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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-6377
DREXLER TECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0176309
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1077 Independence Avenue, Mountain View, CA 94043-1601
(Address of principal executive offices) (Zip Code)
(415) 969-7277
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Number of outstanding shares of Common Stock, $.01 par value,
at August 5, 1997: 9,245,566
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. Further, the condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which included only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of and for the periods indicated.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and the notes thereto for the
year ended March 31, 1997 included in the Company's Form 10-K Annual Report.
The results of operations for the three months ended June 30, 1997 are
not necessarily indicative of results to be expected for the entire year ending
March 31, 1998.
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DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31, June 30,
1997 1997
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Assets
Current assets:
Cash and cash equivalents .......................................................... $ 2,916 $ 2,573
Accounts receivable................................................................. 615 582
Inventories ........................................................................ 852 1,364
Other current assets. .............................................................. 205 215
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Total current assets ............................................................ 4,588 4,734
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Property and equipment, at cost......................................................... 13,404 13,955
Less--accumulated depreciation and amortization ..................................... (11,790) (11,887)
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Property and equipment, net...................................................... 1,614 2,068
Patents, net .......................................................................... 887 858
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Total assets.................................................................. $ 7,089 $ 7,660
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................................... $ 501 $ 1,098
Accrued payroll costs .............................................................. 230 250
Advance payments from customers..................................................... 2,183 1,918
Other accrued liabilities........................................................... 116 122
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Total current liabilities........................................................ 3,030 3,388
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Stockholders' equity:
Preferred stock, $.01 par value:
Authorized--2,000,000 shares
Outstanding--none................................................................ -- --
Common stock, $.01 par value:
Authorized--15,000,000 shares
Outstanding--9,150,416 shares at March 31, 1997 and
9,212,066 shares at June 30, 1997............................................ 91 92
Additional paid-in capital.............................................................. 31,516 31,886
Accumulated deficit..................................................................... (27,548) (27,706)
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Total stockholders' equity....................................................... 4,059 4,272
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Total liabilities and stockholders' equity.................................... $ 7,089 $ 7,660
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DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
Three Months Ended
June 30,
1996 1997
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Revenues:
Product sales ...................................................................... $ 609 $1,484
License fees and royalties.......................................................... 9 5
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Total revenues .................................................................. 618 1,489
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Costs and expenses:
Cost of product sales............................................................... 423 892
Selling, general, and administrative expenses....................................... 634 649
Research and engineering expenses................................................... 236 111
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Total costs and expenses......................................................... 1,293 1,652
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Operating loss................................................................ (675) (163)
Other income and expense:
Other income (expense), net......................................................... 15 (23)
Interest income..................................................................... 16 30
Interest expense.................................................................... (2) (2)
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Total other income, net.......................................................... 29 5
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Net loss...................................................................... $ (646) $ (158)
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Net loss per share............................................................ $ (.07) $ (.02)
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Weighted average common shares.......................................................... 8,849 9,186
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DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
June 30,
1996 1997
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Cash flows from operating activities:
Net loss............................................................................. $ (646) $ (158)
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Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization.................................................... 121 140
Changes in operating assets and liabilities:
Decrease in accounts receivable.................................................. 499 33
Increase in inventories.......................................................... (387) (512)
(Increase) decrease in other assets.............................................. 2 (10)
(Decrease) increase in accounts payable and accrued expenses..................... (785) 623
Decrease in advance payments from customers
and deferred revenue.......................................................... (54) (265)
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Net cash used for operating activities........................................ (1,250) (149)
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Cash flows from investing activities:
Purchase of property and equipment................................................... (127) (551)
Increase in patents.................................................................. (13) (14)
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Net cash used for investing activities........................................ (140) (565)
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Cash flows from financing activities:
Proceeds from sale of common stock................................................... 467 371
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Net cash provided by financing activities..................................... 467 371
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Net decrease in cash and cash equivalents..................................... (923) (343)
Cash and cash equivalents:
Beginning of period.................................................................. 2,094 2,916
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End of period........................................................................ $1,171 $2,573
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--FISCAL 1998 FIRST QUARTER COMPARED WITH
FISCAL 1997 FIRST QUARTER
Revenues
For the fiscal 1998 first quarter ended June 30, 1997, the Company's total
revenues were $1,489,000 compared with $618,000 for last year's first quarter.
