-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RH/tClrCx/iExyodfUa8LHevdSegscqTpnNmTjVj7Z15+GRHXaGbppLovdOBbTlP 7WoAZqwFkBNekvoyXnOBQw== 0000950148-01-501216.txt : 20010716 0000950148-01-501216.hdr.sgml : 20010716 ACCESSION NUMBER: 0000950148-01-501216 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENSE PAC MICROSYSTEMS INC CENTRAL INDEX KEY: 0000784770 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 330033759 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14843 FILM NUMBER: 1680805 BUSINESS ADDRESS: STREET 1: 7321 LINCOLN WAY CITY: GARDEN GROVE STATE: CA ZIP: 92641 BUSINESS PHONE: 7148980007 MAIL ADDRESS: STREET 1: 7321 LINCOLN WAY STREET 2: 7321 LINCOLN WAY CITY: GARDEN GROVE STATE: CA ZIP: 92641 10-Q 1 v74107e10-q.txt FORM 10-Q 1 ================================================================================ 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 May 31, 2001 [ ] 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 0-14843 DENSE-PAC MICROSYSTEMS, INC. (Exact Name of Small Business Issuer as Specified in Its Charter) CALIFORNIA 33-0033759 (State or other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 7321 LINCOLN WAY GARDEN GROVE, CALIFORNIA 92841 (Address of Principal Executive Offices) (714) 898-0007 (Issuer's Telephone Number, Including Area Code) Not Applicable (Former Name, Former Address and Former Fiscal Year if Changed Since Last Year) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of common stock, no par value, outstanding as of June 13, 2001 was 20,950,589. ================================================================================ TOTAL PAGES: 17 With Exhibits: 44 2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Dense-Pac Microsystems, Inc. Consolidated Balance Sheets
May 31, February 28, 2001 2001 ------------ ------------ (unaudited) ASSETS Current Assets: Cash and cash equivalents $ 3,929,577 $ 5,346,525 Accounts receivable, net 2,635,681 3,300,702 Inventories, net 1,444,472 1,444,063 Other current assets 276,159 281,504 ------------ ------------ Total current assets 8,285,889 10,372,794 Property, net 5,214,139 5,380,800 Goodwill, net 5,443,478 5,630,944 Other assets 375,535 378,565 ------------ ------------ $ 19,319,041 $ 21,763,103 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 459,200 $ 456,683 Accounts payable 771,649 1,153,548 Income taxes payable -- 1,545,649 Accrued compensation 431,635 551,623 Other accrued liabilities 538,422 684,540 Deferred revenue 112,561 363,000 ------------ ------------ Total current liabilities 2,313,467 4,755,043 Other long-term debt, net of current portion 658,049 786,828 ------------ ------------ Stockholders' equity Common stock 24,887,080 24,871,477 Accumulated deficit (8,539,555) (8,650,245) ------------ ------------ Total stockholders' equity 16,347,525 16,221,232 ------------ ------------ $ 19,319,041 $ 21,763,103 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 Dense-Pac Microsystems, Inc. Consolidated Statements of Operations (Unaudited)
For the quarter ended: May 31, May 31, 2001 2000 ------------ ------------ NET SALES $ 7,453,389 $ 10,980,203 COST OF SALES 5,239,066 7,874,169 ------------ ------------ GROSS PROFIT 2,214,323 3,106,034 COSTS AND EXPENSES: Selling, general and administrative 1,528,654 1,417,312 Amortization of goodwill 193,454 Research and development 417,852 422,149 ------------ ------------ Total costs and expenses 2,139,960 1,839,461 INCOME FROM OPERATIONS 74,363 1,266,573 ------------ ------------ OTHER INCOME: Interest income 67,379 42,368 Interest expense (31,052) (36,855) ------------ ------------ Total other income 36,327 5,513 INCOME BEFORE INCOME TAX PROVISION 110,690 1,272,086 INCOME TAX PROVISION -- 40,000 ------------ ------------ NET INCOME $ 110,690 $ 1,232,086 ============ ============ NET INCOME PER SHARE: Basic $ 0.01 $ 0.06 ============ ============ Diluted $ 0.01 $ 0.06 ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 20,943,000 19,359,000 ============ ============ Diluted 21,126,000 20,661,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 4 Dense-Pac Microsystems, Inc. Consolidated Statements of Cash Flows (Unaudited)
For the three months ended May 31, May 31, 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 110,690 $ 1,232,086 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 536,411 362,669 Amortization of unearned compensation -- 39,236 Changes in operating assets and liabilities: Accounts receivable 665,021 (90,498) Inventories (410) 140,228 Other current assets 8,375 (75,262) Accounts payable (381,898) (226,905) Income taxes payable (1,545,000) 4,000 Accrued compensation (119,988) (313,980) Other accrued liabilities (152,756) (94,940) Deferred revenue (250,439) 75,000 ----------- ----------- Net cash provided by (used in) operations: (1,129,994) 1,051,634 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (176,295) (113,516) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on other long-term debt (126,262) (175,239) Proceeds from issuance of common stock 15,603 92,745 ----------- ----------- Net cash used in financing activities (110,659) (82,494) ----------- ----------- NET INCREASE (DECREASE) IN CASH (1,416,948) 855,624 CASH, BEGINNING OF YEAR 5,346,525 2,949,562 ----------- ----------- CASH, END OF QUARTER $ 3,929,577 $ 3,805,186 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 31,362 $ 46,242 =========== =========== Income taxes paid $ 1,545,000 $ 48,000 =========== ===========
See accompanying notes to condensed financial statements. 5 DENSE-PAC MICROSYSTEMS, INC. CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - Dense-Pac Microsystems, Inc. including its wholly owned subsidiaries ("we," "us," Dense-Pac" or the "Company"), is a technology company that provides products and services for the Integration Age. Dense-Pac was founded in 1982 and has three operating units, the System Design Group, the Advanced Packaging Group, and the Added Value Manufacturing Group, each of which is certified ISO 9001 compliant. The Advanced Packaging Group provides patented component packaging technology to create high-density, board space-saving products. The System Design/Value Added Manufacturing Group provides contract manufacturing of prototype devices and medium volume production runs of circuit boards as well as outsourced design, product development, production and engineering for telecommunications, networking, Internet devices, and industrial markets, with expertise in providing networking and DSL product development solutions. DPAC's products are used in electronic circuits found in network servers, computer storage devices, medical instrumentation