended February 28, 1997
("Fiscal Year 1997"). Foreign sales are made in U.S. dollars. The decline was
primarily due to a decrease in memory prices resulting in lower revenue as well
as several programs being completed in the previous fiscal year.
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
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
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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 has been significantly increased by
the purchase of an automated commercial line which is adequate to support large
volume production. Also, on May 19, 1997, Dense-Pac announced a strategic
alliance with SCI Systems, Inc.(SCI), 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 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.
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.
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Environmental Matters
The Company is not aware of any issues related to environmental matters that
have materially affected or are expected to materially affect its business.
Employees
At April 21, 1998, the Company had 94 full-time employees, of which 11
were engaged in engineering, 47 in manufacturing, production and testing, 6 in
quality assurance, 17 in marketing/sales and 13 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 1998.
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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 Market are inter-dealer prices without retail
mark-up, mark-down or commissions, and may not represent actual transactions.
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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
Fiscal Year ended February 28, 1998:
Quarter Ended
May 31, 1997 2- 5/8 1 - 13/16
August 31, 1997 2- 5/8 2 - 1/16
November 30, 1997 4- 11/16 2 - 1/8
February 28, 1998 4- 5/8 3
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As of April 21, 1998, the Company had 327 shareholders of record, and
over 5,500 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 Year 1998 Compared to Fiscal Year 1997.
Fiscal Year 1998 net sales of $13,464,000 decreased by $560,000 (4%)
from Fiscal Year 1997 sales of $14,024,000. The decrease was partly due to a
decrease in military sales of approximately $2,384,000
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due to an emphasis by the Company of commercial type business in Fiscal Years
1996 and 1997. Military business typically has a longer lead time for purchase
orders and when the emphasis of the Company was re-directed to commercial
business, the results showed the decrease in military business. The decrease in
the military business was offset largely by an increase of $2,283,000 in
miscellaneous commercial DRAM business. The Company generated approximately
$600,000 in revenue from its new high commercial plastic stacked products.
Revenue from first generation products composed approximately 17% of revenue for
Fiscal Year 1998 as compared to approximately 24% of revenue in Fiscal Year
1997. The decrease in first generation product sales is due to a decline in
military business as well as a decrease in SRAM memory prices that are used in
this technology.
Foreign sales represented 15% of total revenue for Fiscal Year 1998 as
compared to 23% of revenue for Fiscal Year 1997. Overall, sales for first
generation products decreased in the foreign market because less contracts were
awarded in Fiscal Year 1998 than in Fiscal Year 1997.
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 government appropriations and changes
in national defense policies and priorities.
The Company offset some of the decrease in the military business with
orders of commercial product. The Company is re-emphasizing the importance of
the high-reliability products, such as ceramic, first generation modules 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 1998 was $10,613,000 (79% of sales),
as compared to cost of sales for Fiscal Year 1997 of $10,546,000 (75% of sales),
excluding the inventory write-down. The lower cost of sales for Fiscal Year 1997
can be attributed to slightly greater operating efficiencies resulting from the
higher level of sales in 1997. Additionally, for Fiscal Year 1998, depreciation
expense increased by $90,000 as new automated equipment was purchased for the
manufacturing floor. Overall material costs, as a function of sales remained
constant from Fiscal Year 1998, when it was 51%, as compared to 50% for Fiscal
Year 1997. This represents the overall material costs for all product lines for
the fiscal year.
Selling, general and administrative (SG&A) expenses increased by
$153,000 (5%) from $3,322,000 in Fiscal Year 1997 to $3,475,000 in Fiscal Year
1998. The increase in SG&A expense included an increase in
recruitment/relocation costs of $78,000 as the Company continues to hire
employees for various departments. Additionally, the Company increased allowance
for doubtful accounts by $50,000.
Other costs decreased $961,000 or 100% from $961,000 in Fiscal Year 1997
to $0 in Fiscal Year 1998. 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 $477,000 or 59% from $810,000
in Fiscal Year 1997 to $ 1,287,000 in Fiscal Year 1998 due to continued work on
commercial plastic stack products. Research and development represented
approximately 10% of sales for Fiscal Year 1998 as compared to 6% of sales for
the previous year.
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Interest expense decreased $88,000 or 34% from $259,000 in Fiscal Year
1997 to $171,000 in Fiscal Year 1998. Several of the notes that were outstanding
in the previous year for equipment purchases were fully paid during fiscal year
1998. Interest income decreased $72,000 or 37% from $195,000 in Fiscal Year 1997
to $123,000 in Fiscal Year 1998 as the interest earned on available funds was
less than in the previous fiscal year.
Fiscal Year 1997 Compared to Fiscal Year 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 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 Year 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.
Cost of sales for the Fiscal Year 1997, excluding the inventory
write-down, caused by the decreasing price in DRAM memory, 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%) from Fiscal Year 1996 to 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,
13
<PAGE> 14
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, as compared to no other costs in Fiscal
Year 1996 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 $519,000
in Fiscal Year 1996 to $810,000 Fiscal Year 1997 due to continued work on the
commercial plastic stack products. While the previous year was experiencing
growth due to the 512K x 8 module sales, additional costs were 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 $243,000 in
Fiscal Year to $259,000 in Fiscal Year 1997 due to several new equipment leases
having a full year of interest expense. Interest income increased by $176,000
from $19,000 in Fiscal Year 1996 to $95,000 in Fiscal Year 1997 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.
Liquidity and Capital Resources
The Company's primary sources of liquidity during fiscal year 1998 was
cash from the $4.3 million net cash proceeds, from the sale of 900,000 shares of
Common Stock in February 1996 which raised $4.3 million in net cash proceeds.
Cash used in operating activities consisted of the loss for the fiscal year of
approximately $1,960,000. Net cash provided by operating activities included
$1,120,000 from depreciation and mortization, an overall decrease in inventory
of $571,000 and a decrease in accounts receivable of $179,000. There was also an
increase in accounts payable ($114,000).
Cash used for investing activities consisted of approximately $330,000
of capitalized engineering labor and approximately $593,000 for the purchase of
engineering and test equipment, computers, machinery and tooling. Additionally,
the Company paid cash of $130,000 for certain assets associated with the
purchase of assets of TypeHaus. The Company has no material commitments for
capital expenditures in the fiscal year ending February 28, 1999.