PRODUCT SALES. Sales of LaserCard(R) optical memory cards and related
products to value-added resellers (VARs), licensees, and end-user customers were
$1,484,000 for the first three months of fiscal 1998 compared with $609,000 for
last year's comparable period. The Company sold 141 reader/writer units for the
fiscal 1998 first quarter compared with 85 reader/writer units for the first
quarter of fiscal 1997. Optical memory card sales for the fiscal 1998 first
quarter were 234,000 cards compared with 35,000 cards for last year's first
quarter.
Applications for the Company's optical memory card products include:
medical data applications in the United States; several programs in Italy; two
programs in the Philippines--an admission pass/retail purchase log at a
duty-free shopping zone and a vehicle warranty and maintenance records card; and
United States government-related programs--the U.S. Department of Defense
"automated manifest card" and the U.S. Immigration and Naturalization Service
"border crossing card" and "green card."
For the development of commercial markets and applications for its
products, the Company utilizes VAR companies as part of its marketing and
distribution program for LaserCard products. Sales to VARs include the Company's
optical memory cards, the Company's system software, optical card reader/writers
made by a licensee of the Company, and add-on peripherals made by other
companies (such as equipment for adding a digitized photo, fingerprint, hand
template, or signature to the cards). The VARs may add application software,
personal computers, and other peripherals, and then resell these products,
integrated into data systems, for end-user customers.
There can be no assurances that any new or existing VAR company in any
country will be successful in its markets or field trials or that it will place
follow-on orders with the Company for additional quantities of cards and
systems. In order to upgrade its VAR customer base to increase the probability
of success, the Company will continue its efforts to recruit new VARs and
eliminate nonproductive ones. The Company provides marketing leads, customer
technical support, and system software to assist VARs.
Software is an important factor in developing the commercial markets for
optical memory cards. The Company's system software consists of optical card
interface software/device drivers, file systems, software development tools, and
demonstration software. The Company does not provide software for specific
applications, but instead depends on its VARs to integrate optical card products
into existing software products, write new application software for specific
optical card programs, or license software from other VARs. Several VARs have
written optical card software programs for applications such as automobile
warranty and maintenance records, cargo manifesting, digital optical key
systems, admissions/ID, data logging systems, and various medical-related
applications such as medical image storage and health history cards. Other
application software development is underway by VARs and their customers.
Optical memory cards are used in conjunction with card reader/writer
equipment connected to personal computers and accessed in the same manner as
floppy disk drives. Such reader/writers are incorporated into LaserCard systems
sold to VARs and other customers of the Company. The price, performance, and
availability of such reader/writers are factors in the commercialization of
optical cards. The Company sells reader/writers for a few thousand dollars per
unit, and these units generally include the Company's interface software/device
drivers.
The Company does not manufacture card reader/writers but instead continues
to purchase such equipment from a Japanese licensee, Nippon Conlux Co., Ltd.,
currently the Company's sole supplier of reader/writers. The Company's inventory
level for reader/writers fluctuates based on the timing of purchases and sales
and is typically approximately
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50 to 75 units. The Company can give no assurance that increased production of
card reader/writers will occur in the near term or that high-volume sales and
correspondingly lower prices will result. If market demand increases sharply
over a short period of time, an initial shortage of reader/writers could result.
Also, an interruption or change in the supply of reader/writers could cause a
delay in product shipments and a possible loss of sales, which would adversely
affect operating results.
LICENSES. There were no licenses sold in the fiscal 1998 or fiscal 1997
first quarters. License fees received by the Company are unconditional and
nonrefundable, and no significant obligations remain unfulfilled by the Company
under any of its licenses. The Company is actively pursuing its efforts to
generate additional license revenues; however, license sales by the Company are
sporadic and unpredictable as to timing and type of license. The magnitude of
future license revenues, if any, cannot be predicted or inferred from past
events.