and communication devices. The DPAC Web site is at www.dense-pac.com. NOTE 2 - Basis of Presentation - The accompanying unaudited interim consolidated financial statements of Dense-Pac Microsystems, Inc. a California Corporation, as of May 31, 2001 and for the three months ended May 31, 2000 and 2001 reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. These financial statements have been prepared in accordance with generally accepted accounting principles of interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited financial statements included in the Company's Annual report on Form 10-KSB for the year ended February 28, 2001. Effective March 1, 2001, the Company no longer qualifies as a "small business issuer" under Rule 12b-2 and is required to file this report and hereafter under the general rules and regulations applicable to quarterly and annual reports of non-small business issuers. Operating results for the three months ended May 31, 2001 are not necessarily indicative of the results that may be expected for the full year ended February 28, 2002. NOTE 3 - Recent Accounting Pronouncements - In September 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133, as amended, is effective for all fiscal years beginning after June 15, 2000, and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative which would be required to be reported as assets or liabilities and carried at fair value. The Company adopted SFAS No. 133 effective March 1, 2001. The adoption of SFAS No. 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company. 5 6 NOTE 4 - Acquisition - The results of operations of Productivity Enhancements Products, the company acquired in fiscal 2001 is included in the consolidated financial statements from the date of acquisition, October 26, 2000. The first quarter of fiscal 2002 includes actual operating results of this acquisition. The following unaudited pro forma information assumes that the acquisition had occurred on the first day of the Company's fiscal year ended February 29, 2001. The pro forma information is based on historical information and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of the combined enterprise. Quarter ended May 31 2000 (unaudited) Net sales $ 12,707,000 Net income $ 872,000 Net income per share: Basic $ 0.05 Diluted $ 0.05
NOTE 5 - The following table summarizes stock option activity under Dense-Pac's 1985 and 1996 Stock Option Plans for the three months ended May 31, 2001:
Number of Price per Number of Shares Share Options Exercisable ---------- ------------- ------------------- Balance, February 28, 2001 2,187,300 $ .94 - $7.56 ---------- ------------- Granted 346,000 $5.50 - $1.56 Exercised (14,500) $1.00 - $1.72 Canceled (44,875) $1.00 - $6.00 ---------- ------------- Balance, May 31, 2001 2,473,925 $ .94 - $7.56 803,926 ========== ============= ==================
NOTE 6 - The Company computes net income per share in accordance with SFAS No. 128, earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earning per share reflects the potential dilution of securities by including other common stock equivalents, including stock options, in the weighted average number of shares outstanding, if dilutive. The table below sets forth the reconciliation of the denominator of the earnings per share calculations:
Quarter Ended May 31, 2001 2000 ---------- ---------- Shares used in computing basic net income per share 20,943,000 19,382,000 Dilutive effect of stock options 183,000 1,279,000 ---------- ---------- Shares used in computing diluted net 21,126,000 20,661,000 income per share
6 7 NOTE 7- 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 three operating segments; the design and automated manufacturing of proprietary and patented three-dimensional, high-density memory products ("Advanced Component Packaging"), system engineering design services, and value-added manufacturing services. System engineering and value-added manufacturing services do not qualify as reportable segments (neither segment has net sales greater than 10% of total company net sales) and separate information has not been provided. The Company does not separately allocate operating expenses to these segments, nor does it allocate specific assets to the segments. Therefore, segment information reported includes only net sales, cost of sales, and gross profit. Operating segment data for the first quarter ended May 31, 2001 and 2000 were as follows: QUARTER ENDED MAY 31, 2001
ADVANCED COMPONENT PACKAGING OTHER ELIMINATIONS TOTAL -------------- ------------- ------------- -------------- Net sales $6,468,000 $1,024,000 $ (39,000) $7,453,000 Cost of sales 4,556,000 722,000 $ (39,000) 5,239,000 Gross profit 1,912,000 302,000 2,214,000
QUARTER ENDED MAY 31, 2000
ADVANCED COMPONENT PACKAGING OTHER ELIMINATIONS TOTAL -------------- ------------- ------------- -------------- Net sales $10,723,000 $ 257,000 $10,980,000 Cost of sales 7,713,000 161,000 7,874,000 Gross profit 3,010,000 96,000 3,106,000
License revenues for the quarter ended May 31, 2001 and 2000 were $146,000 and $414,000, respectively. The Company had export sales (primarily to Western European customers) accounting for approximately 4% and 5% of net sales for the quarters ended May 31, 2001 and 2000, respectively. FORWARD-LOOKING STATEMENTS Included in the Notes to Consolidated Financial Statements, this Item 2. Management's Discussion and Analysis or Plan of Operation and elsewhere in this Report are several statements that do not present historical information. All of these statements are "forward-looking." Some forward-looking statements also can be identified by words such as "the Company believes." Forward-looking statements reflect the Company's current expectations. 