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UNITED STATES
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, 1999
[ ] 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)
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Issuer's telephone number, including area code: (714) 898-0007
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 $12,604,000.
The aggregate market value of the Issuer's Common Stock, no par value, held by
non-affiliates of the Issuer on May 3, 1999 (based on the average bid and asked
price per share on that date as reported on NASDAQ), was $19,660,000.
Number of shares of Issuer's Common Stock outstanding at May 3, 1999:
18,535,469 shares
Documents Incorporated By Reference
Portions of the registrant's Definitive Proxy Statement relating to the
registrant's 1999 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission 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, 1999
I N D E X
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PART I
Item 1. Description of Business....................................................... 3
Item 2. Description of Property....................................................... 10
Item 3. Legal Proceedings............................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........................... 11
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters.................. 12
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 12
Item 7. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure.................................................. 20
Item 8. Financial Statements ......................................................... 20
PART III
Item 9. Directors, Executive Officers, Promoter and Control Persons;
Compliance with Section 16(a) of the Exchange Act........................ 21
Item 10. Executive Compensation........................................................ 21
Item 11. Security Ownership of Certain Beneficial Owners and Management................ 21
Item 12. Certain Relationships and Related Transactions................................ 21
Item 13. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............... 21
Signatures .............................................................................. 24
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PART 1
ITEM 1: DESCRIPTION OF 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 herein or in the
section entitled "Certain factors that may affect future results" or in the
section entitled " Cautionary Statements" below.
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 typically receives from the customer plastic memory
devices or will purchase 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 $5 for
commercial modules to over five thousand dollars for high-end military
specification modules.
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High density packaging is used in numerous applications within the
electronics industry. Improved performance and reliability in increasingly
smaller packages has been a continuous trend in electronics. During the past 20
years, advances have been made in reducing size and increasing performance at
the integrated circuit level (LSI, VLSI, etc.). However, high pin count, complex
semiconductors with adequate test methods have reached levels that are both
difficult and costly to achieve. The Company's packaging technologies address
the market's need to both reduce the size of the board circuitry and also
improve the performance of packaging integrated circuit 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 Megabit DRAM by stacking two 128 Megabit DRAMs to
provide the same memory as a single 256 Megabit 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., 128 Megabit
DRAMs) instead of a single potentially unavailable expensive state-of-the-art
semiconductor chip (e.g., 256 Megabit DRAM).
Dense-Pac is able to offer customers leading edge memory products by
packaging the highest memory chips available. Future generations of this
technology could produce even greater memory configurations 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 costs,
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, specialty fonts 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, CommercePac.com, to offer solutions
that will increase the accessibility to the Internet for secure
transaction-oriented businesses and to offer Internet commerce interactive
solutions.
Recent Company Changes
During the Fiscal Year ended February 28, 1999 ("Fiscal Year 1999"), the
Company's chief executive officer and chairman of the board resigned. The
resignation occurred in July 1998, after the company reported two consecutive
quarters of the lowest quarterly revenues, as compared to quarterly revenues in
the previous four years. Immediately after the resignation of the chief
executive officer, Richard J. Dadamo joined the Company as interim chief
executive officer to assess the current business strategy at the Company and
review the significant number of products that the Company had been offering for
sale. As a result of this review, numerous low end commercial product lines and
commercial ceramic memory modules were discontinued, resulting in related
inventory and property write-downs during the second quarter of fiscal year 1999
of $774,000 and $372,000, respectively. After six months,
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Mr. Dadamo completed his basic strategy to re-vitalize Dense-Pac and in January
1999, became chairman of the board. Additionally, during this restructuring
period, he began a search for a new chief executive officer, who would lead the
Company into the future and provide the leadership and knowledge of the industry
to grow Dense-Pac.
Ted Bruce joined Dense-Pac from Toshiba Electronics in January 1999, as
Dense-Pac's chief operating officer and then became the chief executive officer.
He is currently is continuing the implementation of the business strategy to
grow the Company with existing and new technologies. Since the resignation of
the previous C.E.O., current management, excluding the chief executive officer,
at Dense-Pac has remained constant with an average experience at the Company of
approximately eight years. The Company also plans to strengthen its management
staff with several vice president positions scheduled to be filled during the
next fiscal year.
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
integrated circuit capability of existing technology. The central elements of
the Company's business strategy include:
MAINTAIN TECHNOLOGY LEADERSHIP IN ADVANCED PACKAGING TECHNIQUES. The
Company believes it is a leader in the design of three-dimensional stacked
integrated circuit products and is currently advancing into more advanced
packaging techniques. The Company's ceramic stack and commercial plastic stack
products both have patented processes for their unique configuration as well as
the automated process for volume production. The Company intends to continue
developing these and other advanced 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, which
would be two-dimensional 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 pin configuration or "footprint" (space on the printed circuit board)
thereby reducing the need for the customer to re-engineer boards as new denser
semiconductors becomes available.
TARGET HIGH VOLUME OEM AND MODULE MANUFACTURERS AS CUSTOMERS. The Company
believes that its technology can increase the overall performance of systems and
their integrated parts. Dense-Pac has structured itself to support large
opportunities that provide the best utilization of the technology in today's
growing market to not only the module manufactures but also the OEM providers.
This structuring includes a specialized and focused "solution" approach to sales
and marketing to OEM markets and the establishment of prototype design teams to
custom design and quickly deliver prototype products to customers.
PURSUE STRATEGIC RELATIONSHIPS. The Company intends to pursue entering
into strategic relationships in order to expand sales and broaden its product
offerings.
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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 and other integrated circuits are stacked one on
the other, and horizontally 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 increase the amount of memory in a single footprint by two, four or
eight times depending on the number of memory devices placed in the stack. 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, personal computers with limited memory slots 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, down hole drilling 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 was 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 had also introduced several other high-density products,
applicable for the military market and the commercial market.