At February 28, 1998, 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
14
<PAGE> 15
without the consent of the lenders except for purchase money indebtedness
incurred for the purchase or lease of equipment and machinery.
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, 1998, the outstanding
principal amount was $423,000. Principal and interest payments on this loan
totaled $188,000 in Fiscal Year 1998.
Despite a loss of $1,960,000 during Fiscal year 1998, the Company ended
the fiscal year in a strong financial position. At February 28, 1998, the
Company had cash of over $3.6 million, working capital of $5.8 million and a
current ratio of 3.9 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."
Other Matters
The Company is assessing the internal readiness of its computer systems
for handling Year 2000 issues. The Company expects to implement successfully the
systems and programming changes necessary to address year 2000 issues with
respect to its internal systems and believes that the cost of such actions will
not be significant and will not have a material adverse effect on its financial
condition or results of operations. Although the Company is not aware of any
material operational issues or costs associated with preparing its internal
systems for the year 2000, there can be no assurance that there will not be a
delay in, or increased costs associated with, the implementation of the
necessary systems and changes to address the year 2000 issues, and the Company's
inability to implement such systems and changes could have an adverse effect on
future results of operations.
Recent Accounting Pronouncements in 1997, SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information,: were issued and are effective for fiscal
years beginning after December 15, 1997. In October 1997, the AICPA issued SOP
97-2, "Software Revenue Recognition,: which supersedes SOP 91-1. The provisions
of SOP 97-2 are effective for fiscal years beginning after December 15, 1997.
The Company is reviewing the impact of these pronouncements on its financial
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
15
<PAGE> 16
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.
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.
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.
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 out-source 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.
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
16
<PAGE> 17
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
sales, development or commercialization of the Company's future products.
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 which 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.
17
<PAGE> 18
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information set forth under 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 (the
"Proxy Statement") for the Annual Meeting of Shareholders, scheduled to be held
on August 14, 1998, is incorporated herein by reference.
ITEM 10: EXECUTIVE COMPENSATION
The information set forth under the sections entitled "Executive
Compensation" and "Election of Directors - Directors' Compensation" in the
Company's Proxy Statement is incorporated herein by reference.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the section entitled "Ownership of
Common Stock" in the Company's Proxy Statement is incorporated herein by
reference
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.
18
<PAGE> 19
PART IV.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The Exhibits listed below have been filed with the U.S.
Securities and Exchange Commission (the "Commission") as part of this annual
report on Form 10-KSB. The Company will furnish a copy of any exhibit upon
request but a reasonable fee will be charged to cover the Company's expense in
furnishing such exhibit.
Exhibit
No.
-------
3.1 Articles of Incorporation, as amended which is incorporated by
reference to Registrant's Current Report on Form 8-K, Date of
Event July 11, 1988.
3.2 By-laws, as amended which is incorporated by reference to
Registrant's Current Report on Form 8-K, Date of Event July 11,
1988
10.1 Letter dated December 4, 1990 from Kreidietbank regarding
$1,270,000 loan as incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter ended November 30,
1990.
10.2 Lease for Premises at 7321 Lincoln Way, Garden Grove,
California, dated June 19, 1997 as incorporated by reference to
Registrant's Annual Report on Form l0-KSB for the year ended
February 29, 1996.
10.3 1996 Stock Option Plan as incorporated by reference to
Registrant's Annual Report on Form l0-KSB for the year ended
February 29, 1996.
10.4 1985 Stock Option Plan, as amended and incorporated by reference
to Registrant's Annual Report on Form l0-KSB for the year ended
February 28, 1994.
10.5 Form of Indemnification Agreement with officers and directors as
incorporated by reference to Registrant's Annual Report on Form
l0-KSB for the year ended February 28, 1994.
10.6 Loan Agreement and Security Agreement dated October 12, 1994
between the Company and Euroventures Benelux II B.V. and Trude
C. Taylor as incorporated by reference to Registrant's Quarterly
Report on Form l0-Q for the quarter ended November 30, 1994.
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 as incorporated by reference to the Registrant's
Registration Statement on Form S-3 (No. (33-87704) filed on
December 22, 1994.
19
<PAGE> 20
10.8 Warrant Agreement and Addendum to Loan Agreement effective as of
October 23, 1995, between the Company and Euroventures Benelux
II B.V., as incorporated by reference to Registrant's Form 8-K,
Date of Event October 23, 1995.
10.9 Management Bonus Plan for Fiscal Year 1997, as incorporated by
reference to Registrant's Annual Report on Form l0-KSB for the
year ended February 29, 1996.
10.10 Amended and Restated Warrant Agreement between the Company and
Euroventures Benelux II B.V. dated as of April 1, 1996.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
(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. "Dense-Pac Microsystems New Chairman Outlines Management and Sales
Restructuring".
20
<PAGE> 21
SIGNATURES
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, 1998 DENSE-PAC MICROSYSTEMS, INC.
By: /s/ Aaron Uri Levy
------------------------------------
Aaron Uri Levy
Chairman of the Board,
Chief Executive Officer and President
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, Director, 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/ 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
/s/ Lyle Jensen May 28, 1997
- ------------------------------------------------
Lyle Jensen, Director
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Dense-Pac Microsystems, Inc.:
We have audited the accompanying consolidated balance sheets of Dense-Pac
Microsystems, Inc. and subsidiary (the Company) as of February 28, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended February 28,
1998. 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, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Dense-Pac
Microsystems, Inc. and subsidiary as of February 28, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended February 28, 1998 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
- -----------------------------
Costa Mesa, California
May 11, 1998
F-1
<PAGE> 23
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 3,626,388 $ 4,660,769
Accounts receivable, net of allowance for doubtful accounts
of $100,000 and $50,000 in 1998 and 1997, respectively 1,066,553 1,245,685
Inventories (Notes 1 and 2) 3,090,889 3,530,648
Prepaid expenses and other current assets 141,538 122,988
----------- -----------
Total current assets 7,925,368 9,560,090
PROPERTY, net (Notes 1, 3 and 4) 4,299,795 3,907,105
OTHER ASSETS 14,360 14,360
----------- -----------
$12,239,523 $13,481,555
=========== ===========
</TABLE>
See accompanying notes to
consolidated financial statements.