ROYALTIES. Although royalty revenues have not reached material amounts, the
Company does anticipate future royalty income on a long-term, continuing basis
from among two royalty-bearing optical memory card manufacturing licenses and
several royalty-bearing, equipment-license upgrades previously sold. The Company
cannot predict whether or when equipment or card sales by its licensees will
result in material royalties to the Company. Therefore, the Company is not
relying on royalty income and does not expect it to be a significant factor in
the near term.
Backlog
The Company received a $7.1 million order in February 1997 for 2 million
optical memory cards for the U.S. Immigration and Naturalization Service (INS).
Of these, approximately 106,000 cards were delivered during the first quarter of
fiscal 1998. Deliveries are expected to average approximately 200,000 cards per
month once the INS's new card issuing station is fully operational. As is the
case in all U.S. government procurement, the government reserves the right to
change specifications, delay deliveries, and cancel all or part of the order.
Margins
The gross margin on product sales for the first quarter of fiscal 1998 was
40% compared with 30% for the prior-year period. This increase is due mainly to
the amortization of a payment from a customer as compensation for installing
certain unique manufacturing capabilities. This payment will be amortized over
the term of the contract. The Company believes that gross margins for the
remainder of fiscal 1998 will continue at levels above fiscal 1997, due to
higher production volumes and the continued amortization of the payment
described above. The gross margin on optical memory card sales will fluctuate
based upon type and volume of cards sold. With the increase in card
manufacturing for commercial orders, the Company's optical memory card
manufacturing facility is used less for the purposes of research and
engineering. Therefore, more of the manufacturing facility costs (depreciation
expense, building lease payments, and other costs) are allocated to cost of card
manufacturing, and less of these costs are charged to research and engineering.
For the first quarter of fiscal 1998, the Company allocated substantially all of
the facility expenses to card manufacturing versus approximately 43% of these
expenses for last year's first quarter.
Income and Expenses
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). For the fiscal 1998
first quarter, SG&A expenses were $649,000 compared with $634,000 for the first
quarter of fiscal 1997. The Company's plans include increased marketing and
customer technical support activity to be implemented during fiscal 1998.
RESEARCH AND ENGINEERING EXPENSES. Research and engineering expenses were
$111,000 for the first quarter of fiscal 1998 compared with $236,000 for the
year-earlier quarter. The optical memory card facility is used for both
engineering and manufacturing. Therefore, the facility costs (depreciation
expense, building lease payments, and other costs) are allocated between
manufacturing and engineering based upon the level of manufacturing activity.
The Company continues to undertake ongoing research and engineering project
activities. However, research and engineering expenses for fiscal year 1998 are
expected to be less than for fiscal year 1997, as optical card production
increases and card manufacturing resources are allocated to card production to a
greater degree than last fiscal year.
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The Company believes that the reduction in card manufacturing facility expenses
allocated to research and engineering will not have a negative effect on its
optical card business since appropriate research and engineering projects are
continuing. Future projects will require increased spending as the optical card
industry grows.
OTHER INCOME AND EXPENSE. Net other income for the first quarter of fiscal
1998 was $5,000 compared with $29,000 for the fiscal 1997 first quarter. The
Company purchases Japanese yen for payment of reader/writers purchased from a
Japanese supplier. Thus, the Company's normal operations are subject to gains or
losses on fluctuations in the yen/dollar exchange rate. Net other income for the
fiscal 1998 first quarter included a $23,000 loss on foreign currency exchange
versus a $15,000 gain on foreign currency exchange during the comparable period
last year.
Interest income for the first quarter of fiscal 1998 was $30,000 compared
with $16,000 for last year's first quarter, due to changes in average invested
funds. The Company's interest expense on short-term loans was $2,000 for the
fiscal 1998 and fiscal 1997 first quarters.
LIQUIDITY
As of June 30, 1997, the Company had cash and cash equivalents of
$2,573,000 and a current ratio of 1.4 to 1. Net cash used for operating
activities was $149,000 for the fiscal 1998 first quarter compared with
$1,250,000 for the fiscal 1997 first quarter. As of June 30, 1997, the Company
had no long-term debt.