After the resignation of the chief executive officer in July 1998, the
Company re-defined its target marketplace and eliminated selling low end
commercial product lines and commercial ceramic memory modules in order to
concentrate on the selling of individual memory stacks to the marketplace.
Additionally, the Company determined that in most instances, the customer would
provide the memory for the stacking application, in order to reduce the
potential exposure of market fluctuations on the DRAM component of Company
product pricing. The Company identified the commercial stacking of unique
patented memory devices as its product niche.
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The commercial plastic stacked technology is targeted for OEMs and module
manufacturers that sell into high density applications. These could include
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 the need for increased
density within their application.
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 modules, plastic
memory stacks and modules with a variety of capabilities to meet market
requirements. The Company's standard memory modules incorporate SRAM, EPROM,
EEPROM, including flash technology, and DRAM. The Company has also introduced
commercial products for military applications, known as
"commercial-off-the-shelf" (COTS). Due to the various configurations and
applications of the Company's products, prices range from less than $5 for
commercial modules to over five thousand dollars for high-end military
specification modules.
Custom Design Capabilities
Many of the Company's customers require product packaging which meets
specialized density, size and performance standards. Accordingly, an important
aspect of the Company's business is its ability to custom design and manufacture
modules to meet a customer's specifications. As part of its new business
strategy, the Company intends to create a specially designated design team to
custom develop and quickly deliver prototype products to customers. In most
cases, the Company retains ownership of the custom designs for prototype
products and therefore is able to offer such designs to other customers as
standard products. Thus, the Company's custom design capabilities also provide
it with an ongoing source of new standard products.
Research and Development; Patents and Technology Rights
The Company is involved in research and development for advanced
packaging techniques, including 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. In 1998,
the Company was awarded a U.S. patent on the manufacturing process incorporated
on the commercial stacking products. The Company applied for four new patents
during Fiscal Year 1999. There can be no assurance that these patents will
afford the
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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 patents pending cover new processes in automating the manufacture
of high-density commercial product and a new ball grid array stacking
technology. To protect its intellectual properties, the Company intends to
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 on a royalty
basis 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.
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.
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 and are typically
only selling into the industrial, defense and aerospace marketplace. In Fiscal
Year 1999, approximately 12% of the Company's sales were export sales, primarily
to Western Europe as compared to 15% in the fiscal year ended February 28, 1998
("Fiscal Year 1998"). 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 frames 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
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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 products, because
they use plastic-molded parts, are lower cost, have a shorter life span and are
used in benign environments. Plastic products are typically used in commercial
applications such as robotics, medical instrumentation, test equipment, portable
computers and cellular phones.
The Company purchases raw materials and components from several material
suppliers, but does not have any supply agreements. Although alternative
suppliers are available, a significant unplanned event at a major supplier or
assembly house could have a short-term adverse impact on the Company's
operations. The market for memory devices is characterized by periodic shortages
which can adversely impact the Company's costs and/or ability to timely ship
products.
The Company's manufacturing capacity has been significantly increased by
the purchase of an automated commercial line which is adequate to support large
volume production. Also, in Fiscal Year 1998, 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, in
parallel with Dense-Pac, 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 defined markets where the customer's requirements allow the Company
to utilize its unique engineering and packaging skills to
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maintain a high value added content. Dense-Pac's direct competition includes
specialty memory module assembly companies such as White Electronics 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, have not typically been
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, Cubic Memory and Simple Technology.
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. Many of Dense-Pac's competitors have greater financial,
technical and personnel resources than the Company.
Environmental Matters
The Company is not aware of any claims or investigations related to
environmental matters that have materially affected or are expected to
materially affect its business.
Employees
At May 3, 1999, the Company had 99 full-time employees, of which 9 were
engaged in engineering, 46 in manufacturing, production and testing, 15 in
quality assurance, 16 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 with relatively
minor turnover of employees since new management started at the Company.
ITEM 2: DESCRIPTION OF PROPERTY
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 to the expiration date.
ITEM 3: LEGAL PROCEEDINGS
On July 13, 1998, Dense-Pac Microsystems, Inc. filed a patent lawsuit
against Staktek Corporation in U.S. Court, City of Los Angeles for patent
infringement for an amount in excess of $1,000,000 on Dense-Pac's patent
covering stacking memory devices, using proprietary technology. The suit alleged
that
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Staktek patent infringement benefited Staktek and unlawfully interfered with the
Dense-Pac sales effort. On August 17, 1998, Staktek Corporation filed suit in
Travis County, Texas against Dense-Pac Microsystems and a current and former
officer for $20,000,000 in damages for alleged libel and slander, arising from
Dense-Pac's press release dated July 13, 1998. On December 28, 1998, the lawsuit
was voluntarily dismissed insofar as it named the defendants (a current and
former officer) of Dense-Pac, in exchange for a dismissal to a challenge by the
Company to the venue in Texas. On January 29, 1999, Dense-Pac Microsystems and
Staktek Corporation dismissed by mutual agreement all lawsuits between the two
parties in order to avoid the cost of litigation and without admission of
liability by either party.
On September 23, 1998, Dense-Pac Microsystems, Inc. was served with a
complaint from Simple Technology, Inc., filed in U.S. District Court for the
Central District of California, Santa Ana Division for an undetermined amount,
alleging that Dense-Pac's stacking technology infringes on a Simple Technology
patent. Dense-Pac intends to vigorously defend itself against such charges. On
October 23, 1998, Dense-Pac filed a cross-complaint in the U.S. District Court
for the Central District of California, Santa Ana for patent infringement
against Simple Technology. The suit alleges that the Simple Technology
infringement has benefited Simple Technology and unlawfully interfered with
Dense-Pac's sales efforts. In April, 1999, Dense-Pac filed two motions for
summary judgement, one relating to non-infringement of the Simple Technology
patent and the second summary motion relating to previous public stacking art,
which invalidates the claims in the Simple Technology patent. The potential loss
is undeterminable at this time.