F-2
<PAGE> 24
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1998 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 438,125 $ 407,254
Accounts payable 1,319,486 1,074,263
Accrued compensation 240,595 636,455
Other accrued liabilities 121,435 73,048
------------ ------------
Total current liabilities 2,119,641 2,191,020
NOTES PAYABLE DUE TO RELATED PARTIES (Note 5) 1,900,000 1,900,000
LONG-TERM DEBT (Note 4) 597,095 764,489
STOCKHOLDERS' EQUITY (Notes 5, 7, 9 and 11):
Common stock, no par value; authorized, 40,000,000 shares;
issued and outstanding, 17,596,181 and 16,997,681 shares
in 1998 and 1997, respectively 17,022,138 16,065,404
Accumulated deficit (9,399,351) (7,439,358)
------------ ------------
Total stockholders' equity 7,622,787 8,626,046
------------ ------------
$ 12,239,523 $ 13,481,555
============ ============
</TABLE>
See accompanying notes to
consolidated financial statements.
F-3
<PAGE> 25
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
NET SALES (Notes 1 and 10) $ 13,463,560 $ 14,023,528
COST OF SALES (Note 1):
Cost of sales 10,612,912 10,546,101
Inventory write-down 2,111,171
------------ ------------
Total cost of sales 10,612,912 12,657,272
------------ ------------
GROSS PROFIT 2,850,648 1,366,256
COSTS AND EXPENSES (Notes 1, 6 and 11):
Selling, general and administrative 3,474,984 3,321,741
Research and development 1,286,808 810,059
Other costs 961,147
------------ ------------
Total costs and expenses 4,761,792 5,092,947
------------ ------------
LOSS FROM OPERATIONS (1,911,144) (3,726,691)
OTHER EXPENSE (INCOME) (Notes 4 and 5):
Interest expense 170,657 258,823
Interest income (123,408) (195,001)
Loss on property disposal 154,681
------------ ------------
Total other expense 47,249 218,503
------------ ------------
LOSS BEFORE INCOME TAX PROVISION (1,958,393) (3,945,194)
INCOME TAX PROVISION (Note 8) 1,600 150,800
------------ ------------
NET LOSS $ (1,959,993) $ (4,095,994)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE (Note 1) $ (0.11) $ (0.24)
============ ============
WEIGHTED AVERAGE SHARES USED TO CALCULATE
BASIC AND DILUTED NET LOSS PER SHARE 17,239,611 16,918,725
============ ============
</TABLE>
See accompanying notes to
consolidated financial statements.
F-4
<PAGE> 26
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
<S> <C> <C> <C> <C>
BALANCE, March 1, 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 1997
(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
Issuance of common stock upon
exercise of stock options (Note 9) 522,619 781,734 781,734
Issuance of common stock for acquisition 75,881 175,000 175,000
Net loss (1,959,993) (1,959,993)
-------------- -------------- -------------- --------------
BALANCE, February 28, 1998 17,596,181 $ 17,022,138 $ (9,399,351) $ 7,622,787
============== ============== ============== ==============
</TABLE>
See accompanying notes to
consolidated financial statements.
F-5
<PAGE> 27
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,959,993) $(4,095,994)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,119,510 1,095,140
Deferred income taxes 150,000
Loss on disposal of property 154,681
Write-off of property and technology and marketing rights 627,154
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable 179,132 2,329,137
Inventories 439,759 1,620,458
Prepaid expenses and other assets (18,550) 216,989
Accounts payable 245,223 (494,644)
Accrued compensation (395,860) 63,956
Other accrued liabilities 48,387 11,066
----------- -----------
Net cash (used in) provided by operating activities (342,392) 1,677,943
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (922,671) (1,395,168)
Cash paid for acquisition (130,000)
----------- -----------
Net cash used in investing activities (1,052,671) (1,395,168)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (421,052) (472,246)
Net proceeds from issuance of common stock 781,734 270,400
----------- -----------
Net cash provided by (used in) financing activities 360,682 (201,846)
----------- -----------
</TABLE>
See accompanying notes to
consolidated financial statements.
F-6
<PAGE> 28
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH $(1,034,381) $ 80,929
CASH, beginning of year 4,660,769 4,579,840
----------- -----------
CASH, end of year $ 3,626,388 $ 4,660,769
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 174,072 $ 223,105
=========== ===========
Income taxes $ 800 $ 800
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of property for note payable $ 284,529 $ 442,536
=========== ===========
Acquisition of property under capital leases $ 88,468
===========
DETAIL OF BUSINESS ACQUIRED IN
PURCHASE BUSINESS COMBINATION -
On September 8, 1997, the Company acquired certain assets of TypeHaus, Inc.
A summary of the transaction is as follows:
Tangible assets acquired $ 245,000
Intangible assets acquired 60,000
Common stock issued (175,000)
Cash paid for acquisition (130,000)
-----------
Liabilities assumed $ --
===========
</TABLE>
See accompanying notes to
consolidated financial statements.
F-7
<PAGE> 29
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Dense-Pac Microsystems, Inc. (Dense-Pac or the
Parent Company), a California corporation, and its wholly-owned
subsidiary, TypeHaus, Inc. (together, the Company), 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.
In September 1997, Dense-Pac acquired substantially all of the assets of
TypeHaus, Inc. for $305,000, consisting of $130,000 in cash and $175,000
in common stock of Dense-Pac. TypeHaus, Inc. was a privately-held Texas
corporation providing printer media devices, printer memory and
electronic laser printer products to a variety of OEM customers.
TypeHaus also supplied custom memory subsystems and support software for
OEM manufacturers of laser printers. The acquisition was accounted for
under the purchase method of accounting and the purchase price was
allocated to tangible assets acquired ($245,000), and a covenant
not-to-compete ($60,000).
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Dense-Pac Microsystems, Inc. and its
subsidiary. All significant intercompany transactions and balances have
been eliminated in consolidation.
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, 1998 is approximately $1,774,000.
