<PAGE> 1
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 29, 2000
[ ] 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.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
California 33-0033759
--------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No. )
7321 Lincoln Way
Garden Grove, California 92841
---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
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
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 $27,460,000.
The aggregate market value of the Issuer's Common Stock, no par value, held by
non-affiliates of the Issuer on April 3, 2000 (based on the average bid and
asked price per share on that date as reported on NASDAQ), was $108,600,000.
Number of shares of Issuer's Common Stock outstanding at April 3, 2000:
19,350,497 shares
Documents Incorporated By Reference
-----------------------------------
Portions of the registrant's Definitive Proxy Statement relating to the
registrant's 2000 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]
<PAGE> 2
DENSE-PAC MICROSYSTEMS, INC.
FORM 10-KSB
FOR THE YEAR ENDED FEBRUARY 29, 2000
I N D E X
PART I
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
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....................................................................... 11
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 17
Item 7. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure................................................... 17
Item 8. Financial Statements ............................................................ 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act......................... 18
Item 10. Executive Compensation........................................................... 18
Item 11. Security Ownership of Certain Beneficial Owners and Management................... 18
Item 12. Certain Relationships and Related Transactions................................... 18
Item 13. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.................. 19
Signatures ................................................................................. 31
</TABLE>
2
<PAGE> 3
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
semiconductor products. The Company was formed as a California corporation on
September 7, 1983. The high-density 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 information in our
website is not part of this report.
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 or devices from a variety of semiconductor
manufacturers and incorporates the 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 currently 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 than can be accomplished with
conventional packaging techniques. For example, a memory system which might
require 20 square inches of printed circuit board using conventional packaging
techniques, could be packaged by the Company in a memory module less than two
square inches in size. The module approach to memory packaging allows the
elimination of most of the printed circuit boards as well as their mating
connectors, resulting in smaller, lighter and less expensive digital systems.
Also, since the electrical signals have less distance to travel, operating
speeds are enhanced.
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.
3
<PAGE> 4
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 as 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 that are commercially available. Future
generations of this technology could produce, we believe, 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, cluster software, checkbox printers
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 Internet commerce
interactive solutions. The Company closed this division in November 1999, at no
material cost to the Company.
Recent Company Changes
Ted Bruce joined Dense-Pac in January 1999, as Dense-Pac's chief operating
officer and then became the chief executive officer. Ted is from Toshiba
Electronics and is in the process of implementation of a business strategy
intended to grow the Company with existing and new technologies. The Company
also has strengthened its management staff with several positions filled during
the fiscal year.
During the prior Fiscal Year, which ended February 28, 1999 ("Fiscal Year
1999"), the Company's chief executive officer and chairman of the board
resigned. Richard J. Dadamo joined the Company as
4
<PAGE> 5
interim chief executive officer. 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, Mr. Dadamo completed
his basic strategy to re-vitalize Dense-Pac and in January 1999, became chairman
of the board.
Business Strategy
The Company's principal business objective is to come the leading
worldwide provider of three-dimensional semiconductor 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 become 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 manufacturers 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 AND LICENSE ITS CURRENT TECHNOLOGY. The
Company intends to pursue entering into strategic relationships in order to
expand sales and broaden its product offerings as well as to license its
technology to third parties that would increase the overall market penetration
of its technology.
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 continues to offer quick solutions
working with the staff of a specially designated design team.
5
<PAGE> 6
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 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. Initially, all of our
ceramic stacked products were 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 ended February 28, 1998, the Company introduced
several new products designed around the patented stacking process. The
technology is known as "M-Densus". The M-Densus, is a family of interchangeable
memory modules that, regardless of their density or size, can 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 had also introduced several other high-density
products, applicable to the military market and the commercial market. The
Company determined that in most instances, the customer would provide the memory
for the stacking application or a set price of the memory would be determined
prior to acceptance of the order, 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.
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 applications.
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.
6
<PAGE> 7
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 are
expected to 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
with the commercial stacking products. The Company applied for four new patents
during Fiscal Year 1999 and Fiscal Year 2000. There can be no assurance that
these patents will afford the Company's products any competitive advantage, that
they will not be challenged or circumvented by third parties, or that patents
issued to others will not adversely affect the development or commercialization
of the Company's products. See the discussion in Item 3, relating to legal
proceedings involving the defense of Company patents.
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.
7
<PAGE> 8
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 or less. 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.
Research and development expenses were approximately $1.3 million and
$1.07 million in Fiscal Year 2000 and 1999, respectively.
Marketing and Customers
The Company markets certain of 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 typically a three to
five-year-life, whereas military/aerospace products typically 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 2000, approximately 5% of the Company's sales were export sales, primarily
to Western Europe as compared to 12% in Fiscal Year 1999. Foreign sales are made
in U.S. dollars. The decline was primarily due to a decrease in memory prices
resulting in lower revenue, but also due to the overall increase in the domestic
commercial business of the Company.
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 or the
customer purchases packaged and un-packaged parts from various semiconductor
vendors, depending on the customer's requirements. The semiconductor chips must
be packed in ceramic leadless chip carriers (LCCs) so that they can be soldered
onto the substrate surface. The Company has the un-packaged chips packaged in
LCCs by an assembly house. The Company then performs final product assembly by
mounting the LCCs on the substrate. The substrate performs the same function as
a miniaturized printed circuit board by providing interconnection between the
LCCs and the memory module's contact pins.