7 8 Although the Company believes that its expectations are based on reasonable assumptions, there can no assurance that the Company's financial goals or expectations will be realized. Numerous factors may affect the Company's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company. Some of these factors include potential risks associated with uncertain demand for and acceptance of new and existing products, changes in customer preferences and buying patterns, rapid technological advances and product obsolescence, uncertain availability of semiconductor devices at reasonable prices, competitive factors, costs and risks concerning litigation, the uncertain ability to protect proprietary intellectual property, limited experience in acquisitions and the uncertain availability of capital to finance growth. These and other factors which could cause actual results to differ materially from those in the forward looking statements are discussed in greater detail in the Company's Annual Report on Form 10-KSB for the year ended February 29, 2001 under the heading "Cautionary Statements". Investors are cautioned against ascribing undue weight to any forward-looking statements herein ITEM 2 - Management's Discussion and Analysis or Plan of Operation RESULTS OF OPERATIONS Net sales for the quarter ended May 31, 2001 decreased $3,527,000 or 32% compared to the quarter ended May 31, 2000. The decrease in net sales for the quarter ended May 31, 2001, when compared to the same quarter in the prior year was due primarily to a decrease in sales of high-density commercial products. The overall unit decrease in commercial stacks shipped during the quarter was 42% from the same quarter in the prior year. Additionally, the product mix within the commercial business changed as to the relationship between consigned material and material purchased on behalf of the customer. For the commercial high density product, the revenue of products containing purchased memory components decreased to 64% of total revenue as compare to 80% from the first quarter in the prior fiscal year. In cases where the memory components are included in sales of products, the Company will purchase material for the commercial order and will determine the final purchase price prior to the order, in order to avoid any price volatility in the components. See "Forward Looking Statements." Gross profit as a percentage of sales was 30% for the three month period ended May 31, 2001, as compared to 28% for the three month period ended May 31, 2000. The increase in the gross margin for the first quarter ended May 31, 2001 can be attributed to approximately $300,000 in revenue from non-refundable deposits on expired contracts and the mix of products that the company was selling during the comparable quarter. Specifically, the Company's production during the first quarter ending May 31, 2001 had a higher percentage of consigned material, therefore decreasing our cost of goods sold and increasing the gross margin for the quarter. This increase in gross margin percentage occurred, even with a decrease in the number of commercial memory stacks that were produced by the company. The Company shipped commercial orders (included in the Advanced Component Packaging segment) for approximately $2,950,000 during the quarter ended May 31, 2001, where the margin was lower due to the fact that the Company procured the memory for the order as compared to $5,700,000 in the previous years first quarter. The balance of the commercial orders in each such quarter had consigned memory associated with the sale. During the first quarter of fiscal year 2002, the Company continued its offering of commercial products and focused on those products that relate to the Company's proprietary packaging technology. In this manner, the Company believes that the Company has been able to define a niche for our products that use a unique proprietary stacking technology and to market 8 9 these products to a defined market. Subject to the future impact of our product mix, the Company believes that margins could improve due to increased production if sales increase. See "Forward-Looking Statements." Selling, general and administrative expenses increased in the first quarter of fiscal 2002 by $146,000 or 10% from the first quarter of the prior fiscal year. The increase in general and administrative expenses can be attributed to an increase in sales and marketing expense as new personnel were added in this area. Additionally, the Company increased the occupied square footage in its facility resulting in an increase in rent expense. Amortization of goodwill was $193,000 for the quarter ended May 31, 2001 as compared to no expense in the prior year's first quarter. The amortization is related to the acquisition of Productivity Enhancement Products, Inc. completed in the third quarter of fiscal year 2001. The current net balance of the goodwill at May 31, 2001 is $5,443,000 and is being amortized over a seven year period which will result in approximately $200,000 of amortization expense per quarter for the foreseeable future. For the quarter ended May 31, 2001 research and development costs were approximately the same as the same quarter in the prior fiscal year. The Company is continuing to invest in research and development for new products in the advanced technology marketplace. See "Forward Looking Statements". For the three months ended May 31, 2001, other income increased $31,000 from the same period last year. This increase is due to additional interest income associated with the increase in average cash reserve balances and a decrease in interest expense is associated with debt repayments. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operations was approximately $1,130,000 during the first quarter of fiscal year 2002 which principally related to the payment of $1.5 million of tax liability associated with the purchase of Productivity Enhancement Products, Inc. Excluding this cash payment, cash generated from operating activities was approximately $400,000 consisting principally of net income of $111,000, depreciation and amortization of $536,000, and a decrease in accounts payable of $665,000. This was offset by decreases in accounts payable and accrued liabilities of approximately $700,000, and a decrease in deferred revenue of $250,000. The Company purchased approximately $176,000 in new equipment during the first quarter of fiscal year 2002. The Company is expecting that it may incur additional lease-related debt with the purchase of additional equipment during the next quarter. The Company expects that it will not purchase more than one million dollars in additional equipment for the remainder of the fiscal year. See "Forward-Looking Statements". The Company believes that the cash from operations will be sufficient to meet the Company's operating cash needs for the next twelve months. Additionally, the Company has received a credit facility for three million dollars from a financial institution. The Company anticipates using the credit facility if the need should arise for additional working capital to support operations. See "Forward Looking Statements." 9 10 CAUTIONARY STATEMENTS Statements in this 10-Q 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. 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. 