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
F-8
<PAGE> 30
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
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 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.
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.
Earnings (Loss) Per Share - In February 1998, the Company adopted SFAS
No. 128, Earnings per Share. SFAS No. 128 redefines earnings per share
under generally accepted accounting principles. Under the new standard,
primary net income per share is replaced by basic net income per share
and fully diluted net income per share is replaced by diluted net income
per share. All historical earnings per share information has been
restated as required by SFAS No. 128.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the periods presented.
F-9
<PAGE> 31
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Diluted net income (loss) per share is computed using the weighted
average number of common and common equivalent shares outstanding during
the periods presented. For fiscal 1998 and 1997, common equivalent
shares have been excluded from the computation, as their effect was
antidilutive.
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.
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 industrywide 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.
New Pronouncements - For fiscal 1999, the Company will adopt SFAS No.
130, Reporting Comprehensive Income, SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, and SFAS No. 132,
Employers' Disclosures About Pensions and Other Post Retirement
Benefits. The Company is reviewing the impact of such statements on its
financial statements.
F-10
<PAGE> 32
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Reclassifications - Certain reclassifications have been made to the
prior year's financial statements to conform with the current year
presentation.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $ 1,054,503 $ 772,615
Work-in-process 1,284,282 2,022,493
Finished goods 752,104 735,540
----------- -----------
Total inventories $ 3,090,889 $ 3,530,648
=========== ===========
</TABLE>
3 PROPERTY
Property consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Machinery and equipment $ 6,091,272 $ 4,818,590
Furniture and fixtures 175,837 151,864
Leasehold improvements 357,515 300,980
Computer software and equipment financed
under capital leases 88,468 177,952
----------- -----------
6,713,092 5,449,386
Less accumulated depreciation and amortization (2,413,297) (1,542,281)
----------- -----------
Property, net $ 4,299,795 $ 3,907,105
=========== ===========
</TABLE>
F-11
<PAGE> 33
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
<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% $ 423,318 $ 564,424
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 555,921 520,686
Obligations under capital leases, bearing interest at rates
ranging from 11.1% to 14.6%, maturing at various dates
through May 2001 55,981 86,633
----------- -----------
1,035,220 1,171,743
Less current portion of other long-term debt (438,125) (407,254)
----------- -----------
$ 597,095 $ 764,489
=========== ===========
</TABLE>
Long-term debt at February 28, 1998 matures as follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
1999 $ 438,125
2000 350,463
2001 242,480
2002 4,152
-----------
$ 1,035,220
===========
</TABLE>
Interest expense related to long-term debt was $170,657 and $160,823 for
fiscal years 1998 and 1997, respectively.
F-12
<PAGE> 34
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
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 ($100,000 was repaid in fiscal 1996). 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.
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
that 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. In connection with the acquisition of
TypeHaus (Note 1), the Company obtained a one-time waiver from the
related parties regarding the price adjustment of the outstanding
warrants.
Interest expense related to related-party borrowings was $94,000 and
$98,000 for fiscal years 1998 and 1997, respectively.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its office and manufacturing facility under an
operating lease arrangement that 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, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 141,041
2000 145,822
2001 133,670
----------
Total future minimum lease payments $ 420,533
==========
</TABLE>
F-13
<PAGE> 35
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Rent expense relating to the operating lease was approximately $150,000
and $162,000 for fiscal years 1998 and 1997, respectively.
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.
7. STOCKHOLDERS' EQUITY
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 year 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,
1998, 3,000 warrants had lapsed and 9,000 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. During fiscal 1998, the Company terminated its relationship
with the vendor. No warrants were exercised as a result of this
agreement.
8. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal $ -- $ --
State 1,600 800
------ ------
1,600 800
</TABLE>
F-14
<PAGE> 36
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred:
Federal $(1,053,430) $(1,303,219)
State (191,952) (393,316)
----------- -----------
(1,245,382) (1,696,535)
Change in valuation allowance 1,245,382 1,846,535
----------- -----------
Total net change for deferrals 150,000
----------- -----------
Total income tax provision $ 1,600 $ 150,800
=========== ===========
</TABLE>
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 are as follows at February 28:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Inventories $ 152,919 $ 239,422
Other reserves 84,238 174,842
State taxes 272 272
Net operating loss carryforwards, general business
credit carryforwards and AMT credit carryforwards 4,393,971 3,023,441
----------- -----------
Total gross deferred assets 4,631,400 3,437,977
Deferred tax liability - depreciation and amortization (185,729) (237,688)
----------- -----------
4,445,671 3,200,289
Valuation allowance (4,445,671) (3,200,289)
----------- -----------
Net deferred income taxes $ -- $ --
=========== ===========
</TABLE>
As of February 28, 1998, a valuation allowance of $4,445,671 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.
F-15
<PAGE> 37
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Additionally, at February 28, 1998, approximately $661,000 of the
valuation allowance was attributable to the potential tax benefit of
stock option transactions that will be credited directly to additional
paid-in capital, if realized.
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Statutory rate (35)% (35)%
Valuation allowance 34 38
Other 1 1
---- ----
0% 4%
==== ====
</TABLE>
As of February 28, 1998, the Company had federal and state net operating
loss carryforwards of $10,997,000 and $3,838,000, respectively. The
federal net operating losses begin to expire in 2002, while the state
net operating losses begin to expire in 1999. As of February 28, 1998,
the Company had federal and state tax credit carryforwards of $268,000
and $260,000, respectively. The federal tax credits begin to expire in
2006, while the state tax credits begin to expire in 2004.
9. EMPLOYEE STOCK OPTION PLAN
At February 28, 1998, options to purchase 380,144 shares of the
Company's common stock were outstanding under the Company's 1985 Stock
Option Plan, of which options to purchase 318,682 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, 1998, 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.
F-16
<PAGE> 38
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
At February 28, 1998, options to purchase 1,522,100 shares of the
Company's common stock were outstanding under the 1996 Stock Option
Plan, of which options to purchase 393,158 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, 1998, 477,900 shares were available for future grants
under the Plan.