8
<PAGE> 9
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 an 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 two automated commercial lines which are currently adequate to
support large volume production. 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. The
Company discontinued the use of SCI during the beginning of fiscal year 2000, as
Dense-Pac was able to support the requirements for production orders at its
facility in Garden Grove, California. If Dense-Pac requires additional
production facilities, its licensees have short-term capacity that would produce
finished products until the Company was able to set up additional production
lines.
License Agreements
A portion of the Company's revenue is generated from license agreements
that the Company has entered into with various customers. These agreements
provide for the payment of royalties to the Company based on using Dense-Pac's
technology or the right to sell determined products into the marketplace. During
Fiscal Year 2000, royalty revenue represented approximately 3% of total
revenues. There were no royalty revenues in the previous fiscal year.
Defense-Related Subcontracts
A portion of the Company's revenue is 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.
9
<PAGE> 10
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 maintain a high value
added content. Dense-Pac's direct competition includes specialty memory module
assembly companies such as White Electronics and AeroFlex. 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, and Cubic Memory.
The principal competitive factors in the memory module market include
product reliability, product performance characteristics, the ability to meet
the customer's product needs and delivery requirements, and price. Dense-Pac
believes it competes favorably with respect to all of these factors. The
Company's commercial business is characterized by more intense competition, with
the most important factors being price and the ability to meet short development
and delivery schedules. 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, 2000, the Company had 104 full-time employees, of which 16 were
engaged in engineering, 57 in manufacturing, production and testing, 11 in
quality assurance, 7 in marketing/sales and 13 in management and administration.
The Company currently has 8 temporary employees in manufacturing. None of the
Company's employees is represented by a labor union, and the Company considers
its employee relations to be good.
ITEM 2: DESCRIPTION OF PROPERTY
The Company's executive offices and manufacturing facilities consist of
37,060 square feet in an industrial park in Garden Grove, California. The lease
expires January 31, 2001 and provides for an effective monthly rent of $23,500.
The Company is currently evaluating the current facility as to its adequacy to
meet its foreseeable needs prior to the expiration date. The Company has also
requested renewal rates from the landlord for the existing facility.
10
<PAGE> 11
ITEM 3: LEGAL PROCEEDINGS
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 committed
infringement which 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 are alleged to invalidate the claims in the Simple Technology patent. The
potential loss in the event of an unfavorable outcome is undeterminable at this
time.
On April 11, 2000, Dense-Pac Microsystems filed suit, in Superior Court
for the State of California, Orange County, against Simple Technology, Inc. and
its Chief Operating Officer. The complaint alleges trade secret
misappropriation, unfair competition and intentional and negligent interference
with prospective business advantages. Dense-Pac believes that on or before
September 1997, Simple Technology and its officer obtained Dense-Pac's
proprietary technology concerning Dense-Pac's products without authorization or
consent from Dense-Pac. The complaint alleges that Simple Technology then used
the above proprietary technology to manufacture a product substantially
identical to Dense-Pac's proprietary rail M-Densus product and interfered with
Dense-Pac's business. Dense-Pac is seeking general damages, monetary losses,
attorneys' fees and punitive and exemplary damages. Dense-Pac intends to
aggressively pursue this action.
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 2000.
11
<PAGE> 12
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." The following table sets
forth the high and low closing sale prices on the Nasdaq National Market as
reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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 29, 2000:
Quarter Ended
May 31, 1999 2.47 1.38
August 31, 1999 2.34 1.94
November 30, 1999 7.56 2.03
February 29, 2000 8.50 6.50
</TABLE>
As of May 3, 2000, there were 3,617 shareholders of record. The last
reported sale price for the Company's common stock was 6.125 on May 18, 2000.
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
preclude 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 2000 Compared to Fiscal Year 1999.
Fiscal year 2000 net sales of $27,460,000 increased by $14,856,000 (118%)
from fiscal year 1999 sales of $12,604,000. We believe that the increase was due
to a complete change in the strategy of the company on the commercial stackable
business and the approach to reliability, fast-turns and guaranteed
12
<PAGE> 13
yields to the customer base. As the result, the increase in sales is caused by
the increase in the commercial products of the business. The industrial, defense
and aerospace (IDA) portion of the business remained constant as an absolute
dollar amount of the business but decreased as a percentage of the overall
business revenue. The Company's IDA business will continue 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.
Export sales represented 18% of total revenue for Fiscal Year 2000 as
compared to 12% of revenue for Fiscal Year 1999.
The Company's commercial business continues to increase as Fiscal Year
2000 represents the first full year of shipping its commercial stacking
technology as compare to the previous fiscal year when the product had just been
offered as a component and only generated meaningful revenue for a portion of
the previous fiscal year.
The Company's wholly owned subsidiary, TypeHaus, Inc. (purchased in
September 1997) generated $1,411,000 of revenue, or 5% of total revenue, for
the fiscal year ended February 29, 2000 as compared to $1,424,000, or 11% of
total revenue, for fiscal year 1999. TypeHaus spent much of the year developing
new products for introduction in fiscal year 2001, while maintaining its
existing customer base and current sales level.