10 11 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 quarter ended May 31, 2001, sales to two major customers accounted for 34% and 17% of net sales. Accounts receivable from these two customers accounted for 32% of total net accounts receivable at May 31, 2001. During the quarter ended May 31, 2000, sales to two major customers accounted for 55% and 16% of net sales. Accounts receivable from these two customers accounted for 52% of total net accounts receivable at May 31, 2000. A decision by a significant customer to substantially decrease or delay purchases from the Company or the Company's inability to collect receivables from these customers could have a material adverse effect on the Company's 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. Intellectual Property 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 competitive products, including Irvine Sensors, Staktek, Kentron, Legacy and White Electronics. Some of such companies have greater financial, manufacturing and marketing capabilities than the Company. The Company could also experience competition from established and emerging computer memory companies. There can be no assurance that the Company's products will be 11 12 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. Variability of Gross Margin Any change in the gross margins can typically be attributed to the type of products that the Company was selling during the year as well as the royalty income generated during the periods. As the Company markets its products both to military and aerospace, and commercial customers, the product mix that each category of the customers orders may be different and result in changes in the gross margin. Due to the various configuration and applications of the Company's product, prices range from less than $5 for commercial modules to over five thousand dollars for high-end military specification modules. The Company expects that its net sales and gross margin may vary significantly based on these and other factors, including the mix of products sold and the manufacturing services provided, the channels through which the Company's products are sold, changes in product selling prices and component costs, the level of manufacturing efficiencies achieved and pricing by competitors. The selling prices of the Company's products may decline depending upon the price changes of DRAM, SRAM and Flash semiconductors, which would have a material adverse effect on the Company's net sales and could have a material adverse effect on the Company's business, financial condition and results of operation. Accordingly, the Company's ability to maintain or increase net sales will be highly dependent upon its ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in selling prices. Declining product selling prices may also materially and adversely affect the Company's gross margin unless the Company is able to reduce its cost per unit to offset declines in product selling prices. There can be no assurance that the Company will be able to increase unit sales volumes, introduce and sell new products or reduce its cost per unit. The Company also expects that its business may experience significant seasonality to the extent it sells a material portion of its products in Europe and to the extent its exposure to the personal computer market remains significant. Decline of Demand for Product Due to Downturn of Related Industries The Company may experience substantial period-to-period fluctuations in operating results due to factors affecting the semiconductor, computer, telecommunications and networking industries. From time to time, each of these industries has experienced downturns, often in connection with, or in anticipation of, declines in general economic conditions. A decline or significant shortfall in growth in any one of these industries could have a material adverse impact on the demand for the Company's products and therefore a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company's net sales and results of operations will not be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in the semiconductor, computer, telecommunications, networking or other industries utilizing the Company's products. Fluctuations in Operating Results The Company's results of operations and gross margin have been subject to fluctuations from period to period. The primary factors that have affected and may in the future affect the Company's results of operations include adverse changes in the mix of products sold, the inability 12 13 to procure required components, and the partial or complete loss of a principal customer or the reduction in orders from a customer due to, among other things, excess product inventory accumulation by such customer. Other factors that have affected and may in the future affect the Company's results of operations include fluctuating market demand for and declines in the selling prices of the Company's products, decreases or increases in the costs of the components of the Company's products, market acceptance of new products and enhanced versions of the Company's products, the Company's competitors selling products that compete with the Company's products at lower prices or on better terms than the Company's products, delays in the introduction of new products and enhancements to existing products, manufacturing inefficiencies associated with the start up of new product introductions, and the Company's semiconductor customers manufacturing memory modules, internally or with other third parties, outside of the United States due to concerns about United States antidumping investigations and laws. The Company's operating results may also be affected by the timing of new product announcements and releases by the Company or its competitors, the timing of significant orders, the ability to produce products in volume, delays, cancellations or rescheduling of orders due to customer financial difficulties or other events, inventory obsolescence, including the reduction in value of the Company's inventories due to price declines, unexpected product returns, the timing of expenditures in anticipation of increased sales, cyclicality in the Company's targeted markets, and expenses associated with acquisitions. In particular, declines in DRAM, SRAM and Flash semiconductor prices could affect the valuation of the Company's inventory which could result in adverse changes in the Company's business, financial condition and results of operations. Sales of the Company's individual products and product lines toward the end of a product's life cycle are typically characterized by steep declines in sales, pricing and gross margin, the precise timing of which may be difficult to predict. The Company has experienced and could continue to experience unexpected reductions in sales of products as customers anticipate new product