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, 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
Granted (weighted average fair value of $1.19) 698,000 $2.39
Exercised (522,619) $1.50
Canceled (363,137) $2.26
----------
OUTSTANDING, February 28, 1998 1,902,244 $2.01
==========
</TABLE>
Additional information regarding options outstanding as of February 28,
1998 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 1,250 4.2 $0.81 1,250 $0.81
$1.00 - $2.00 776,269 8.0 $1.40 316,682 $1.51
$2.00 - $3.00 1,022,725 8.5 $2.34 392,908 $2.39
$3.00 - $4.41 102,000 9.8 $3.28 1,000 $4.41
--------- -------
1,902,244 711,840
========= =======
</TABLE>
F-17
<PAGE> 39
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (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:
<TABLE>
<CAPTION>
FOR OPTIONS
GRANTED DURING:
---------------------------------
ASSUMPTIONS 1998 1997
<S> <C> <C>
Expected life, following vesting (months) 42 42
Stock volatility 65.00% 85.00%
Risk-free interest rate 5.50% 6.06%
Dividends during the expected term None None
</TABLE>
The Company's calculations are based on a single-option valuation
approach and forfeitures are recognized as they occur. If the fair
values of the awards had been amortized to expense over the vesting
period the awards, results would have been as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net loss as reported $(1,959,993) $(4,095,994)
Pro forma net loss $(2,593,063) $(4,576,308)
Pro forma net loss per share:
Basic and diluted $ (0.15) $ (0.27)
</TABLE>
F-18
<PAGE> 40
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED FEBRUARY 28, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
The impact of outstanding nonvested stock options granted prior to 1996
has been excluded from the pro forma calculation; accordingly, the 1998
and 1997 pro forma adjustments may not be indicative of future period
pro forma adjustments, when the calculation will be applicable to all
stock options.
10. CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION
The Company had export sales (primarily to Western European customers)
accounting for approximately 15% and 23% of net sales for fiscal years
1998 and 1997, 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.
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 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 $45,525 and $47,800 to the
401(k) plan during fiscal years 1998 and 1997, 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 years 1998 and 1997.
F-19
<PAGE> 41
EXHIBIT INDEX
- -------------
10.10 Amended and Restated Warrant Agreement between the Company and
Euroventures Benelux II B.V. dated as of April 1, 1996.
21.1 Subsidiaries of the Company - TypeHaus, Inc., incorporated in California
on September 8, 1997.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.10
DENSE-PAC MICROSYSTEMS, INC.
AMENDED AND RESTATED WARRANT AGREEMENT
THE SECURITIES REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY
NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT
IN COMPLIANCE WITH SECTION 10 OF THIS AGREEMENT.
THIS AMENDED AND RESTATED WARRANT AGREEMENT (the "Agreement"),
originally dated as of October 23, 1995 and amended and restated as of April 1,
1996, is made and entered into by and between Dense-Pac Microsystems, Inc., a
California corporation (the "Company"), and Euroventures Benelux II B.V., a
Netherlands corporation (the "Warrantholder").
For good and valuable consideration, receipt of which is hereby
acknowledged, the Company hereby issues to the Warrantholder warrants (as
hereinafter described, the "Warrants") to purchase up to an aggregate of 375,000
(subject to adjustment pursuant to Section 5 hereof) shares (the "Shares") of
the Company's Common Stock (the "Common Stock").
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and the Warrantholder, for value received, hereby agree
as follows:
Section 1. Representations.
1.1 Investment Representation. The Warrantholder acknowledges that
neither the Warrants nor any of the Shares have been registered under the
Securities Act of 1933, as amended (the "Act") or qualified under the California
Corporate Securities Law, in reliance upon exemptions therefrom. The
Warrantholder represents that it is acquiring the Warrants, and will acquire the
Shares, for its own account and not with a view to the distribution thereof. The
Warrantholder has no contract, undertaking, agreement or arrangement with any
person to sell, transfer or otherwise distribute to such persons or to have such
persons sell, transfer or otherwise distribute for the Warrantholder, the
Warrants or the Shares. The Warrantholder further represents and warrants that
it is an existing shareholder of the Company and has the business experience to
analyze, and net worth sufficient to assume, the risks of this investment.
1.2 Legend on Shares. Each certificate for Shares issued upon
exercise of the Warrants shall bear the following legend:
"The shares represented by this Certificate have not been
registered under the Securities Act of 1933. The shares may not
be sold, exchanged, hypothecated or transferred in any manner
unless they are registered under said Act and applicable state
law or an exemption from such registration is available.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a Registration Statement under the Act, of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
Section 2. Term of Warrants; Exercise of Warrants.
Subject to the terms of this Agreement, the Warrantholder shall have the
right, at any time until 5:00 p.m., Los Angeles time, on November 14, 1999 (the
"Termination Date"), to purchase from the Company up to the number of fully paid
and nonassessable Shares to which the Warrantholder may at the time be entitled
to purchase pursuant to this Agreement, upon surrender to the Company, at its
principal office, of this Agreement and payment to the Company of the Warrant
Price (as defined in and determined in accordance with the provisions of
Sections 4 and 5 hereof), for the number of Shares in respect of which such
Warrant is then exercised, but in no event for less than 100 Shares (unless less
than an aggregate of 100 Shares are then purchasable under all outstanding
Warrants held by a Warrantholder). Payment of the aggregate Warrant Price shall
be made in cash, by check or wire transfer, or upon written notice by the
Warrantholder that it agrees to the cancellation of a specified amount of
outstanding principal or interest which the Company then owes the Warrantholder
under that certain Loan Agreement dated October 12, 1994 between the Company and
the Warrantholder, as amended and supplemented by that certain Addendum to Loan
Agreement of even date herewith between the Company and the Warrantholder.
1
<PAGE> 2
Upon surrender of this Agreement and payment for the Shares, the Company
shall issue and cause to be delivered within five business days to or upon the
written order of the Warrantholder and in such name or names as the
Warrantholder may designate a certificate or certificates for the number of full
Shares issuable upon the exercise of the Warrants, together with cash, as
provided in Section 0 hereof, in respect of any fractional Share otherwise
issuable upon such exercise.