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 1999.
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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 sale 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, 1999:
Quarter Ended
May 31, 1998 3.31 1.63
August 31, 1998 2.47 .69
November 30, 1998 1.81 .53
February 28, 1999 2.91 .75
Fiscal Year ended February 28, 1998:
Quarter Ended
May 31, 1997 2.63 1.81
August 31, 1997 2.63 2.06
November 30, 1997 4.69 2.13
February 28, 1998 4.63 3.00
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As of May 3, 1999, there were 3,617 shareholders of record.
The Company has not paid any dividends and it does not expect to pay any
dividends in the foreseeable future. There are currently contractual
arrangements in the Company's loan agreements and other restrictions that
negatively affect 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 1999 Compared to Fiscal Year 1998.
Fiscal year 1999 net sales of $12,604,000 decreased by $860,000 (6%) from
fiscal year 1998 sales of $13,464,000. The decrease was partly due to a decrease
in aerospace, defense and industrial (IDA) sales of approximately $2,384,000 due
to an emphasis by the Company on commercial type business.
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Commercial business has increased as a percentage of the overall revenue from
approximately 65% of fiscal year 1998 revenue to 75% of revenue in fiscal year
1999. IDA business typically has a longer lead time for purchase orders and when
the emphasis of the Company was re-directed to commercial business, the revenues
in military business decreased as compared to the previous fiscal year. The
Company's business continues to be 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.
Revenue from first generation (high density three-dimensional ceramic
stackable products), which are primarily in the IDA marketplace, composed
approximately 9% of revenue for Fiscal Year 1999 as compared to approximately
17% of revenue in Fiscal Year 1998. Additionally, a decrease in SRAM memory
prices that are used in this technology, also negatively impacted sales levels.
The decrease in the aerospace, defense and industrial business was offset
largely by an increase of $2,283,000 in commercial DRAM business as a result of
low end DRAM memory opportunities to sell product into the secondary market.
The Company generated approximately $600,000 in revenue from its new high
density commercial plastic stacked products.
Export sales represented 12% of total revenue for Fiscal Year 1999 as
compared to 15% of revenue for Fiscal Year 1998. Overall, sales decreased in the
export market because less contracts were awarded in Fiscal Year 1999 than in
Fiscal Year 1998.
The Company has offset some of the decrease in the military business with
the offering of new high density products known as "Commercial-off-the-shelf"
(COTS) products for defense applications requiring high, reliable,
commercial-type products for military applications.
The Company's wholly owned subsidiary, TypeHaus, Inc. (purchased in
September 1997) generated $1,424,000 of revenue, or 11% of total revenue, for
the fiscal year ended February 28, 1999 as compared to $184,000, or 1% of total
revenue, for fiscal year 1998 as a result of having a full year of operations in
fiscal year 1999 and increasing business opportunities through new product
offerings.
Cost of sales for the Fiscal Year 1999, excluding the inventory
write-down of $774,000 during the second quarter of fiscal year 1999 was
$10,545,000 (84% of sales), as compared to cost of sales for Fiscal Year 1998 of
$10,613,000 (79% of sales). The lower gross margin for Fiscal Year 1999 can be
attributed to margin erosion that occurred in the first and second quarters as
some of the commercial product shipped did not generate profitable margins
because the Company was offering a significant number of commercial products
which required investments in inventory in a volatile market. Additionally, many
of the products were being offered at or near cost in order to obtain market
entry into various customer bases.
In July 1998, the chief executive officer resigned, at which time Richard
Dadamo joined the Company as interim chief executive officer. The Company's
fiscal 1998 strategy to offer the numerous commercial products was changed in
order to concentrate on the Company's commercial stacking technology. As a
result, the inventory on hand for the numerous commercial products was
liquidated and the Company wrote off the balance that was not liquidated at the
end of the second fiscal quarter. A charge of $774,000 was recorded in the
second quarter of fiscal year 1999 associated with these actions. Additionally,
efforts were then focused toward the commercial stacking products, including the
processes, markets and production costs of these products. The Company has been
able to increase the operating efficiencies in producing the commercial stacks,
which are expected to result in increased margins as compared to the margins
that were experienced producing low-end DRAM commercial products in a very
13
<PAGE> 14
competitive and low-margin marketplace. The automated equipment is currently
being used exclusively for the production of the commercial stacks. By utilizing
the automated equipment for essentially one product, the efficiencies of
equipment and personnel are increased for potentially better margins in
production runs. See "Cautionary Statements."
Selling, general and administrative (SG&A) expenses decreased by $61,000
(2%) from $3,475,000 in Fiscal Year 1998 to $3,414,000 in Fiscal Year 1999. The
decrease in SG&A expense can be attributed to a decrease in utility expense
associated with a successful re-negotiation of a prior period's utility rates
and a decrease in recruitment and travel and related expenses associated with
decreasing travel and a focus on the retention of employees. Additionally, there
was a decrease in the cost of outside sales representative organization expense
of $273,000 due to the fact the Company moved more of the selling function
in-house. Also, inside sales commissions and related expenses associated with a
European salesperson decreased by $206,000, as a result of the individual not
being employed in fiscal year 1999. Offsetting these decreases were increases in
the cost of legal representation of $405,000 for legal costs associated with
the patent infringement lawsuits.
Research and development expense decreased $240,000 or 19% from
$1,287,000 in Fiscal Year 1998 to $1,047,000 in Fiscal Year 1999 due to
completion of work on several commercial plastic stack products that the Company
is currently selling. The Company is continuing to invest in research and
development for new products in the IDA and the commercial marketplace. Research
and development represented approximately 8% of sales for Fiscal Year 1999 as
compared to 10% of sales for the previous year.
During the second quarter ending August 31, 1998, the Company wrote-off
approximately $372,000 of equipment used in the production of commercial
products no longer being offered for sale by the Company.
Interest expense decreased $5,000 or 3% from $171,000 in Fiscal Year 1998
to $166,000 in fiscal year 1999. Several of the notes that were outstanding in
the previous year for equipment purchases were fully paid during fiscal year
1999, but new equipment for the automated production line were put into place
during fiscal year 1999. Interest income decreased $44,000 or 36% from $123,000
in fiscal year 1998 to $79,000 in fiscal year 1999 as the interest earned on
available funds was less than in the previous fiscal year primarily due to lower
cash balances on hand during the current fiscal year.
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 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.
14
<PAGE> 15
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 increasing
development 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.
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.
15
<PAGE> 16
Liquidity and Capital Resources
The Company's primary source of liquidity during fiscal year 1999 was
from the $4.3 million net cash proceeds from the sale of 900,000 shares of
Common Stock in February 1996. Cash used in operating activities was $1,841,000
and consisted primarily from the loss for the fiscal year of approximately
$3,612,000 and an increase in accounts receivable and inventory. These cash uses
were offset by $1,136,000 of depreciation and amortization, the write-off of
property of $372,000, and increases in accounts payable and other accrued
expenses.
Cash used in investing activities consisted of approximately $117,000 of
capitalized engineering labor and approximately $441,000 for the purchase of
manufacturing and test equipment, computers, machinery and tooling. The Company
has no material commitments for capital expenditures in the fiscal year ending
February 28, 2000.
As of February 28, 1999, the Company had recorded in the financial
records a $1.8 million loan payable to a major shareholder with interest at 5%
per annum, payable quarterly. The Company also had a $100,000 loan payable to a
director with interest at 8% per annum, with interest payable quarterly and the
principal on both loans due in October 1999. These loans are collateralized by
all of the Company's assets, although the major shareholder had agreed to
subordinate its security interest in accounts receivable in order to permit the
Company to obtain conventional bank financing for accounts receivable.
Otherwise, these loans preclude the Company from incurring additional debt
without the consent of the lenders except for purchase money indebtedness
incurred for the purchase or lease of equipment and machinery.
On April 8, 1999, the Company amended the terms of the loan agreements.
Under the terms of the amendment, $1,200,000 of the outstanding principal was
converted into 662,069 shares of common stock at $1.8125, representing the
approximate current market price at the date of the amendment. The remaining
outstanding principal will accrue interest at 8.75% per annum, with
interest-only payments due quarterly and the principal due on December 31, 2000.
At the election of the lenders, the remaining outstanding principal may be
converted into common stock based at a price of $1.8125 per share on the terms
defined in the agreement.
The loans are collateralized by all of the Company's assets, but
Euroventures agreed to release its security interest in the Company's assets
once a formal credit facility has been offered to the Company. This will allow
to obtain conventional bank financing, collateralized by the Company's assets.
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, 1999, the outstanding
principal amount was $282,212. Principal and interest payments on this loan
totaled $172,628 in Fiscal Year 1999.
Despite a loss of $3,638,000 during fiscal year 1999, the Company ended
the fiscal year with a cash balance of approximately $1.3 million, working
capital of $3.3 million and a current ratio of 1.9 to 1.0. Management believes
that this positive cash position, together with working capital, and a credit
facility, if the Company obtains one, should be adequate to implement
management's business plan and to meet
16
<PAGE> 17
the Company's foreseeable needs. The Company is currently obtaining bids for a
credit facility and has received three letters of interest to provide a credit
facility to the Company. There can be no assurance that a credit facility will
be available or secured on terms satisfactory to the Company, or at all. If the
Company is unsuccessful in obtaining the credit facility, it may scale back
expenditures or seek other financing, which might include sales of equity
securities that could dilute existing shareholders. Failure to raise capital
when needed could have a material adverse effect on the business, financial
condition and results of operations of the Company. See "Cautionary Statements."
Certain Factors that may affect future results
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digits in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
the 20th century dates. As a result, in less than one year, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements.
The Company has already completed the review of its internal business
processes, obtained assurances of compliance in the form of "Year 2000 Readiness
Disclosure Statements" which the Company relies upon, a completed internal
testing for the new software and hardware that the Company has installed to
replace known non-compliant items. The final item (a piece of test equipment)
has been evaluated for its compliance with the Year 2000. The piece of test
equipment was found to be compliant to year 2000 issues, and has been placed on
order. Once received the Company will be compliant with the requirements of Year
2000. The year 2000 project is expected to be fully completed before the end of
the Company's second quarter.
The Company, in the ordinary course of business, does not sell products
that are susceptible to Year 2000 compliance problems because the product is not
year sensitive. The Company's subsidiary, TypeHaus, Inc. does sell some products
that are date sensitive. TypeHaus believes that its products are generally Year
2000 compliant. This means that the use or occurrence of dates on or after
January 1, 2000 will not affect the performance of the Company's products with
respect to four digits or the ability of such products to correctly create,
store, process and output information related to such data. The Company has
warranted that the use or occurrence of dates on or after January 1, 2000 will
not adversely affect the performance of the Company's products with respect to
four digit date dependent data or the ability to create, store, process and
output information related to such data.