purchases. In addition, to the extent that the Company manufactures products in anticipation of future demand that does not materialize, or in the event a customer cancels outstanding orders during a period of either declining product selling prices or decreasing demand, the Company could experience an unanticipated decrease in sales of products. These factors could give rise to charges for obsolete or excess inventory, returns of products by distributors, or substantial price protection charges or discounts. In the past, the Company has had to write-down and write-off excess or obsolete inventory. To the extent that the Company is unsuccessful in managing product transitions, its business, financial condition and results of operations could be materially and adversely affected. The need for continued significant expenditures for capital equipment purchases, research and development and ongoing customer service and support, among other factors, will make it difficult for the Company to reduce its operating expenses in any particular period if the Company's expectations for net sales for that period are not met. Accordingly, there can be no assurance that the Company will be able to continue to be profitable. The Company believes that period-to-period comparisons of the Company's financial results are not necessarily meaningful and should not be relied upon as indications of future performance. Due to the foregoing factors, it is likely that in some future period the Company's operating results will be below the expectations of public market analysts or investors. In such event, the market price of the Company's securities would be materially and adversely affected. International Sales For quarter ended May 31, 2001, approximately 2% of the Company's sales were export sales, primarily to Western Europe as compared to 6% in for the previous quarter ended May 31, 2000. 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 13 14 business of the Company. International sales may be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, timing and availability of export licenses, political and economic instability, difficulties in accounts receivable collections, natural disasters, difficulties in staffing and managing foreign subsidiary and branch operations, difficulties in managing distributors, difficulties in obtaining governmental approvals for telecommunications and other products, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties, potentially adverse tax consequences and uncertainties relative to regional, political and economic circumstances. Moreover and as a result of currency changes and other factors, certain of the Company's competitors may have the ability to manufacture competitive products in Asia at lower costs than the Company. The Company is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products will be implemented by the United States or other countries. Because sales of the Company's products have been denominated to date in United States dollars, increases in the value of the United States dollar could increase the price of the Company's products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Company's results of operations. Some of the Company's customer's purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect damages, if awarded. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. Substantial Influence of Existing Shareholders Euroventures I and Euroventures beneficially own approximately 18% of our common stock. As a result, they have the ability to exert significant or controlling influence on all matters requiring approval by our shareholders, including the election and removal of directors, approval of significant corporate transactions and the decision of whether a change in control will occur. Limited Experience in Acquisition While we have no agreements or negotiations currently underway, we intend to pursue selective acquisitions to complement our internal growth. If we make any future acquisitions, we could issue stock that would dilute our shareholders' percentage ownership, incur substantial debt or assume contingent liabilities. We have limited experience in acquiring other businesses, product lines and technologies. In addition, the attention of our small management team may be diverted from our core business if we undertake an acquisition. Potential acquisitions also involve numerous risks, including, among others: - Problems assimilating the purchased operations, technologies or products; - Costs associated with the acquisition; - Adverse effects on existing business relationships with suppliers and customers; - Risks associated with entering markets in which we have no or limited prior experience; - Potential loss of key employees of purchased organizations; and 14 15 - Potential litigation arising from the acquired company's operations before the acquisition. Our inability to overcome problems encountered in connection with such acquisitions could divert the attention of management, utilize scarce corporate resources and harm our business. In addition, we are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. Cyclical Nature of Semiconductor Industry The semiconductor industry, including the memory markets in which we compete, is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor companies' and their customers' products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could have a material adverse effect on our business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased demand for, and possible shortages of, components we use to manufacture and assemble our ICs. Such shortages could have a material adverse effect on our business and operating results. Product Returns And Order Cancellation To the extent we manufacture products in anticipation of future demand that does not materialize, or in the event a customer cancels outstanding orders, we could experience an unanticipated increase in our inventory. A majority of our sales through aftermarket channels include limited rights to return unsold inventory. In addition, while we may not be contractually obligated to accept returned products, we may determine that it is in our best interest to accept returns in order to maintain good relations with our customers. Product returns would increase our inventory and reduce our revenues. We have had to write-down inventory in the past for reasons such as obsolescence, excess quantities and declines in market value below our costs. We have no long-term volume commitments from our customers except those subject to cancellation by the customer. Sales of our products are made through individual purchase orders and, in certain cases, are made under master agreements governing the terms and conditions of the relationships. Customers may change, cancel or delay orders with limited or no penalties. We have experienced cancellations of orders and fluctuations in order levels from period-to-period and we expect to continue to experience similar cancellations and fluctuations in the future which could result in fluctuations in our revenues. Additional Capital Funding to Impair Value of Investment If we expand more rapidly than currently anticipated or if our working capital needs exceed our current expectations, we may need to raise additional capital through public or private equity offerings or debt financings. Our future capital requirements depend on many factors including our research, development, sales and marketing activities. We do not know whether additional financing will be available when needed, or will be available on terms favorable to us. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. To the extent we raise additional capital by issuing equity securities, our shareholders may experience substantial dilution and the new equity securities may have greater rights, preferences or privileges than our existing common stock. 15 16 Geographic Concentration of Operation All of our manufacturing operations are located in our facility in garden Grove, California. Due to this geographic concentration, a disruption of our manufacturing operations, resulting from sustained process abnormalities, human error, government intervention or natural disasters such as earthquakes, fires or floods could cause us to cease or limit our manufacturing operations and consequently harm our business, financial condition and results of operations. Compliance with Environmental Laws and Regulations We are subject to a variety of environmental laws and regulations governing, among other things, air emissions, waste water discharge, waste storage, treatment and disposal, and remediation of releases of hazardous materials. Our failure to comply with present and future requirements could harm our ability to continue manufacturing our products. Such requirements could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The imposition of additional or more stringent environmental requirements, the results of future testing at our facilities, or a determination that we are potentially responsible for remediation at other sites where problems are not presently known to us, could result in expenses in excess of amounts currently estimated to be required for such matters. Stock Price Volatility The stock market in general, and the market for shares of technology companies in particular, has experienced extreme price fluctuations. These price fluctuations are often unrelated to the operating performance of the affected companies. Many technology companies, including the Company, have experienced dramatic volatility in the market prices of their common stock. If our future operating results are below the expectations of stock market analysts and investors, our stock price may decline. We cannot be certain that the market price of our common stock will remain stable in the future. Our stock price may undergo fluctuations that are material, adverse and unrelated to our performance PART II - OTHER INFORMATION Item 1 - Legal Proceedings The information is incorporated from Form 10-KSB filing from February 28, 2001. There has been no significant changes in the status of these legal proceedings. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits The exhibits listed below are hereby filed with the Securities and Exchange Commission as part of the Quarterly Report. Exhibit 10.11A - Executive Employment Agreements made as of June 7, 2001 between Dense-Pac Microsystems, Inc., a California Corporation and Ted Bruce, CEO, John Sprint, COO and William Stowell, CFO, respectively*. * Management compensatory plan or arrangement 16 17 (b) Reports on Form 8-K - No reports on Form 8-K were filed during the first quarter of fiscal 2002 covered by this Form 10-Q. 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. DENSE-PAC MICROSYSTEMS, INC. (Registrant) July 13, 2001 /s/ Ted Bruce - ----------------------------- -------------------------------------------- Date Ted Bruce, Chief Executive Officer July 13, 2001 /s/ William M. Stowell - ----------------------------- -------------------------------------------- Date William M. Stowell, Chief Financial Officer 17 EX-10.11.(A) 2 v74107ex10-11_a.txt EXHIBIT 10.11A 1 EXHIBIT A EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made as of June 7, 2001 (the "Effective Date"), by and between Dense-Pac Microsystems, Inc., a California corporation (the "Company") and Edward G. Bruce (the "Executive"). RECITALS WHEREAS, Executive has provided services to the Company since January 25, 1999; WHEREAS, the services and ability of Executive have constituted a major factor in the growth and development of the Company; WHEREAS, the Company wishes to continue to employ Executive, to make secure for itself the experience, abilities and services of Executive, and to prevent the loss of such experience, services and abilities; and WHEREAS, Executive wishes to accept such continued employment on the terms and conditions hereafter set forth; NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto, each intending to be legally bound, do hereby agree as follows: 1. Employment. The Company shall employ Executive, and Executive shall perform services for and continue in the employment of the Company, for an initial period of two (2) years commencing on the Effective Date and ending two (2) years thereafter, whereupon Executive's employment hereunder shall automatically be extended from year to year thereafter, until either the Company or Executive gives the other party at least one hundred and twenty (120) days written notice prior to the then-applicable "Expiration Date" (as hereinafter defined) of its or his desire to terminate this Agreement, unless such employment shall have been sooner terminated as hereinafter set forth. For purposes of this Agreement (i) the term "Employment Period" shall mean the initial two (2) year period and all extensions thereof, if any, as aforesaid, and (ii) the term "Expiration Date" shall mean the date two (2) years from the Effective Date or the date this Agreement is last in effect in the event that the Employment Period is extended on and after the date two (2) years from the Effective Date. 2. Position and Duties. Executive shall serve the Company at its Garden Grove location, or at any other location within thirty-five miles of the Garden Grove location, in the capacity of President and Chief Executive Officer of the Company, or in such other position consistent with Executive's previously (during the two years 18 2 preceding the date of this Agreement) rendered duties and obligations as the Board of Directors of the Company ("Board") may designate from time to time, and shall be accountable to, and shall have such other executive powers, duties and responsibilities, consistent with such capacity. Executive shall perform and discharge, faithfully, diligently and to the best of his ability, such duties and responsibilities. Executive shall devote all of his working time and efforts to the business and affairs of the Company. 