The Warrants shall be exercisable, at the election of the Warrantholder,
either in full or from time to time in part and, in the event that the Warrants
are partially exercised, a new Warrant Agreement evidencing the remaining
portion of the Warrants shall be executed by both parties hereto.
Section 3. Reservation of Shares.
There has been reserved, and the Company shall at all times keep
reserved so long as the Warrants remain outstanding, out of its authorized and
unissued Common Stock, such number of shares of Common Stock as shall be subject
to purchase under the Warrants.
Section 4. Warrant Price.
The initial price per Share (the "Warrant Price") at which Shares shall
be purchasable upon the exercise of the Warrants shall be $7.00.
If at any time after April 1, 1996, the Company sells any Common Stock,
other than pursuant to employee benefit plans (whether now in effect or adopted
in the future) or warrants or convertible securities with a fixed exercise or
conversion price (subject to standard anti-dilution adjustments) which are
outstanding on April 1, 1996, at a price per share which is less than the
initial Warrant Price (as adjusted to give effect to stock splits or stock
dividends), the Warrant Price shall be reduced to equal such lower price;
provided, however, that no adjustment of the Warrant Price shall be made at any
time that such adjustment would result in the Warrantholder incurring any
liability to the Company pursuant to Section 16(b) of the Securities Exchange
Act of 1934, as amended. The Warrant Price shall also be subject to adjustment
pursuant to Section 5 hereof.
Section 5. Adjustment of Warrant Price and Number of Shares.
In case the Company shall (i) pay a dividend in Common Stock or any
other security or make a distribution in Common Stock, (ii) subdivide its
outstanding Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of shares of Common Stock, or (iv) issue by reclassification of
its Common Stock other securities of the Company, the number and kind of Shares
purchasable upon exercise of the Warrants immediately prior thereto shall be
adjusted so that the Warrantholder shall be entitled to receive the kind and
number of Shares or other securities of the Company which it would have owned or
would have been entitled to receive immediately after the happening of any of
the events described above, had the Warrants been exercised immediately prior to
the happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this Section 5 shall become effective immediately
after the effective date of such event retroactive to the record date, if any,
for such event.
Whenever the number of Shares purchasable upon the exercise of the
Warrants is adjusted as herein provided, the Warrant Price payable upon exercise
of the Warrants shall be adjusted by multiplying such Warrant Price immediately
prior to such adjustment by a fraction, the numerator of which shall be the
number of Shares purchasable upon the exercise of the Warrants immediately prior
to such adjustment, and the denominator of which shall be the number of Shares
so purchasable immediately thereafter.
Except as provided in this Section 5, no adjustment in respect of any
cash dividends or distributions out of earnings shall be made during the term of
the Warrants or upon the exercise of the Warrants.
Section 6. Merger or Consolidation.
In case of any merger or consolidation of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation), or in the case of any sale or conveyance of the
property of the Company as an entirety or substantially as an entirety in
connection with which the Company is dissolved, the Warrantholder shall have the
right thereafter (until the Termination Date) to receive upon the exercise
hereof, for the same aggregate Warrant Price hereunder immediately prior to such
event, the kind and amount of shares of stock or other securities or property
receivable upon such merger or consolidation, or upon the dissolution following
such sale or other transfer, by a holder of the number of Shares obtainable upon
exercise of this Warrant immediately prior to such event.
Section 7. Fractional Interests.
The Company shall not be required to issue fractional Shares on the
exercise of the Warrants. If any fraction of a Share would, except for the
provisions of this Section 0, be issuable on the exercise of the Warrants (or
specified portion thereof), the Company shall pay an amount in cash equal to (i)
the average Sale Price (as defined in Section 8 hereof) during the fifteen (15)
consecutive trading days immediately preceding the date in question, (ii)
multiplied by such fraction.
2
<PAGE> 3
Section 8. Call Option.
If at any time during the term of the Warrants the Sale Price (as
defined below) of the Company's Common Stock equals or exceeds $9.00 (as
adjusted to give effect to stock splits and stock dividends) for each of the 20
consecutive trading days preceding but not including the date of such call, the
Company shall have the right and option, upon no less than 30 days' written
notice to the Warrantholder, to call, and thereafter to redeem and acquire, all
of the Warrants evidenced hereby which remain outstanding and unexercised at the
date fixed for redemption in such notice (the "Redemption Date"), for an amount
equal to One-Tenth of One Cent ($.001) per Warrant; provided, however, that the
Warrantholder shall have the right during the period between the date of such
notice and the Redemption Date to exercise the Warrants in accordance with the
provisions hereof; and provided further that if prior to the Redemption Date the
Warrantholder has requested a registration of the Shares pursuant to Section
10.2 hereof, the Redemption Date shall be extended, if necessary, until the
effective date of such registration. Said notice of redemption shall require the
Warrantholder to surrender this Agreement to the Company, on the Redemption
Date, at the principal executive offices of the Company. Notwithstanding the
fact that any Warrants called for redemption have not been surrendered for
redemption and cancellation on the Redemption Date, after the Redemption Date
such Warrants shall be deemed to be expired and all rights of the Warrantholder
to such unsurrendered Warrants shall cease and terminate, other than the right
to receive the redemption price of $.001 per Warrant for such Warrants, without
interest.
The term "Sale Price" shall mean (i) if the Common Stock is traded in
the over-the-counter market or quoted on a NASDAQ system but not on any national
securities exchange, the highest ask (offer) price on the day in question as
reported by NASDAQ or an equivalent generally accepted reporting service, or
(ii) if the Common Stock is traded on a national securities exchange, the
highest sale price on the day in question as reported thereon.
Section 9. No Rights as Stockholder; Notices to Warrantholder.
Nothing contained in this Agreement shall be construed as conferring
upon the Warrantholder or its transferees any rights by virtue of the Warrants
as a stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect of any meeting of
stockholders for the election of directors of the Company or any other matter,
except the Company shall mail to Warrantholder a copy of its annual report and
any periodic reports provided its shareholders. If, however, at any time prior
to the expiration or redemption of the Warrants and prior to their exercise in
full, any one or more of the events described in Section 0 shall occur, then the
Company shall give notice in writing of such event to the Warrantholder, as
provided in Section 14 hereof, as soon as reasonably practical but in any event
at least 30 days prior to the date fixed as a record date or the date of closing
the transfer books for the determination of the stockholders entitled to vote on
such proposed consolidation, merger, sale, dissolution, liquidation or winding
up. Such notice shall specify such record date or the date of closing the
transfer books, as the case may be. Failure to mail or receive such notice or
any defect therein shall not affect the validity of any action taken with
respect thereto.