Cost of sales for Fiscal Year 2000 was $ 18,181,000 (66% of sales), as
compared to Fiscal Year 1999, which was $10,545,000 (84% of sales) which
excludes an inventory write-down of $774,000 during the second quarter of fiscal
year 1999. The increase in the gross margin for Fiscal Year 2000 can be
attributed to margin gain on the high volume stackable products that were
shipped during the year and the increase in efficiencies due to the increase in
capacity utilization.
During Fiscal Year 2000, efforts were focused toward the commercial
stacking products. The Company was able to increase the operating efficiencies
in producing the commercial stacks, which produced increased margins as compared
to the margins that were experienced in the prior fiscal year, which had been
characterized by the production of low-end DRAM commercial products in a very
competitive and low-margin marketplace. 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 of
that product. See "Cautionary Statements."
Selling, general and administrative (SG&A) expenses increased by
$1,849,000 (54%) from $3,414,000 in Fiscal Year 1999 to $5,263,000 in Fiscal
Year 2000. The increase in selling, general and administrative expense
represents a decrease in SG&A as a percentage of revenue, 19% as a percentage of
sales for fiscal year 2000 as compared to 27% for the prior fiscal year. The
increase in SG&A expense can be attributed to an increase in payroll expense due
to the increase in business and new sales personnel and related expenses. There
was also an increase in recruitment and travel and related expenses associated
with increasing travel and a focus on the retention of employees. Additionally,
there was an increase in outside sales representative organization expense of
$105,000 due to increased revenues and related expenses associated with
maintaining a European presence. Additionally, during the fiscal year, the
Company's legal costs of defending and prosecuting a patent infringement lawsuit
increased by $740,000, as well as bonus expense to management as the result of
the increase in revenue and profitability of the Company during Fiscal Year
2000.
13
<PAGE> 14
Research and development expense increased $230,000 or 22% from $1,047,000
in Fiscal Year 1999 to $ 1,278,000 in Fiscal Year 2000 due to continued work on
several commercial plastic stack products that the Company is currently selling
and new products for three-dimensional technology stacking. 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
5% of sales for Fiscal Year 2000 as compared to 8% of sales for the previous
year.
During the second quarter of Fiscal Year 1999 ended 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 increased $50,000 or 30% from $166,000 in Fiscal Year 1999
to $216,000 in fiscal year 2000. Several new capital leases were entered into
during Fiscal Year 2000. Interest income decreased $14,000 or 17% from $79,000
in fiscal year 1999 to $66,000 in fiscal year 2000 as the interest earned on
available funds was less than in the previous fiscal year primarily due to the
timing of the cash balances on hand during the current fiscal year.
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. Commercial business
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 continued to be impacted by reductions in the federal defense budget
and 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 high density
commercial plastic stacked products which were introduced in Fiscal Year 1999.
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 lesser amount of contracts were awarded in Fiscal Year
1999 than in Fiscal Year 1998.
The Company had 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
14
<PAGE> 15
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 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. 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. 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.
15
<PAGE> 16
Liquidity and Capital Resources
The Company's primary source of liquidity during fiscal year 2000 was cash
generated from operations. Cash provided by operating activities was $3,718,000
and consisted primarily of net income for the fiscal year of approximately
$2,565,000, depreciation and amortization of $1,346,000, and cash generated from
a decrease in inventory of $1,918,000. The cash generated from operations was
offset to a significant extent, by an increase in accounts receivable of
$1,589,000, a decrease in accounts payable of $1,641,000.
Cash used in investing activities consisted of approximately $1,505,000 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, 2001.
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.
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
current market price at the date of the amendment. On November 1, 1999, the
remaining outstanding principal was converted into 368,208 shares of common
stock at a price of $1.8125 per share, based on the terms of the amended loan
agreement.
The Company also had a loan from a Belgian bank due November 2000 which
provided for semi-annual principal payments of $70,533. The interest rate was
two points over the LIBOR rate in effect at the time of each principal payment,
and interest was payable semiannually. At February 28, 1999, the outstanding
principal amount was $282,212. The balance of this loan was paid in full in
November 1999.
Principal payments or the Company's long-term debt during Fiscal Year 2000
were $996,578. Net proceeds from issuance of common stock associated with
exercise of stock options was $458,863.
As of February 29, 2000, the Company's future commitments under its capital
leases and term debt through Fiscal Year 2005 is $1,935,000.
The Company ended the 2000 fiscal year with a cash balance of approximately
$2,950,000, working capital of $4.9 million and a current ratio of 2.4 to 1.0.
Management believes that this positive cash position, together with working
capital, cash from operations, and a potential credit facility, if the Company
obtains one, should be adequate to implement management's business plan and to
meet the Company's needs for at least the next twelve months. The actual amount
and timing of working capital and capital expenditures that the Company may
incur in future periods may vary significantly and will depend upon numerous
factors, including the amount and timing of the receipt of revenues from
operations, an increase in manufacturing capabilities, the timing and extent of
the introduction of new products and services, and growth in personnel and
operations. 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. If the Company is unsuccessful in obtaining a credit facility, it may
scale back expenditures or seek other financing, which might include sales of
equity securities that could dilute existing shareholders. There can
16
<PAGE> 17
be no assurance that additional financing will be available when needed on terms
favorable to the Company, if at all. See "Cautionary Statements."