3. Compensation. (a) Salary. During the Employment Period, Executive shall receive a salary (the "Salary") payable at the rate of $200,000 per annum. The Board may increase such Salary from time to time without the Executive's consent, which increase shall constitute an amendment to this Agreement. In no event shall the Executive's Salary be adjusted or decreased below the Executive's then current Salary without the Executive's written consent. The Salary shall be payable biweekly or in accordance with the Company's current payroll practices, less all required deductions. The Salary shall be pro-rated for any period of service less than a full year. (b) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by him on behalf of the Company. (c) Fringe Benefits. During the Employment Period, Executive shall be entitled to participate in or receive benefits under any life or disability insurance, health, pension, retirement and accident plans or arrangements made generally available by the Company to its executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. In accordance with the Company policy, Executive shall also be entitled to no less then 25 days of personal time off (PTO) with pay, in any fiscal year during the Employment Period as well as all paid holidays given by the Company to its executives. (d) Options. Through the Employment Period Executive shall be entitled to participate in any applicable option grant of the Company. Upon a Change of Control (as defined below), 100 % of all unvested options issued under any of the Company's Stock Plans to Executive shall immediately vest, and all such vested options shall immediately be exercisable. The amount of vesting and acceleration of the option's exercisability in the preceding sentence is separate from, and to the extent applicable in addition to, any vesting or acceleration that may apply to options granted Executive under any of the Company's Stock Plans. Notwithstanding anything to the contrary in any Stock Option Plan of the Company concerning the exercise of options by a person who is no longer an employee of the Company, the Company agrees that following any resignation or termination as a result of a Change of Control, for purposes of exercising options, Executive will continue to be treated as an "Employee" as defined under each of the applicable Stock Plans through which Executive has been granted options with respect to the time within which Executive's options must be exercised. 19 3 (e) Automobile. Without limiting the generality of the foregoing during the Employment Period Executive shall be furnished with an automobile allowance of $500 per month. 4. Termination and Compensation Thereon. (a) Termination Date. The term "Termination Date" shall mean the earlier of (i) the Expiration Date; or (ii) if Executive's employment is terminated (x) by his death, the date of his death; or (y) for any other reason, the date on which such termination is to be effective pursuant to the notice of termination given by the party terminating the employment relationship. (b) Death. Executive's employment hereunder shall terminate upon his death. In such event, the Company shall pay to such person as Executive shall have designated in a notice filed with the Company, or, if no such person shall have been designated, to his estate, a lump sum amount equal to the Salary that would have been due to Executive had this Agreement been in effect from the date of his death until the Expiration Date. (c) Incapacity. If in the reasonable judgment of the Board, as a result of Executive's incapacity due to physical or mental illness or otherwise, Executive shall for at least six consecutive months during the term of this Agreement been unable to perform his duties under this Agreement on a full-time basis, the Company may terminate Executive's employment hereunder by notice to Executive. In such event, the Company shall continue to pay Executive his Salary (at the rate in effect as of the Termination Date) and extend to him the applicable fringe benefits referred to in Section 3(c), 3(d) and 3(e) hereof, until the Expiration Date. Any dispute between the Board and Executive with respect to the Executive's incapacity shall be settled by reference to a competent medical authority mutually agreed to by the Board and Executive, whose decision shall be binding on all parties. 20 4 (d) Change of Control. For purposes of this Agreement "Change of Control" is defined as any of the following: (i) the sale on a single or series of transactions of all or substantially all the assets of the Company, or (ii) a transaction or series of transactions which results in any person or entity or a group (as defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) becoming the beneficial owner (within the meaning of Rule 13d-3 under the Act), of shares of common stock of the Company (or in the case of any merger, consolidation or reorganization, of the surviving or new entity) constituting in excess of 40% of the voting rights of all outstanding shares of common stock of the Company (or in the case of any merger, consolidation or reorganization, of the surviving or new entity), including for purposes of this calculation, common stock, as to which there is then deemed to be a beneficial owner (within the meaning of said Rule 13d-3), or (iii) a change in the composition of the board of directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are "Incumbent Directors" (for purposes of a Change of Control, Incumbent Directors shall mean directors of the Company who (x) are directors of the Company as of the Effective Date of this Agreement, or (y) are elected, or nominated for election, to the board of directors with the affirmative vote of at least a majority of the Incumbent Directors at the time of such election or nomination, but shall not include an individual whose director election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company's