Section 10. Restrictions on Transfer; Registration Rights.
10.1 The Warrantholder agrees that prior to making any disposition of
the Warrants or the Shares, if no registration statement or post-effective
amendment thereto under the Act (collectively a "Registration Statement") with
respect to such disposition is then effective, no such disposition shall be made
unless the Company has received from the Warrantholder an opinion of counsel
reasonably satisfactory to the Company that such disposition may be made without
registration under the Act.
10.2 Upon the written request of the Warrantholder at any time prior
to the Termination Date, the Company agrees to prepare and file, as promptly as
practicable at its own expense, a Registration Statement with the Securities and
Exchange Commission and appropriate Blue Sky authorities sufficient to permit
the public offering of the Shares, and to use its best efforts at its own
expense through its officers, directors, auditors and counsel, in all matters
necessary or advisable, to cause such Registration Statement to become effective
and to keep such Registration Statement effective for a period of three years
(and to keep the Prospectus current for such period) following the effective
date thereof. The Company shall be required to file only one Registration
Statement pursuant to this Section 0. Notwithstanding any provision to the
contrary, the Company's obligation to file a Registration Statement shall not be
satisfied unless and until the Registration Statement is declared effective by
the Securities and Exchange Commission. The registration rights of the
Warrantholder shall not be extinguished if the Registration Statement is
withdrawn for any reason.
The Company may include other of its securities in such Registration
Statement, unless the underwriter of such offering, if any, reasonably advises
the Company that the inclusion of such other securities will materially and
adversely affect the distribution of, or the market for, the Shares.
10.3 All fees, disbursements and out-of-pocket expenses (other than
Warrantholder's or holders' of Shares brokerage fees and commissions and legal
fees of counsel to the Warrantholders or holders of Shares, if any) in
connection with the filing of a Registration Statement (and Prospectus) pursuant
to Section 0, including amendments and supplements thereto, and in complying
with applicable securities and Blue Sky laws of up to five states designated by
the Warrantholder shall be borne by the Company.
3
<PAGE> 4
The Company at its expense will supply any Warrantholder and any holder of
Shares with copies of such Registration Statement and the prospectus included
therein and other related documents in such quantities as may be reasonably
requested by the Warrantholder or holder of Shares.
10.4 The Company shall not be required by this Section 0 to file a
Registration Statement or include any Shares in a Registration Statement
pursuant to this Section 0 if, in the written opinion of counsel for the Company
the proposed sale or other transfer of the Shares is exempt from applicable
federal and state securities laws and would result in all purchasers or
transferees of such Shares obtaining securities which are not "restricted
securities," as defined in Rule 144 under the Act.
Section 11. Indemnification.
11.1 In the event of the filing of any Registration Statement with
respect to the Shares pursuant to Section 0 hereof, the Company agrees to
indemnify and hold harmless the Warrantholder or any holder of such Shares and
each person, if any, who controls the Warrantholder or any holder of such Shares
within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees and costs), to which the Warrantholder or any holder of such
Shares or such controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such Registration
Statement, final prospectus, or amendment or supplement thereto, or arise out of
or are based upon the omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement of omission or omission was
made therein in reliance upon, and in conformity with, written information
furnished or omitted to be furnished to the Company by such Warrantholder or
such holder of Shares specifically for use in the preparation thereof. This
indemnity will be in addition to any liability which the Company may otherwise
have.
11.2 The Warrantholders and the holders of the Shares agree that they
will indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include but not be limited to,
all costs of defense and investigation and all attorneys' fees) to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement of any material fact contained in such Registration Statement,
final prospectus or amendment or supplement thereto, or arise out of or are
based upon the omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but in each
case only to the extent that such untrue statement or omission was made in such
Registration Statement, final prospectus or amendment or supplement thereto in
reliance upon, and in conformity with, written information furnished or omitted
to be furnished to the Company by the Warrantholder or such holder of Shares
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Warrantholder or such holder of Shares
may otherwise have.
11.3 Promptly after receipt by an indemnified party under this
Section 0 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 0, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
except as to any losses, claims, damages or liabilities incurred by the
indemnified party prior to its notice to the indemnifying party. In case any
such action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, reasonably assume the defense
thereof, subject to the provisions herein stated and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section 0 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless the indemnifying party shall not
pursue the action to its final conclusion. The indemnified party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall not be at the
expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is a Warrantholder or a holder of
Shares or a person who controls a Warrantholder or a holder of Shares within the
meaning of the Act, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party or (ii) the named
parties to any such action, including any impleaded parties, include both a
Warrantholder or a holder of Shares or such controlling person and the
indemnifying party and a Warrantholder or a holder of Shares or such controlling
person shall have been advised by such counsel that there may be one or more
legal defenses available to the indemnifying party which are not available to or
in conflict with any legal defenses which may be available to a Warrantholder or
a holder of Shares or controlling person (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of a
Warrantholder or a holder of Shares or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the
4
<PAGE> 5
reasonable fees and expenses of more than one separate firm of attorneys for the
Warrantholders, the holders of the Shares and controlling persons, which firm
shall be designated in writing by a majority in interest of such holders and
such controlling party based upon the value of the securities included in the
Registration Statement). No settlement of any action against an indemnified
party shall be made without the consent of the indemnified and the indemnifying
parties, which consent shall not be unreasonably withheld in light of all
factors of importance to such parties.
Section 12. Contribution.