Recently Issued Accounting Standards - In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Company is required to adopt in
fiscal 2001. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. As of February 29, 2000, the Company
had no derivative investments nor had it engaged in hedging activities, but it
will continue to evaluate the effects of the adoption of SFAS No. 133.
CAUTIONARY STATEMENTS
Statements in this Report which are not historical facts, including all
statements about the Company's business strategy or expectations, or information
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 not more than 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 need to
make substantial investments in inventory and capital equipment or, as currently
contemplated, the Company will need 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 our products will achieve or maintain market acceptance, result
in increased revenues, or be profitable.
17
<PAGE> 18
Parts Shortages and Over-Supplies and Dependence on Suppliers
The semiconductor industry is characterized by periodic shortages or
over-supplies of parts which have in the past and may in the future negatively
affect the Company's operations. For example, an over-supply of 16 meg DRAMs in
1996 resulted in significant price declines which required the Company to make
significant inventory reductions in Fiscal Year 1997. The Company is dependent
on a limited number of suppliers for semiconductor devices used in its products,
and it has no long-term supply contracts with any of them. For example, the
Company was not able to market its second generation Dense-Stack product when it
lost its source of SRAM die.
Due to the cyclical nature of the semiconductor industry and competitive
conditions, the Company may 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, or that patents issued to others will not adversely affect the
sales, development or commercialization of the Company's present or 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 affect its ability to satisfy customer demand in
a timely fashion. Failure to manage growth effectively could adversely affect
the Company's financial condition and results of operations.
Competition
There are memory companies which offer or are in the process of developing
three-dimensional products, including Irvine Sensors, Staktek, Cubic Memory and
Thompson CSF in France. Some of
18
<PAGE> 19
such companies have greater financial, manufacturing and marketing capabilities
than the Company. The Company could also experience competition from established
and emerging computer memory companies. There can be no assurance that the
Company's products will be competitive with existing or future products, or that
the Company will be able to establish or maintain a profitable price structure
for its products.
Product Liability
In the course of its business, the Company may be subject to claims for
product liability for which its insurance coverage is excluded or inadequate.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests excess cash in money market funds. Money market funds
do not have a maturity dates and do not present a material market risk. For
Fiscal Year 2000, interest expense was not sensitive to the general level of the
U.S. interest rates because the Company's debt instruments, consisting
principally of capital lease agreements, were based on fixed interest rates.
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.
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 10, 2000, is incorporated herein by reference.
19
<PAGE> 20
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 2000
Annual Meeting of Shareholders.
PART IV.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The Exhibits listed below have been filed with the U.S.
Securities and Exchange Commission (the "Commission") as part of this annual
report on Form 10-KSB. The Company will furnish a copy of any exhibit upon
request but a reasonable fee will be charged to cover the Company's expense in
furnishing such exhibit.
<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
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.
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
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 incorporated by
reference between the Company and Euroventures
Benelux II B.V. dated as of April 1, 1996.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
EXHIBIT 21.1
<TABLE>
<S> <C>
21.1 Subsidiaries of the Company - TypeHaus, Inc., incorporated
in California on September 8, 1997.
</TABLE>
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Articles of Incorporation, as amended, as incorporated by reference
to Registrant's Current Report on Form 8-K, Date of Event July 11, 1988.
3.2 By-laws, as amended, as incorporated by reference to Registrant's
Current Report on Form 8-K, Date of Event July 11, 1988.
10.1 Letter dated December 4, 1990 from Kreidietbank regarding $1,270,000
loan as incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1990.
10.2 Lease for Premises at 7321 Lincoln Way, Garden Grove, California,
dated June 19, 1997 Incorporated by reference to Registrants' Annual
Report on Form l0-KSB for the year ended February 29, 1996.
10.3 1996 Stock Option Plan (Incorporated by reference to Registrants'
Annual Report on Form l0-KSB for the year ended February 29, 1996.
10.4 1985 Stock Option Plan, as amended 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
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 which
is 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 which is
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. which is 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 incorporated by reference between
the Company and Euroventures Benelux II B.V. dated as of April 1, 1996.
21.1 Subsidiaries of the Company - TypeHaus, Inc., incorporated in
California on September 8, 1997.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
</TABLE>
22
<PAGE> 23
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 26, 1999 DENSE-PAC MICROSYSTEMS, INC.
By: /s/ Ted G. Bruce
-----------------------------
Ted G. 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 26, 1999
--------------------------------------------------
Richard J. Dadamo
Chairman of the Board
/s/ Ted G. Bruce May 26, 1999
--------------------------------------------------
Ted G. Bruce
Chief Executive Officer, President, Director
(Principal Executive Officer)
/s/ William M. Stowell May 26, 1999
--------------------------------------------------
William M. Stowell
Vice President - Finance
Chief Financial Officer & Secretary
(Principal Financial and Accounting Officer)
/s/ Roger G. Claes May 26, 1999
--------------------------------------------------
Roger G. Claes, Director
/s/ Samuel W. Tishler May 26, 1999
--------------------------------------------------
Samuel W. Tishler, Director
/s/ Gordon M. Watson May 26, 1999
--------------------------------------------------
Gordon M, Watson, Director
</TABLE>
23
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Dense-Pac Microsystems, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Dense-Pac
Microsystems, Inc. and subsidiary (the Company) as of February 29, 2000 and
February 28, 1999, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Dense-Pac Microsystems, Inc. and
subsidiary as of February 29, 2000 and February 28, 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 7, 2000
F-1
<PAGE> 25
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,949,562 $ 1,273,887
Accounts receivable, net of allowance for doubtful accounts
of $115,000 (2000) and $110,000 (1999) 3,346,318 1,756,953
Inventories, net 1,778,959 3,696,471
Prepaid expenses and other current assets 200,120 166,400
----------- -----------
Total current assets 8,274,959 6,893,711
PROPERTY, net 5,819,824 3,371,309
OTHER ASSETS 29,171 14,360
----------- -----------
$14,123,954 $10,279,380
=========== ===========
</TABLE>
See accompanying notes to
consolidated financial statements.