The Company did not create a separate budget for the investigating and
remedying issues related to Year 2000 compliance involving the company's own
software or systems used in its internal operations. The Company has currently
spent approximately $50,000 upgrading internal software and hardware,
approximately $40,000 in employee time and expenses and estimates that the
balance of the additional hardware will not exceed $25,000.
In addition, the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in the delay of the placement of
purchase orders with the Company, which could have an adverse effect on the
Company's business,
17
<PAGE> 18
results of operations and financial condition. The Company could also be
adversely affected by potential effects such as power, telephone, or data
interruptions.
CAUTIONARY STATEMENTS
Statements in this Report which are not historical facts, including
statements about the Company's business strategy and expectations about new and
existing products and technologies or market characteristics and conditions, are
forward-looking statements that involve risks and uncertainties. These include,
but are not limited to, the factors described below which could cause actual
results to differ from those contemplated by the forward-looking statements.
Product Development and Technological Change
The semiconductor and memory module industries are characterized by rapid
technological change and are highly competitive with respect to timely product
innovation. The Company's memory products are subject to obsolescence or price
erosion because semiconductor manufacturers are continuously introducing chips
with the same or greater memory density as the Company's modules. As a result,
memory products typically have a product life of only three to five years.
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 megabit 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
18
<PAGE> 19
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 portion of its revenues from
defense-related contracts. As a result, the Company's business has been impacted
by reductions in the federal defense budget and will continue to be subject to
risks affecting the defense industry, including changes in governmental
appropriations and changes in national defense policies and priorities. The
Company has sought to reduce its dependence on defense-related business by
developing products with commercial applications, although such products
generally have lower margins than defense-related products.
Patent Rights
The Company's ability to compete effectively is dependent on its
proprietary know-how, technology and patent rights. The Company holds U.S.
patents on certain aspects of its 3-D stacking technology and has applied for
additional patents. There can be no assurance that the Company's patent
applications will be approved, that any issued patents will afford the Company's
products any competitive advantage or will not be challenged or circumvented by
third parties, that the Company's patents do not infringe patents of third
parties, that the costs incident to litigation over patent rights will not
adversely affect the Company or deter the Company from pursuing its patent
rights, 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
19
<PAGE> 20
future products, or that the Company will be able to establish or maintain a
profitable price structure for its products.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7a of Form 10-K is incorporated herein
by reference to the information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
ITEM 8: FINANCIAL STATEMENTS
The Company's Financial Statements are included in this report commencing
at page F-l.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 21
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 17, 1999, 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
1999 Annual Meeting of Shareholders.
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 of a shareholder, but a reasonable fee will be charged to cover the
Company's expense in furnishing such exhibit.
<TABLE>
<CAPTION>
Exhibit
No.
-------
<S> <C>
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
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
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.
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.
10.11 Amended Loan Agreement and Registration Agreement between the
Company and Euroventures Benelux II B.V. dated as of April 8,
1999. Incorporated by reference to Euroventures 13D filing,
Date of Event April 08, 1999, filed April 20, 1999.
21.1 Subsidiaries of the Company - TypeHaus, Inc. incorporated in
California on September 8, 1997. See Form 10-KSB Financial
Statements - Footnote 1.
23.1 Independent Auditors' Consent
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
27.1 Financial Data Schedule
</TABLE>
* Management contract or compensating plan.
** Previously filed.
(b) Reports on Form 8-K
None
23
<PAGE> 24
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 25, 1999 DENSE-PAC MICROSYSTEMS, INC.
By: /s/ Ted Bruce
-----------------------------
Ted Bruce
Chief Executive Officer
President & Director
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.
<TABLE>
<S> <C>
/s/ Richard J. Dadamo May 25, 1999
- ------------------------------------------------
Richard J. Dadamo
Chairman of the Board
/s/ Ted Bruce May 25, 1999
- ------------------------------------------------
Ted Bruce
Chief Executive Officer, President, Director
(Principal Executive Officer)
/s/ William M. Stowell May 25, 1999
- ------------------------------------------------
William M. Stowell
Vice President - Finance
Chief Financial Officer & Secretary
(Principal Financial and Accounting Officer)
/s/ Roger G. Claes May 25, 1999
- ------------------------------------------------
Roger G. Claes, Director
/s/ Robert Southwick May 25, 1999
- ------------------------------------------------
Robert Southwick, Director
/s/ Trude C. Taylor May 25, 1999
- ------------------------------------------------
Trude C. Taylor, Director
/s/ Charles A. Dickinson May 25, 1999
- ------------------------------------------------
Charles A. Dickinson, Director
</TABLE>
24
<PAGE> 25
DENSE-PAC MICROSYSTEMS, INC.
Consolidated Financial Statements for the
Years Ended February 28, 1999 and 1998,
and Independent Auditors' Report
<PAGE> 26
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, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 21, 1999
<PAGE> 27
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,273,887 $ 3,626,388
Accounts receivable, net of allowance for doubtful accounts
of $110,000 and $100,000 in 1999 and 1998, respectively 1,756,953 1,066,553
Inventories, net (Note 2) 3,696,471 3,090,889
Prepaid expenses and other current assets 166,400 141,538
----------- -----------
Total current assets 6,893,711 7,925,368
PROPERTY, net (Notes 3 and 4) 3,371,309 4,299,795
OTHER ASSETS 14,360 14,360
----------- -----------
$10,279,380 $12,239,523
=========== ===========
</TABLE>
See accompanying notes to
consolidated financial statements.
2
<PAGE> 28
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 351,731 $ 438,125
Accounts payable 2,793,304 1,319,486
Accrued compensation 240,762 240,595
Other accrued liabilities 217,176 121,435
------------ ------------
Total current liabilities 3,602,973 2,119,641
NOTES PAYABLE DUE TO RELATED PARTIES (Note 5) 1,900,000 1,900,000
LONG-TERM DEBT, less current portion (Note 4) 269,157 597,095
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 5, 7, and 9):
Common stock, no par value; authorized, 40,000,000 shares;
issued and outstanding, 17,873,400 and 17,596,181 shares
in 1999 and 1998, respectively 17,544,267 17,022,138
Accumulated deficit (13,037,017) (9,399,351)
------------ ------------
Total stockholders' equity 4,507,250 7,622,787
------------ ------------
$ 10,279,380 $ 12,239,523
============ ============
</TABLE>
See accompanying notes to
consolidated financial statements.
3
<PAGE> 29
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NET SALES (Note 10) $ 12,603,791 $ 13,463,560
COST OF SALES:
Cost of sales 10,544,562 10,612,912
Inventory write-down (Note 2) 773,954
------------ ------------
Total cost of sales 11,318,516 10,612,912
------------ ------------
GROSS PROFIT 1,285,275 2,850,648
COSTS AND EXPENSES (Notes 6 and 11):
Selling, general, and administrative 3,414,005 3,474,984
Research and development 1,047,249 1,286,808
Write-off of property (Note 3) 372,447
------------ ------------
Total costs and expenses 4,833,701 4,761,792
------------ ------------
LOSS FROM OPERATIONS (3,548,426) (1,911,144)
OTHER EXPENSE (INCOME) (Notes 4 and 5):
Interest expense 166,270 170,657
Interest income (79,430) (123,408)
------------ ------------
Total other expense, net 86,840 47,249
------------ ------------
LOSS BEFORE INCOME TAX PROVISION (3,635,266) (1,958,393)
INCOME TAX PROVISION (Note 8) 2,400 1,600
------------ ------------
NET LOSS $ (3,637,666) $ (1,959,993)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.20) $ (0.11)
============ ============
WEIGHTED AVERAGE SHARES USED TO CALCULATE
BASIC AND DILUTED NET LOSS PER SHARE 17,802,483 17,239,611
============ ============
</TABLE>
See accompanying notes to
consolidated financial statements.
4
<PAGE> 30
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock Total
------------------------------- Accumulated stockholders'
Shares Amount deficit equity
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, March 1, 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
Issuance of common stock upon
exercise of stock options (Note 9) 277,219 522,129 522,129
Net loss (3,637,666) (3,637,666)
---------- ------------ ------------ ------------
BALANCE, February 28, 1999 17,873,400 $ 17,544,267 $(13,037,017) $ 4,507,250
========== ============ ============ ============
</TABLE>
See accompanying notes to
consolidated financial statements.
5
<PAGE> 31
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,637,666) $(1,959,993)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,135,604 1,119,510
Write-off of property 372,447
Inventory write-down 773,954
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable, net (690,400) 179,132
Inventories, net (1,379,536) 439,759
Prepaid expenses and other assets 15,138 (18,550)
Accounts payable 1,473,818 245,223
Accrued compensation 167 (395,860)
Other accrued liabilities 95,741 48,387
----------- -----------
Net cash used in operating activities (1,840,733) (342,392)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (564,272) (922,671)
Cash paid for acquisition (130,000)
----------- -----------
Net cash used in investing activities (564,272) (1,052,671)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (469,625) (421,052)
Net proceeds from issuance of common stock 522,129 781,734
----------- -----------
Net cash provided by financing activities 52,504 360,682
----------- -----------
</TABLE>
See accompanying notes to
consolidated financial statements.
6
<PAGE> 32
DENSE-PAC MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
NET DECREASE IN CASH $(2,352,501) $(1,034,381)
CASH, beginning of year 3,626,388 4,660,769
----------- -----------
CASH, end of year $ 1,273,887 $ 3,626,388
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ 166,149 $ 174,072
=========== ===========
Income taxes $ 2,400 $ 800
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of property for note payable $ -- $ 284,529
=========== ===========
Acquisition of property under capital leases $ 55,293 $ --
=========== ===========
Disposal of property for note receivable $ 40,000 $ --
=========== ===========
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.
7
<PAGE> 33
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 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. (TypeHaus) (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
include 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, 1999, is approximately $1,836,000.
Inventories - Inventories 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
inventories for excess or obsolete items and makes any necessary
adjustments when such adjustments are required.
Long-Lived Assets - The Company accounts for the impairment and
disposition of long-lived assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. In accordance with SFAS No. 121, long-lived assets to be
held are reviewed for events or changes in circumstances which indicate
that their carrying value may not be recoverable. The Company will
periodically review the
8
<PAGE> 34
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
carrying value of long-lived assets to determine whether or not an
impairment to such value has occurred. Based on its most recent
analysis, the Company believes that no impairment exists at February
28, 1999.
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 12 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.
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.
Basic net loss per share is computed using the weighted average number
of common shares outstanding during the periods presented. Diluted net
loss per share is computed using the weighted average number of common
and common equivalent shares outstanding during the periods presented.
For fiscal 1999 and 1998, 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.
9
<PAGE> 35
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Significant Concentrations - The semiconductor industry is highly
cyclical and has been subject to significant downturns, at various
times, that have been characterized by diminished product demand,
production over capacity, and accelerated erosion of average selling
prices. Therefore, the average selling price the Company receives for
products is dependent on 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.
Comprehensive Income - In fiscal 1999, the Company adopted SFAS No.
130, Reporting Comprehensive Income. The Company had no items of other
comprehensive income, as defined, for fiscal years 1999 and 1998.
Segment Information - In fiscal 1999, the Company adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information.
This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It
also establishes standards for related disclosure about products and
services, geographic areas, and major customers (Note 10).
Recently Issued Accounting Standards - In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Company does not invest in
derivative investments nor does it engage in hedging activity and,
therefore, does not believe that the adoption of SFAS No. 133 will have
an impact on the Company's financial statements.
Reclassifications - Certain 1998 amounts have been reclassified to
conform with the 1999 presentation.
10
<PAGE> 36
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials $1,092,065 $1,054,503
Work-in-process 1,940,470 1,284,282
Finished goods 663,936 752,104
---------- ----------
Total inventories $3,696,471 $3,090,889
========== ==========
</TABLE>
During the second quarter of fiscal year 1999, the Company recorded an
inventory write-down of $773,954 associated with the discontinuance of
certain low-end commercial product lines and commercial ceramic memory
modules.
3. PROPERTY
Property consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Machinery and equipment $ 5,334,087 $ 6,091,272
Furniture and fixtures 184,347 175,837
Leasehold improvements 372,495 357,515
Computer software and equipment financed
under capital leases 143,761 88,468
----------- -----------
6,034,690 6,713,092
Less accumulated depreciation and amortization (2,663,381) (2,413,297)
----------- -----------
Property, net $ 3,371,309 $ 4,299,795
=========== ===========
</TABLE>
During the second quarter of fiscal year 1999, certain property with a
net book value of $372,447 was written off in accordance with SFAS No.
121, associated with the discontinuance of product lines to which the
property related. The property written off was related to the segment
of the Company's business engaged in the design and automated
manufacturing of proprietary and patented three-dimensional,
high-density memory products (Note 10).
11
<PAGE> 37
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable to bank, collateralized by substantially all of the Company's
assets, payable in 20 semi-annual principal payments of $70,553, plus
interest; interest rate determined as LIBOR rate on payment dates, plus 2% $ 282,212 $ 423,318
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 305,460 555,921
Obligations under capital leases, bearing interest at rates ranging from
11.1% to 14.6%, maturing at various dates through May 2001 33,216 55,981
----------- -----------
620,888 1,035,220
Less current portion of other long-term debt (351,731) (438,125)
----------- -----------
$ 269,157 $ 597,095
=========== ===========
Long-term debt at February 28, 1999, matures as follows:
Fiscal year ending:
2000 $ 351,731
2001 264,376
2002 4,781
-----------
$ 620,888
===========
</TABLE>
5. RELATED-PARTY BORROWINGS
The Company has a loan agreement with related parties. Under the terms
of the amended loan agreement, $1,800,000 of the principal amount
accrues interest at 5% per annum and $100,000 accrues interest at 8%
per annum, with interest-only payments due quarterly and principal due
on October 12,
12
<PAGE> 38
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
1999. In connection with the amended loan agreement, the Company issued
four-year warrants, which expire on October 12, 1999, to purchase
375,000 shares of the Company's common stock at a price of $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. 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. At February 28, 1999, all the warrants were outstanding and
exercisable.
Interest expense related to these borrowings was $94,000 for both
fiscal years 1999 and 1998.
On April 8, 1999, the Company amended the terms of the loan agreements.
Under the terms of the amendment, $1,200,000 of the outstanding
principal was converted into 662,069 shares of common stock at $1.8125
per share, the approximate fair market value of the Company's common
stock at the date of the amendment. The remaining outstanding principal
will accrue interest at 8.75% per annum, with interest-only payments
due quarterly and principal due on December 31, 2000. At the election
of the lenders, the remaining outstanding principal may be converted
into common stock based on the terms defined in the agreement.
As a result of the above amendment, the $1,900,000 balance outstanding
at February 28, 1999 has been shown as a long-term liability in the
accompanying consolidated financial statements.
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, 1999:
<TABLE>
<CAPTION>
Year ending February 28:
<S> <C>
2000 $145,822
2001 133,670
--------
Total future minimum lease payments $279,492
========
</TABLE>
Rent expense relating to the operating lease was approximately $142,000
and $150,000 for fiscal years 1999 and 1998, respectively.
13
<PAGE> 39
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
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 became exercisable in four installments of
3,000 warrants each in six-month intervals commencing July 1, 1995.
Each installment is exercisable for a period of 32 months. At February
28, 1999, 6,000 warrants had lapsed and 6,000 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 and all of the outstanding warrants were
canceled. No warrants were exercised as a result of this agreement.
8. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Current:
Federal $ -- $ --
State 2,400 1,600
------ ------
2,400 1,600
</TABLE>
14
<PAGE> 40
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred:
Federal $(1,183,641) $(1,053,430)
State (194,612) (191,952)
----------- -----------
(1,378,253) (1,245,382)
Change in valuation allowance 1,378,253 1,245,382
----------- -----------
Total net change for deferrals
----------- -----------
Total income tax provision $ 2,400 $ 1,600
=========== ===========
</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>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories $ 209,829 $ 152,919
Other reserves 69,608 84,238
State taxes 816 272
Potential stock option income tax benefits 683,416 663,827
Net operating loss carryforwards, general business
credit carryforwards, and AMT credit carryforwards 4,949,414 3,730,144
----------- -----------
Total gross deferred assets 5,913,083 4,631,400
Deferred tax liability - depreciation and amortization (89,159) (185,729)
----------- -----------
5,823,924 4,445,671
Valuation allowance (5,823,924) (4,445,671)
----------- -----------
Net deferred income taxes $ -- $ --
=========== ===========
</TABLE>
As of February 28, 1999, a valuation allowance of $5,823,924 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.
15
<PAGE> 41
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal statutory rate (35)% (35)%
Valuation allowance 34 34
Other 1 1
--- ---
-- % -- %
=== ===
</TABLE>
As of February 28, 1999, the Company had federal and state net
operating loss carryforwards of $14,340,680 and $5,508,733,
respectively. The federal net operating losses begin to expire in 2002,
while the state net operating losses begin to expire in 2000. As of
February 28, 1999, the Company had federal and state tax credit
carryforwards of $266,411 and $277,015, respectively. The federal tax
credits begin to expire in 2006, while the state tax credits begin to
expire in 2004.
9. EMPLOYEE STOCK OPTION PLANS
At February 28, 1999, options to purchase 235,550 shares of the
Company's common stock were outstanding under the Company's 1985 Stock
Option Plan, of which options to purchase 211,175 shares were
exercisable. Options issued under this plan were 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, 1999, no shares were available for future
grants under the Plan.
In January 1996, the Company adopted the 1996 Stock Option Plan (Plan).
Under the terms of the Plan, options to purchase 3,000,000 shares of
the Company's common stock are available for issuance to employees,
officers, directors, and consultants.
At February 28, 1999, options to purchase 1,576,000 shares of the
Company's common stock were outstanding under the 1996 Stock Option
Plan, of which options to purchase 406,072 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, 1999, 1,117,000 shares were available for future grants
under the Plan.
16
<PAGE> 42
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
A summary of activity for the stock option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
OUTSTANDING, March 1, 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
Granted (weighted average fair value of $1.14) 1,901,700 $ 1.19
Exercised (277,219) $ 1.88
Canceled (1,715,175) $ 2.03
-----------
OUTSTANDING, February 28, 1999 1,811,550 $ 1.16
===========
</TABLE>
Additional information regarding options outstanding as of February 28,
1999, 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>
$0.81 - $0.99 16,250 9.3 $ 0.93 1,250 $ 0.81
$1.00 - $1.99 1,750,175 8.4 $ 1.23 572,622 $ 1.28
$2.00 - $2.99 43,125 4.8 $ 2.58 41,875 $ 2.58
$4.41 2,000 6.6 $ 4.41 1,500 $ 4.41
--------- ---------
1,811,550 617,247
========= =========
</TABLE>
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 APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related interpretations.
17
<PAGE> 43
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
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 1999 1998
--------------------
<S> <C> <C>
Expected life, following vesting (months) 42 42
Stock volatility 124.09% 65.00%
Risk-free interest rate 5.55% 5.50%
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>
1999 1998
----------- -----------
<S> <C> <C>
Net loss as reported $(3,637,666) $(1,959,993)
Pro forma net loss $(4,291,311) $(2,593,063)
Pro forma net loss per share:
Basic and diluted $ (0.24) $ (0.15)
</TABLE>
10. SEGMENT INFORMATION
The Company engages in business activity primarily in two operating
segments: the design and automated manufacturing of proprietary and
patented three-dimensional, high-density memory products and the design
and manufacturing of memory and memory-related products for the laser
printer industry (through its wholly owned subsidiary, TypeHaus, Inc.).
18
<PAGE> 44
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Operating segment data for fiscal years 1999 and 1998 were as follows:
FISCAL YEAR 1999
<TABLE>
<CAPTION>
TYPEHAUS,
DENSE-PAC INC. ELIMINATIONS TOTAL
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 11,199,851 $1,424,176 $ (20,236) $12,603,791
Net (loss) income (3,798,496) 160,830 (3,637,666)
Depreciation and amortization 1,054,800 80,804 1,135,604
Other expense, net 86,840 86,840
Total assets 9,661,920 627,460 (10,000) 10,279,380
Capital expenditures 573,525 46,040 619,565
</TABLE>
FISCAL YEAR 1998
<TABLE>
<CAPTION>
TYPEHAUS,
DENSE-PAC INC. ELIMINATIONS TOTAL
------------ --------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 13,279,347 $ 184,213 $ -- $13,463,560
Net (loss) income (1,778,263) (181,730) (1,959,993)
Depreciation and amortization 1,079,508 40,002 1,119,510
Other expense, net 47,249 47,249
Total assets 11,741,194 508,329 (10,000) 12,239,523
Capital expenditures 1,072,809 134,391 1,207,200
</TABLE>
The Company had export sales (primarily to Western European customers)
accounting for approximately 12% and 15% of net sales for fiscal years
1999 and 1998, respectively.
11. BENEFIT AND COMPENSATION PLANS
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 $41,944 and $45,525 to the
401(k) plan during fiscal years 1999 and 1998, 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 1999 and 1998.
* * * * * *
19
<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 333-76161 on Form S-8 and in
Registration Statement Nos. 33-87704 and 333-1847 on Form S-3 of our report,
dated April 21, 1999, appearing in this Annual Report on Form 10-KSB of
Dense-Pac Microsystems, Inc. for the year ended February 28, 1999.
/s/ Deloitte & Touche LLP
- ---------------------------------------------
Costa Mesa, California
May 25, 1999
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YEAR END
REPORT - FORM 10-KSB FOR THE PERIOD ENDING FEBRUARY 28, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB FOR THE YEAR END FEBRUARY 28,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 1,273,887
<SECURITIES> 0
<RECEIVABLES> 1,866,953
<ALLOWANCES> 110,000
<INVENTORY> 3,696,471
<CURRENT-ASSETS> 6,893,711
<PP&E> 6,034,690
<DEPRECIATION> 2,663,381
<TOTAL-ASSETS> 10,279,380
<CURRENT-LIABILITIES> 3,602,973
<BONDS> 0
0
0
<COMMON> 17,544,267
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,279,380
<SALES> 12,603,791
<TOTAL-REVENUES> 12,603,791
<CGS> 11,318,516
<TOTAL-COSTS> 4,833,701
<OTHER-EXPENSES> 86,840
<LOSS-PROVISION> 110,000
<INTEREST-EXPENSE> 166,270
<INCOME-PRETAX> (3,635,266)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (3,637,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,637,666)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
</TABLE>