The Company has not established a line of credit. Generally, the Company's
customers make advance payments, in whole or in part, at the time of order
placement because the Company's optical memory cards are usually made to custom
specifications that are specific to each customer, end user, or application. The
Company believes that although working capital requirements should grow in
proportion to product shipment levels, the advance payments will reduce the need
for working capital financing. The Company may negotiate a line of credit if and
when it becomes appropriate, although no assurance can be made that such
financing would be available, if needed.
At June 30, 1997, the Company had an accumulated deficit of $27,706,000
and, except for sporadic sales of licenses, has experienced quarterly losses.
Based on current raw-material costs and other expense calculations, the Company
estimates that it will break even on operations at annual sales of approximately
1.6 million to 1.8 million optical memory cards, depending on the margins on
sales of related hardware. Due to its large card order from the INS, the Company
expects its financial performance to improve.
The Company's total deferred income tax asset was $16,114,000 at March 31,
1997. If utilized, the total deferred income tax asset would reduce future tax
expense and payments. Included are amounts derived from federal income tax net
operating losses that will expire at various dates from 2001 through 2012,
amounts from state income tax net operating losses that will expire at various
dates from 1998 through 2002, and amounts from tax credits that will expire from
2000 through 2004. The ability of the Company to utilize this deferred tax asset
is contingent upon generating sufficient income within the stated time periods.
In view of the uncertain value of this asset, the Company has recorded a full
valuation allowance against it; therefore, no part of the total deferred tax
asset of $16,114,000 has been added to stockholders' equity on the Company's
balance sheet.
The Company is planning to install an additional $1.5 million of capital
equipment and leasehold improvements in its card production facility during the
remainder of the fiscal year ending March 31, 1998. These assets are for the
production of cards with new features and for manufacturing-process improvements
and will result in a production capacity of 6 million cards annually. The
Company currently estimates that an additional $5 million in production
equipment is required to reach the factory-designed capacity of 25 million cards
per year. Such equipment will be purchased incrementally as commercial orders
for optical memory cards justify increased production capacity, estimated as
follows: for 8 million cards annually, $1.2 million; for 10 million cards
annually, an additional $1.3 million; and for 25 million cards annually, an
additional $2.5 million. The Company will make additional capital expenditures
for cost savings and other purposes.
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During the fiscal 1998 first quarter, Company employees and consultants
purchased from the Company 61,650 shares of registered common stock, at an
average price of $6.02 per share, through the exercise of stock options under
the Company's 1991 Stock Option Plan, which resulted in additional cash receipts
to the Company of $371,000. As of June 30, 1997, Company employees and
consultants held unexercised, vested, in-the-money options to purchase 545,817
shares of common stock at exercise prices ranging from $4.56 to $9.06 per share,
for an average of $6.69 per share. These stock options, if exercised, would
provide the Company with cash in the amount of $3,649,000.
FORWARD-LOOKING STATEMENTS
Certain statements made above relating to plans, objectives, and economic
performance go beyond historical information and may provide an indication of
future results. To that extent, they are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
each is subject to factors that could cause actual results to differ from those
in the forward-looking statement. In particular, the ability of the Company to
achieve a profitable level of optical memory card sales is subject to risks and
uncertainties with respect to the economic availability of reader/writers,
customer implementation of ongoing commercial applications, and the economic
configuration and operation of the Company's card manufacturing facility for
increased output levels. Such factors are described in the Company's Report on
Form 10-K and other documents filed by the Company from time to time with the
Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibit Description
27 Financial Data Schedule
No other exhibits are included in this report as the contents of the
required exhibits are either not applicable to Registrant, to be provided only
if Registrant desires, or contained elsewhere in this report.
(b) No reports on Form 8-K were filed by Registrant during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
DREXLER TECHNOLOGY CORPORATION
(Registrant)
Date: August 8, 1997 /s/ Jerome Drexler
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Jerome Drexler, Chairman of the Board
of Directors and Chief Executive Officer
(Principal Executive Officer)
Date: August 8, 1997 /s/ Steven G. Larson
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Steven G. Larson, Vice President of Finance
and Treasurer (Principal Financial Officer
and Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule