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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended: Commission file number:
June 30, 1996 0-6377
DREXLER TECHNOLOGY CORPORATION
(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, 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 June
30, 1996: 8,900,624
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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, 1996, included in the Company's Form 10-K Annual Report.
The results of operations for the three months ended June 30, 1996 are not
necessarily indicative of results to be expected for the entire year ending
March 31, 1997.
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DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Assets
March 31, June 30,
1996 1996
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents .................................................... $ 2,094 $ 1,171
Accounts receivable .......................................................... 667 168
Inventories .................................................................. 864 1,251
Other current assets ......................................................... 157 155
-------- --------
Total current assets ...................................................... 3,782 2,745
-------- --------
Property and equipment, at cost .................................................. 13,067 13,187
Less--accumulated depreciation and amortization .............................. (11,460) (11,533)
-------- --------
Property and equipment, net ............................................... 1,607 1,654
Patents, net ..................................................................... 982 954
-------- --------
Total assets ........................................................... $ 6,371 $ 5,353
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................................. $ 1,498 $ 740
Accrued payroll costs ........................................................ 233 225
Advance payments from customers .............................................. 177 123
Other accrued liabilities .................................................... 136 117
-------- --------
Total current liabilities ................................................. 2,044 1,205
-------- --------
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--8,831,674 shares at March 31, 1996 and
8,900,624 shares at June 30, 1996 ...................................... 88 89
Additional paid-in capital ................................................... 29,452 29,918
Accumulated deficit .......................................................... (25,213) (25,859)
-------- --------
Total stockholders' equity ................................................ 4,327 4,148
-------- --------
Total liabilities and stockholders' equity ............................. $ 6,371 $ 5,353
======== ========
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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,
1995 1996
------- -------
Revenues:
Product sales ............................... $ 762 $ 609
License fees and royalties .................. 207 9
------- -------
Total revenues ........................... 969 618
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Costs and expenses:
Cost of product sales ....................... 534 423
Selling, general, and administrative expenses 560 634
Research and engineering expenses ........... 332 236
------- -------
Total costs and expenses ................. 1,426 1,293
------- -------
Operating loss ........................ (457) (675)
Other income and expense:
Other income ................................ -- 15
Interest income ............................. 6 16
Interest expense ............................ (2) (2)
------- -------
Total other income, net .................. 4 29
------- -------
Net loss .............................. $ (453) $ (646)
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Net loss per share .................... $ (.05) $ (.07)
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Weighted average common shares .................. 8,401 8,849
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DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
June 30,
1995 1996
------- -------
Cash flows from operating activities:
Net loss ....................................................... $ (453) $ (646)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization .............................. 107 121
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ................. (356) 499
(Increase) decrease in inventories ......................... 25 (387)
(Increase) decrease in other assets ........................ (20) 2
(Decrease) increase in accounts payable and accrued expenses 198 (785)
(Decrease) increase in advance payments from customers
and deferred revenue .................................... 82 (54)
Decrease in liabilities related to discontinued operations . (6) --
------- -------
Net cash used for operating activities .................. (423) (1,250)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ............................. (31) (127)
Increase in patents ............................................ (17) (13)
------- -------
Net cash used for investing activities .................. (48) (140)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock ............................. 1,261 467
------- -------
Net cash provided by financing activities ............... 1,261 467
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Net increase (decrease) in cash and cash equivalents .... 790 (923)
Cash and cash equivalents:
Beginning of period ............................................ 1,050 2,094
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End of period .................................................. $ 1,840 $ 1,171
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--FISCAL 1997 FIRST QUARTER
AS COMPARED WITH FISCAL 1996 FIRST QUARTER
REVENUES
The Company's total revenues for the first quarter of fiscal 1997 were
$618,000 as compared with $969,000 for last year's first quarter.
OPTICAL MEMORY CARD PRODUCTS. Sales of optical memory cards and related
products to value-added resellers (VARs), licensees, and end-user customers were
$609,000 for the first three months of fiscal 1997 as compared with $762,000 for
last year's comparable period.
For the development of commercial market applications for its products,
the Company utilizes VAR companies as part of its marketing and distribution
program for LaserCard(R) 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 in their geographic regions.
For the first quarter of fiscal 1997, the Company commercially sold
approximately 35,000 LaserCard optical memory cards and 85 reader/writers. Some
of the current applications for the Company's optical memory card products are:
U.S. government-related programs; medical data applications in the United
States; several programs in Italy, including a secure soccer-season ticket; and
two programs in the Philippines--an admission pass/retail purchase log at a
duty-free shopping zone and a vehicle warranty/maintenance records card.
There can be no assurances that any 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 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/maintenance, 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
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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.As of the end of the fiscal first quarter, the Company had
over 100 reader/writers in inventory. 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 affect operating results adversely.
LICENSES. There were no license revenues for the first quarter of fiscal
1997, as compared with revenues of $200,000 for the first quarter of fiscal 1996
from an agreement that included a trademark license and a LaserCard distribution
license payment. 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, since the optical memory card
industry is in the early commercial stage. 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 generally fills most orders within 30 to 120 days of
receipt of purchase order or release order. Therefore, to date there has not
been a consistent, large order backlog. The Company's quarterly sales are
generally dependent upon new orders placed each quarter. Until a large order
backlog is established, the Company's quarterly sales will be subject to
material fluctuation.
MARGINS
The gross margin on product sales for the first three months of fiscal
1997 was 30% as compared with 30% for the year-earlier period.
The gross margin on optical memory card sales will fluctuate based upon
type and volume of cards sold. As card manufacturing for commercial orders
increases, 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
1997 and fiscal 1996, respectively, the Company allocated 43% and 39% of the
facility expenses to card manufacturing for commercial orders and marketing
samples. When the Company reaches a production level of approximately 1.5
million cards per year for commercial orders, the cost allocation percentages
should become relatively fixed, with essentially all of the card manufacturing
facility costs allocated to cost of product sales. The facility expenses will
then become a fixed cost component of product sales and should decrease on a
per-card basis as volumes increase.
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INCOME AND EXPENSES
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). For the fiscal 1997
first quarter, SG&A expenses were $634,000 as compared with $560,000 for the
fiscal 1996 first quarter. Most of this difference is attributable to increased
payroll expenses. SG&A spending is expected to continue at current levels for
the short term. The Company's plans include increased marketing and customer
support activity, which will be implemented when certain financial goals are
achieved.
RESEARCH AND ENGINEERING EXPENSES. Research and engineering expenses were
$236,000 for the fiscal 1997 first quarter as compared with $332,000 for the
fiscal 1996 first 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.
As optical card production increases and card manufacturing resources are
allocated to card production to a greater degree than at present, reported
research and engineering expenses are expected to decrease. The Company believes
that the reduction in card manufacturing facility expenses allocated to research
and engineering will not have any negative effect on its optical card business
since research and engineering projects are continuing. It also is possible that
future projects may require increased spending as the optical card industry
grows.
OTHER INCOME AND EXPENSE. Interest income for the fiscal 1997 first
quarter was $16,000 as compared with $6,000 for the fiscal 1996 first quarter.
The Company's interest expense on short-term loans was $2,000 for the first
quarter of fiscal 1997 as compared with $2,000 for last year's first quarter.
Other income for the first quarter of fiscal 1997 was $15,000. There
was no income of this type for the first quarter of last year.
LIQUIDITY
As of June 30, 1996, the Company had cash and cash equivalents of
$1,171,000 and a current ratio of 2.3 to 1. Cash used for operating activities
was $1,250,000 for the first quarter of fiscal 1997 as compared with $423,000
for last year's first quarter. The increase in cash used was due mainly to the
$785,000 decrease in accounts payable during the first quarter of fiscal 1997.
The Company had no long-term debt as of June 30, 1996.
The Company has not established a line of credit. Generally, the
Company's customers make advance payments, in whole or in part, at 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.
At the current level of product sales, the Company does not generate cash
or profits from operations. To fund its operations, the Company requires either
a substantial increase in order levels of optical cards, sales of additional
licenses, or additional financing. 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 1.5 million optical memory cards
along with sales of related hardware. If there is slow progress by customers in
the development and implementation of LaserCard-based programs, this could
extend the period during which the Company would need additional financing.
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The Company's plan to increase card production capacity calls for the
addition over several years of $4.3 million in capital equipment to the card
manufacturing facility and additional production employees when customer orders
are of sufficient magnitude to justify each incremental step. This investment in
capital equipment would be implemented incrementally, as follows: to increase
the current production equipment capabilities from 3 million to 6 million cards
annually, $500,000; for producing up to 10 million cards annually, $2.4 million
more; for producing up to 25 million cards annually, $1.4 million more. The
Company may make additional capital investments for cost savings and other
purposes.
At June 30, 1996, the Company had an accumulated deficit of $25,859,000.
The Company anticipates that the size of its losses will decrease due to
anticipated increases in sales of optical memory cards and related products,
except for possible quarterly fluctuations. However, if increased
commercialization is delayed and the Company does not realize such increased
sales, its losses will continue, except in the event of sporadic sales of
licenses which in the past have ranged in price from approximately $1 million
for a card distribution license to $10 million plus royalties for a card
manufacturing license.
During the first quarter of fiscal 1997, Company employees and
consultants purchased from the Company 68,950 shares of registered common stock,
at an average price of $6.79 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 $468,000. As of June 30, 1996, Company employees and
consultants held unexercised, vested options to purchase 826,383 shares of
common stock at exercise prices ranging from $4.25 to $9.06 per share, for an
average of $6.51 per share. These stock options, if exercised, would provide the
Company cash in the amount of $5,377,000.
The Company will continue its product marketing activities and its
licensing efforts and will consider opportunities for additional equity
financing in order to strengthen its cash position, to accelerate its marketing
and sales activities, and to add software and manufacturing capabilities to more
rapidly build sales of optical memory cards. The Company is not aware of any
materially adverse trends that would limit its ability to finance operations
through additional equity financings, if required. However, the Company cannot
guarantee that such equity financing would be available, if needed.
Stock Price Volatility
The Company's common stock price is subject to significant volatility due
to fluctuations in revenues, earnings, capitalization, liquidity, press
coverage, and financial market interest. Some of these factors may be
exacerbated because the Company operates solely in the optical memory card
products industry, which is in the early stage of commercialization.
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. Such factors are described above and in the
documents filed by the Company from time to time with the Securities and
Exchange Commission, including Form S-3 Registration Statement 33-88588.
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PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On September 28, 1995, the Company filed a complaint against LeRoy A.
Pesch, Genus Technology Corporation, LAPESCH & Company, and Genus Technology,
N.V. ("Genus"), in Santa Clara County California Superior Court, to collect an
$800,000 balance due under an upgrade license agreement entered into between the
Company and Genus. The other defendants are guarantors and/or co-obligors.
On November 29, 1995, the defendants answered by denying the allegations
of the complaint and asserting as a cross-complaint that defendant Genus was
wrongly denied the right to purchase 400,000 shares of the Company's common
stock at a purchase price of $5.75 per share. The Company believes this
cross-complaint to be meritless. Moreover, the Company will seek dismissal of
the cross-complaint on the basis that the defendants have failed to pay the
required administrative and hearing fees for arbitration.
On January 16, 1996, the parties entered into a stipulation to submit all
issues raised in this litigation to binding arbitration before the American
Arbitration Association.
On May 20, 1996, Dr. Pesch filed a Chapter 11 bankruptcy petition,
thereby effecting an automatic stay of the arbitration proceedings as to Dr.
Pesch (but not as to the other defendants). The Company has filed a proof of
claim in the bankruptcy court.
The Company intends to vigorously pursue the complaint and vigorously
defend the cross-complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter for which this report is filed.
ITEM 6(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
DREXLER TECHNOLOGY CORPORATION
SIGNATURES
Pursuant to the requirements of 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:
Signature Title Date
--------- ----- ----
/s/Jerome Drexler Chairman of the Board of Directors August 12, 1996
- ----------------------------- and President
Jerome Drexler (Principal Executive Officer)
/s/Steven G. Larson Vice President of Finance and Treasurer August 12, 1996
- ----------------------------- (Principal Financial Officer and
Steven G. Larson Principal Accounting Officer)
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