F-2
<PAGE> 26
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 671,336 $ 351,731
Accounts payable 1,152,151 2,793,304
Accrued compensation 782,996 240,762
Other accrued liabilities 353,393 217,176
Deferred revenue 450,000
------------ ------------
Total current liabilities 3,409,876 3,602,973
NOTES PAYABLE DUE TO RELATED PARTIES 1,900,000
LONG-TERM DEBT, less current portion 1,263,544 269,157
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, 40,000,000 shares;
issued and outstanding, 19,350,497 and 17,873,400 shares
in 2000 and 1999, respectively 20,039,109 17,544,267
Unearned compensation expense (116,131)
Accumulated deficit (10,472,444) (13,037,017)
------------ ------------
Total stockholders' equity 9,450,534 4,507,250
------------ ------------
$ 14,123,954 $ 10,279,380
============ ============
</TABLE>
See accompanying notes to
consolidated financial statements.
F-3
<PAGE> 27
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
NET SALES $ 27,459,614 $ 12,603,791
COST OF SALES:
Cost of sales 18,181,463 10,544,562
Inventory write-down 773,954
------------ ------------
Total cost of sales 18,181,463 11,318,516
------------ ------------
GROSS PROFIT 9,278,151 1,285,275
COSTS AND EXPENSES:
Selling, general, and administrative 5,263,039 3,414,005
Research and development 1,277,701 1,047,249
Write-off of property 372,447
------------ ------------
Total costs and expenses 6,540,740 4,833,701
------------ ------------
INCOME (LOSS) FROM OPERATIONS 2,737,411 (3,548,426)
OTHER EXPENSE:
Interest expense 215,835 166,270
Interest income (65,797) (79,430)
------------ ------------
Total other expense, net 150,038 86,840
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION 2,587,373 (3,635,266)
INCOME TAX PROVISION 22,800 2,400
------------ ------------
NET INCOME (LOSS) $ 2,564,573 $ (3,637,666)
============ ============
NET INCOME (LOSS) PER SHARE:
Basic $ 0.14 $ (0.20)
============ ============
Diluted $ 0.13 $ (0.20)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 18,773,138 17,802,483
============ ============
Diluted 19,974,857 17,802,483
============ ============
</TABLE>
See accompanying notes to
consolidated financial statements.
F-4
<PAGE> 28
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------------------- UNEARNED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT EQUITY
------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE,
March 1, 1998 17,596,181 $ 17,022,138 $ -- $ (9,399,351) $ 7,622,787
Issuance of common
stock upon exercise
of stock options 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
Issuance of common
stock upon exercise
of stock options 428,820 458,863 458,863
Issuance of common
stock for debt
conversion, net 1,048,277 1,879,034 1,879,034
Unearned
compensation 156,945 (156,945)
Amortization of
unearned compensation 40,814 40,814
Net income 2,564,573 2,564,573
------------ ------------ ------------ ------------ ------------
BALANCE,
February 29, 2000 19,350,497 $ 20,039,109 $ (116,131) $(10,472,444) $ 9,450,534
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to
consolidated financial statements.
F-5
<PAGE> 29
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,564,573 $(3,637,666)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,345,988 1,135,604
Amortization of unearned compensation 40,814
Write-off of property 372,447
Inventory write-down 773,954
Changes in operating assets and liabilities:
Accounts receivable, net (1,589,365) (690,400)
Inventories, net 1,917,512 (1,379,536)
Prepaid expenses and other assets (48,531) 15,138
Accounts payable (1,641,153) 1,473,818
Accrued compensation 542,234 167
Other accrued liabilities 136,217 95,741
Deferred revenue 450,000
----------- -----------
Net cash provided by (used in) operating activities 3,718,289 (1,840,733)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (1,504,899) (564,272)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (996,578) (469,625)
Net proceeds from issuance of common stock 458,863 522,129
----------- -----------
Net cash (used in) provided by financing activities (537,715) 52,504
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,675,675 (2,352,501)
CASH AND CASH EQUIVALENTS, beginning of year 1,273,887 3,626,388
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 2,949,562 $ 1,273,887
=========== ===========
</TABLE>
See accompanying notes to
consolidated financial statements.
F-6
<PAGE> 30
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ 210,390 $ 166,149
========== ==========
Income taxes $ 10,800 $ 2,400
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases $2,289,604 $ 55,293
========== ==========
Conversion of notes payable into common stock $1,879,034
==========
Disposal of property for note receivable $ 40,000
==========
</TABLE>
See accompanying notes to
consolidated financial statements.
F-7
<PAGE> 31
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
--------------------------------------------------------------------------------
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.
Basis of Presentation - The accompanying consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America.
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 because the interest rates approximate
a rate the Company could obtain under similar terms at the balance sheet
date.
Cash and Cash Equivalents - Cash equivalents include short-term highly
liquid investments with original maturities of three months or less.
Inventories - Inventories are stated at the lower of first-in, first-out
cost or market. The Company regularly monitors inventories for excess or
obsolete items and makes any necessary adjustments when 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 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 29, 2000.
F-8
<PAGE> 32
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
Property - Property is stated at cost less accumulated depreciation and
amortization. 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.
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. Under
arrangements where the Company licenses its stacking technology,
revenues are recognized based on the number of units produced by the
customer, or on a straight-line basis over the term of the related
agreement. Advanced payments are classified as deferred revenue.
Income Taxes - The Company accounts for its income taxes under the
provisions of SFAS No. 109, Accounting for Income Taxes. Deferred taxes
on income result from temporary differences between the reporting of
income for financial statements and tax reporting purposes. Measurement
of the deferred items is based on enacted tax laws. In the event the
future consequences of differences between financial reporting bases and
tax bases of the Company's assets and liabilities result in a deferred
tax asset, SFAS No. 109 requires an evaluation of the probability of
being able to realize the future benefits indicated by such asset. A
valuation allowance related to a deferred tax asset is recorded when it
is more likely than not that some portion or all of the deferred tax
asset will not be realized.
Net Income (Loss) Per Share - The Company computes net income (loss) per
share in accordance with SFAS No. 128, Earnings per Share. Basic
earnings (loss) per share is computed by dividing net income (loss)
attributable to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution of securities by including other common
stock equivalents, including stock options, in the weighted average
number of common shares outstanding for a period. Common stock
equivalents are excluded from the calculation in loss years as the
effect is antidilutive.
The table below sets forth the reconciliation of the denominator of the
earnings per share calculation:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
February 29, February 28,
2000 1999
---------- ----------
<S> <C> <C>
Shares used in computing basic net income (loss) per share 18,773,138 17,802,483
Dilutive effect of stock options 889,075
Conversion of convertible notes payable 312,644
---------- ----------
Shares used in computing diluted net income (loss) per share 19,974,857 17,802,483
========== ==========
</TABLE>
F-9
<PAGE> 33
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
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 accounting principles generally accepted in the United States of
America necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from these
estimates.
Significant Concentrations - The semiconductor industry is highly
cyclical and has been subject to significant downturns, at various
times, that have been characterized by diminished product demand,
production over-capacity, and accelerated erosion of average selling
prices. Therefore, the average selling price the Company receives for
products is dependent on industrywide demand and capacity, and such
prices have historically been subject to rapid change.
The Company is dependent on a limited number of suppliers for
semiconductor devices used in its products but has no long-term supply
contracts with any of them. Due to the cyclical nature of the
semiconductor industry and competitive conditions, there can be no
assurance that the Company will not experience difficulties in meeting
its supply requirements in the future. Any inability to obtain adequate
deliveries of parts, either due to the loss of a supplier or
industry-wide shortages, could delay shipments of the Company's
products, increase its cost of goods sold and have a material adverse
effect on its business, financial condition and results of operations.
The Company has historically derived a substantial portion of its
revenues from defense-related contracts. As a result, the Company's
business has been impacted by reductions in the federal defense budget
and will continue to be subject to risks affecting the defense industry,
including changes in governmental appropriations and changes in national
defense policies and priorities. The Company has sought to reduce its
dependence on defense-related business by developing products with
commercial applications, although such products generally have lower
margins than defense-related products.
Concentration of Credit Risk - The Company grants credit to customers
included in the military, aerospace, and a variety of commercial
industries. Credit is extended based on an evaluation of the customer's
financial condition and collateral is not required. Estimated credit
losses are provided for in the financial statements. During the year
ended February 29, 2000, sales to three major customers accounted for
29%, 12%, and 11% of net sales. Accounts receivable from these three
customers accounted for 38% of total net accounts receivable at February
29, 2000. During the year ended February 28, 1999, no customer accounted
for more than 10% of net sales. A decision by a significant customer to
substantially decrease or delay purchases from the Company or Company's
inability to collect receivables from these customers could have a
material adverse effect on the Company's financial condition and results
of operations.
F-10
<PAGE> 34
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
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 2000 and 1999.
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 9).
Recently Issued Accounting Standards - In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which the Company is
required to adopt in fiscal 2001. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. As of February 29, 2000, the Company had no derivative
investments nor had it engaged in hedging activities, but it will
continue to evaluate the effects of the adoption of SFAS No. 133.
Reclassifications - Certain 1999 amounts have been reclassified to
conform with the 2000 presentation.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Raw materials $ 945,484 $1,092,065
Work-in-process 559,352 1,940,470
Finished goods 274,123 663,936
---------- ----------
Total inventories $1,778,959 $3,696,471
========== ==========
</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.
F-11
<PAGE> 35
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
3. PROPERTY
Property consists of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Machinery and equipment $ 5,977,173 $ 5,334,087
Furniture and fixtures 282,698 184,347
Leasehold improvements 620,479 372,495
Computer software and equipment financed
under capital leases 2,433,362 143,761
----------- -----------
9,313,712 6,034,690
Less accumulated depreciation and amortization (3,493,888) (2,663,381)
----------- -----------
Property, net $ 5,819,824 $ 3,371,309
=========== ===========
</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.
Accumulated depreciation of assets under capital lease was $246,069 and
$53,652 at February 29, 2000 and February 28, 1999, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Note payable to bank, collateralized by substantially all of the
Company's assets, interest rate determined as LIBOR rate
on payment dates, plus 2%, repaid in November 1999 $ -- $282,212
</TABLE>
F-12
<PAGE> 36
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Notes payable to finance company, collateralized by fixed assets,
bearing interest at rates ranging from 9.1% to 9.4%, payable in
monthly installments of principal and interest, maturing at
various dates through February 2001 $ 108,938 $ 305,460
Obligations under capital leases, bearing interest at rates ranging
from 8.7% to 14.6%, maturing at various dates through
January 2005 (Note 6) 1,825,942 33,216
----------- -----------
1,934,880 620,888
Less current portion of long-term debt (671,336) (351,731)
----------- -----------
$ 1,263,544 $ 269,157
=========== ===========
</TABLE>
Long-term debt at February 29, 2000, matures as follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
2001 $ 671,336
2002 485,534
2003 469,541
2004 275,935
2005 32,534
----------
$1,934,880
</TABLE>
5. RELATED-PARTY BORROWINGS
The Company had a $1,900,000 loan agreement with related parties. In
connection with the amended loan agreement, the Company issued
detachable warrants, which expired on October 12, 1999, to purchase
375,000 shares of the Company's common stock at a price of $7.00 per
share. None of the warrants were exercised.
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 fair market value of the Company's common stock on the
date of the amendment. The remaining outstanding principal accrued
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
F-13
<PAGE> 37
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
in the agreement. On November 1, 1999, the remaining outstanding
principal was converted into 386,208 shares of common stock at a price
of $1.8125 per share, based on the terms defined in the amended loan
agreement.
Interest expense related to these borrowings was approximately $44,000
and $94,000 for fiscal years 2000 and 1999, respectively.
In connection with the conversion of the notes, $20,966 of expenses were
incurred which have been offset against proceeds from common stock in
the accompanying consolidated financial statements.
6. COMMITMENTS AND CONTINGENCIES
Commitments - 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. Additionally, the Company leases
certain equipment under capital leases. The following table summarizes
the future minimum payments under the Company's operating and capital
leases at February 29, 2000:
<TABLE>
<CAPTION>
CAPITAL OPERATING
----------- ------------
<S> <C> <C>
Fiscal year ending:
2001 $ 721,674 $ 247,140
2002 587,483 6,176
2003 523,903 6,176
2004 288,484 2,999
2005 33,996
----------- -----------
Total minimum lease payments 2,155,540 $ 262,491
===========
Less amounts representing interest (329,598)
-----------
Present value of minimum lease payments 1,825,942
Less current portion (564,155)
-----------
Long-term portion $ 1,261,787
===========
</TABLE>
Rent expense relating to the operating lease was approximately $178,000
and $142,000 for fiscal years 2000 and 1999, respectively.
F-14
<PAGE> 38
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
Litigation - On September 23, 1998, Dense-Pac Microsystems, Inc. was
served with a complaint from Simple Technology, Inc. (Simple
Technology), 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 Division for
patent infringement against Simple Technology. The suit also alleges
that Simple Technology unlawfully interfered with Dense-Pac's sales
efforts. In April 1999, Dense-Pac filed two motions for summary
judgment, one relating to Dense-Pac's noninfringement of the Simple
patent and the second relating to prior art, which is alleged to
invalidate the claims in the Simple Technology patent. Simple Technology
also filed a summary judgment motion. The ruling on the summary motions
is still open. Factual and expert discovery in the case has concluded.
Trial is set for June 6, 2000. The ultimate outcome or any resulting
potential loss cannot be determined at this time.
The Company, in the normal course of business, is subject to various
other legal matters. However, management believes that none of these
matters will have an adverse effect on the Company's financial
statements.
7. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current:
Federal $ 17,100 $ --
State 5,700 2,400
----------- -----------
22,800 2,400
Deferred:
Federal 398,944 (1,183,641)
State 91,067 (194,612)
----------- -----------
490,011 (1,378,253)
Change in valuation allowance (490,011) 1,378,253
----------- -----------
Deferred income tax provision, net
----------- -----------
Total income tax provision $ 22,800 $ 2,400
=========== ===========
</TABLE>
F-15
<PAGE> 39
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and
income tax purposes. The income tax effects of these temporary
differences representing significant portions of the deferred tax assets
and deferred tax liabilities are as follows at February 29, 2000 and
February 28, 1999:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories $ 265,004 $ 209,829
Other reserves 88,581 69,608
State taxes 1,936 816
Net operating loss carryforwards, general business
credit carryforwards, and AMT credit carryforwards 5,142,213 5,632,830
----------- -----------
Total gross deferred assets 5,497,734 5,913,083
Deferred tax liability - depreciation and amortization (163,822) (89,159)
----------- -----------
5,333,912 5,823,924
Valuation allowance (5,333,912) (5,823,924)
----------- -----------
Net deferred income taxes $ -- $ --
=========== ===========
</TABLE>
As of February 29, 2000, a valuation allowance of $5,333,912 has been
provided based upon the Company's assessment of the future realizability
of certain deferred tax assets, as it is more likely than not that
sufficient taxable income will not be generated to realize these
temporary differences.
Additionally, at February 28, 2000, approximately $1,216,000 of the
valuation allowance was attributable to the potential tax benefit of
stock option transactions that will be credited directly to common
stock, if realized.
A reconciliation of the Company's effective tax rate compared to the
federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Federal statutory rate 35% (35)%
State taxes, net of federal benefit 6 (3)
Valuation allowance (40) 37
Other 1
---- ----
1% -0%
==== ====
</TABLE>
F-16
<PAGE> 40
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
As of February 29, 2000, the Company had federal and state net operating
loss carryforwards of $13,023,639 and $4,203,632, respectively. The
federal net operating losses begin to expire in 2007, while the state
net operating losses begin to expire in 2003. As of February 29, 2000,
the Company had federal and state tax credit carryforwards of $283,498
and $301,515, respectively. The federal tax credits begin to expire in
2006, while the state tax credits begin to expire in 2004.
8. EMPLOYEE STOCK OPTION PLANS
At February 29, 2000, options to purchase 210,150 shares of the
Company's common stock were outstanding under the Company's 1985 Stock
Option Plan, of which options to purchase 210,150 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 29, 2000, no shares were available for future
grants under the 1985 Stock Option 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 29, 2000, options to
purchase 1,861,350 shares of the Company's common stock were outstanding
under the 1996 Stock Option Plan, of which options to purchase 443,000
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 29, 2000, 428,680 shares were
available for future grants under the Plan.
During the year ended February 29, 2000, the Company granted 60,000
options to nonemployees to purchase common shares at $4.75 to $7.56 per
share. The options vest 50% on June 31, 2000, and 50% on December 31,
2000 and expire the later of: (1) two years after service termination,
or (2) ten years from date of grant. The value of the options was
determined to be $156,945 utilizing the Black-Scholes option-pricing
model on the date of grant and has been recorded as unearned
compensation expense in the accompanying consolidated financial
statements. The unearned compensation is being amortized on a
straight-line basis over the vesting period of the options.
F-17
<PAGE> 41
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (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, 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
Granted (weighted average fair value of $3.02) 786,470 $4.37
Exercised (428,820) $1.07
Canceled (97,700) $1.00
---------
OUTSTANDING, February 29, 2000 2,071,500 $2.39
=========
</TABLE>
Additional information regarding options outstanding as of February 29,
2000, 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>
$0.94 - $1.00 802,350 7.7 $1.00 313,000 $1.00
$1.01 - $1.99 655,950 5.5 $1.53 295,950 $1.51
$2.00 - $2.99 210,200 7.6 $2.22 42,200 $2.60
$4.41 - $7.56 403,000 9.4 $6.70 2,000 $4.41
--------- ------ ------- -----
2,071,500 $2.39 653,150 $1.35
========= ====== ======= =====
</TABLE>
As of February 28, 1999, 617,247 options were exercisable at weighted
average exercise price of $1.38.
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.
F-18
<PAGE> 42
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income (loss) and earnings (loss) 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 2000 1999
----------- ------
<S> <C> <C>
Expected life (months) 42 42
Stock volatility 112% 124%
Risk-free interest rate 5.02 - 6.74% 5.55%
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>
2000 1999
---------- -----------
<S> <C> <C>
Net income (loss) as reported $2,564,573 $(3,637,666)
Pro forma net income (loss) $2,002,474 $(4,291,311)
Net income (loss) per share as reported:
Basic $0.14 $(0.20)
Diluted $0.13 $(0.20)
Pro forma net income (loss) per share:
Basic $0.11 $(0.24)
Diluted $0.10 $(0.24)
</TABLE>
F-19
<PAGE> 43
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
9. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated
regularly by the Company's chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and in
assessing performance. The operating segments of the Company are managed
separately because each segment represents a strategic business unit
that offers different products or services.
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.).
Operating segment data for fiscal years 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 2000
TypeHaus,
Dense-Pac Inc. Eliminations Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 26,055,145 $ 1,411,469 $ (7,000) $ 27,459,614
Net income (loss) 2,564,984 (411) 2,564,573
Depreciation and amortization 1,241,228 104,760 1,345,988
Other expense, net 150,038 150,038
Total assets 13,558,203 575,751 (10,000) 14,123,954
Capital expenditures
(includes capital leases) 3,745,975 48,528 3,794,503
FISCAL YEAR 1999
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
(includes capital leases) 573,525 46,040 619,565
</TABLE>
License revenues for fiscal year 2000 were $729,678. No license revenues
were generated in fiscal year 1999.
F-20
<PAGE> 44
DENSE-PAC MICROSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 (CONTINUED)
--------------------------------------------------------------------------------
The Company had export sales (primarily to Western European customers)
accounting for approximately 18% and 12% of net sales for fiscal years
2000 and 1999, respectively.
10. 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 $81,137 and $41,944 to the
401(k) plan during fiscal years 2000 and 1999, 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. The Company
recorded $784,730 in profit sharing expense in fiscal year 2000 and zero
during fiscal year 1999.
* * * * * *
F-21