In order to provide for just and equitable contribution under the Act in
any case in which (i) a Warrantholder or any holder of the Shares or controlling
person makes a claim for indemnification pursuant to Section 0 hereof but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 0 thereof
provide for indemnification in such case or (ii) contribution under the Act may
be required on the part of any Warrantholder or any holder of the Shares or
controlling person, then the Company and any Warrantholder or any such holder of
the Shares or controlling person shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or a
Warrantholder or holder of Shares or controlling person on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and such holders of
such securities and such controlling parties agree that it would not be just and
equitable if contribution pursuant to this Section 0 were determined by pro rata
allocation or by any other method which does not take account of the equitable
considerations referred to in this Section 0. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this Section 0 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
Section 13. Exchange, Transfer, Assignment or Loss of Warrant.
Subject to Section 0 hereof, this Warrant is exchangeable, without
expense, at the option of the Warrantholder, upon presentation and surrender
hereof to the Company at its offices for other Warrants of different
denominations entitling the holder thereof to purchase in the aggregate the same
number of Shares as are purchasable hereunder. Upon surrender of this Warrant to
the Company at its principal office with the Assignment form annexed hereto duly
executed, the Company shall, without charge, execute and deliver a new Warrant
in the name of the assignee named in such instrument of assignment and this
Warrant shall be promptly cancelled. Subject to Section 0 hereof, this Warrant
may be divided or combined with other Warrants upon presentation thereof at the
office of the Company together with a written notice signed by the Warrantholder
hereof specifying the names and denominations in which new Warrants are to be
issued. Upon receipt by the Company of evidence satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and, in the case of loss,
theft or destruction, of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date.
Section 14. Notices.
Any notice pursuant to this Agreement by the Company or by a
Warrantholder or a holder of Shares shall be in writing and addressed as
follows, and shall be deemed to have been duly given, if delivered personally or
by telecopy, on the date of delivery, or if sent by air courier, two business
days after deposited with the air courier:
If to a Warrantholder or a holder of Shares:
Euroventures Benelux II B.V.
H. Henneaulaan 366
1930 Zaventem
Belgium
Attn: Mr. Roger Claes and Ms. Sabine Vermassen
Facsimile: 011 322 721 4435
With a copy to:
Jon R. Tandler, Esq.
Coblentz, Cahen, McCabe & Breyer
222 Kearny Street, 7th Floor
San Francisco, CA 94108-4510
Facsimile: (415) 989-1663
5
<PAGE> 6
If to the Company:
Dense-Pac Microsystems, Inc.,
7321 Lincoln Way
Garden Grove, California 92641
Attention: James G. Turner, President
Facsimile: (714) 897-1772
With a copy to:
Helen W. Melman, Esq.
1299 Ocean Avenue
Fourth Floor
Santa Monica, California 90401
Facsimile: (310) 394-4759
Any party may from time to time change the address to which notices to
it are to be delivered or mailed hereunder by notice in accordance herewith to
the other parties.
Section 15. Successors.
All the covenants and provisions of this Agreement by or for the benefit
of the Company, the Warrantholders or the holders of Shares shall bind and inure
to the benefit of their respective successors and assigns hereunder.
Section 16. Applicable Law.
This Agreement shall be deemed to be a contract made under the laws of
the State of California and for all purposes shall be construed in accordance
with the laws of said State. Each party hereto expressly consents to the
jurisdiction of the California courts and agrees that any action relating to or
arising out of this Agreement shall be instituted and prosecuted only in the
Municipal or Superior Court of the City and County of San Francisco. Each party
waives any right to a change in venue and any and all objections to the
jurisdiction of the California courts.
Section 17. Attorneys' Fees.
In the event of any dispute concerning the terms or conditions of this
Agreement, or in the event the Warrantholder is required to enforce said terms
and conditions, the prevailing party in such dispute or enforcement shall be
entitled to recover all of its reasonable attorneys' fees and costs incurred in
connection with said dispute or enforcement, whether or not litigation is
commenced.
Section 18. Benefits of this Agreement.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company, the Warrantholder and the holders of Shares
any legal or equitable right, remedy or claim under this Agreement. This
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrantholder and the holders of Shares.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
DENSE-PAC MICROSYSTEMS, INC.
By /S/ James G. Turner
-------------------------------------
James G. Turner,
Chief Executive Officer
EUROVENTURES BENELUX II B.V.
By /S/ Roger G. Claes
-------------------------------------
Roger G. Claes,
Managing Director
6
<PAGE> 7
ASSIGNMENT FORM
For value received, the undersigned registered owner of Warrants to
purchase Common Stock of Dense-Pac Microsystems, Inc., a California corporation
(the "Company"), represented by that certain Warrant Agreement dated
________________ between the Company and the undersigned, hereby sells,
transfers and assigns to the assignee named below Warrants to purchase
___________ shares of the Company's Common Stock:
Assignee:
Name ____________________________
Address ____________________________
____________________________
and authorizes the Company to cancel the Warrant Agreement and to issue and
deliver a new Warrant Agreement in the name of the Assignee for the number of
Warrants so transferred hereby.
Dated:___________ _____________________________________________________________
Signature
7
<PAGE> 1
EXHIBIT 21.1
21.1 SUBSIDIARIES OF THE COMPANY
TypeHaus, Inc., incorporated in California on
September 8, 1997.
<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 11, 1998, appearing in this Annual Report on Form 10-KSB of Dense-Pac
Microsystems, Inc. for the year ended February 28, 1998.
/s/ Deloitte & Touche LLP
- ------------------------------------
Costa Mesa, California
May 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YEAR END
REPORT FORM 10-KSB FOR THE PERIOD ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB FOR THE YEAR ENDED FEBRUARY 28,
1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> MAR-01-1997
<CASH> 3,626,388
<SECURITIES> 0
<RECEIVABLES> 1,166,553
<ALLOWANCES> 100,000
<INVENTORY> 3,090,889
<CURRENT-ASSETS> 7,925,368
<PP&E> 6,713,092
<DEPRECIATION> 2,413,297
<TOTAL-ASSETS> 12,239,523
<CURRENT-LIABILITIES> 2,119,641
<BONDS> 0
0
0
<COMMON> 17,022,138
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,239,523
<SALES> 13,463,560
<TOTAL-REVENUES> 13,463,560
<CGS> 10,612,912
<TOTAL-COSTS> 15,374,704
<OTHER-EXPENSES> 47,249
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 170,657
<INCOME-PRETAX> (1,958,393)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (1,959,993)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,959,993)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
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