board of directors)). If a Change of Control occurs and this Agreement or Executive's employment is terminated during the period six months prior to such Change of Control or the period eighteen months following said Change of Control, by either the Company, or its successors or assigns, or by the executive, other than for Cause pursuant to Section 4(e), then the Company, including its successors or assigns, shall: (A) Within thirty (30) days after the Termination Date, pay to Executive (or in the event of Executive's subsequent death, such person as Executive shall have designated in a notice filed with the Company, or, if no such person shall have been designated, to his estate) a lump sum amount equal to the Executive's unpaid Salary from the Termination Date through the Expiration Date, which amount shall be paid in addition to the Salary due and payable under Section 4(g) below; (B) Until the Expiration Date, continue to extend to the Executive all of the expenses, fringe benefits and options set forth in Section 3(b), 3(c), 3(d) and 3(e) above. The obligations of the Company, its successors, or assigns pursuant to this Section 4(d) shall survive any termination of this Agreement or Executive's employment (other than for Cause pursuant to Section 4(e)), or any resignation of such employment by Executive. (e) Termination by the Company. The Company may terminate Executive's employment hereunder for "Cause." For purposes of this Agreement, Cause shall mean (i) Executive's willful failure to materially perform and discharge his duties and responsibilities hereunder, (ii) willful breach of any fiduciary duties Executive may have with the Company or any subsidiary or affiliate thereof, or (iii) a felony conviction. 21 5 If the Company pursuant to this Section 4(e) terminates Executive's employment for Cause, then the Company shall have no further obligations to Executive under this Agreement after the Termination Date, except for unpaid Salary and benefits to Executive accrued through the Termination Date. If the Company terminates the Executive's employment prior to the Expiration Date, unless for Cause, then the Company shall pay to the Executive the Executive's unpaid Salary from the Termination Date through the Expiration Date, payable biweekly or in accordance with the Company's current payroll practices, less all required deductions, as well as continue from the Termination Date through the Expiration Date all of the benefits to Executive under Section 3(c), 3(d) and 3(e). (f) Not applicable 22 6 (g) Severance Pay. Except for termination of Executive's Employment by voluntary resignation (other then a change of control as defined in section 4(d)) or for Cause pursuant to Section 4(e), and subject to each of Sections 5(d) and 5(e), in the event the Company terminates the employment of Executive during the Employment Period, or upon the expiration of the Employment Period if the company provides notice of non-renewal, Executive shall be entitled to the additional consideration of, and the Company shall pay Executive, his then current Salary and continue his benefits under Section 3(c), 3(d) and 3(e) as in effect on the Termination Date for a period of twenty four (24) months following the Expiration Date, commencing on the Expiration Date. In addition (subject to forfeiture under Sections 5(d) and 5(e)), 100 % of all unvested options issued under any of the Company's Stock Plans to Executive shall vest as of the termination date, and all such vested options shall immediately be exercisable. The amount of vesting and acceleration of the option's exercisability in the preceding sentence is separate from, and to the extent applicable in addition to, any vesting or acceleration that may apply to options granted Executive under any of the Company's Stock Plans. Notwithstanding anything to the contrary in any Stock Option Plan of the Company concerning the exercise of options by a person who is no longer an employee of the Company, the Company agrees that for purposes of exercising options, Executive will continue to be treated as an "Employee" as defined under each of the applicable Stock Plans through which Executive has been granted options with respect to the time within which Executive's options must be exercised. (h) Out-Placement Assistance. Except for termination of Executive Employment for Cause pursuant to Section 4(e), or the voluntary termination by Executive of his Employment six months before or eighteen months following a Change of Control, upon the termination of Executive's employment, the Company will provide, at its sole expense, executive-level out-placement services to Executive at the out-placement provider of Executive's reasonable choice for a period not to exceed twenty-four (24) months following Executive's Termination Date. 5. Proprietary Rights and Non-Competition. Executive acknowledges that the Company is engaged in a continuous program of research, development and production in connection with its business, present and future and hereby covenants as follows: (a) Confidentiality. Executive will maintain in confidence and will not disclose or use, either during or after the Employment Term, any proprietary or confidential information or know-how belonging to the Company ("Proprietary Information" hereinafter defined), whether or not in written form, except to the extent required to perform duties on behalf of the Company. For purposes of this Agreement, "Proprietary Information" shall mean any information, not generally known to the relevant trade or industry, which was obtained from the Company, or which was learned, discovered, developed, conceived, originated or prepared by Executive in connection with this Agreement. Such Proprietary Information includes, without limitation, software, technical and business information relating to the Company's inventions or products, research and development, production processes, manufacturing and engineering processes, machines and equipment, finances, customers, marketing and production and 23 7 future business plans, information belonging to customers or suppliers of the Company disclosed incidental to Executive's performance under this Agreement, and any other information which is identified as confidential by the Company, but only so long as the same is not generally known in the relevant trade or industry. (b) Inventions. (i) Definition of Inventions. For purposes of this Agreement, "Inventions" shall mean any new or useful art, discovery, contribution, finding or improvement, whether or not patentable, and all related know-how. Inventions shall include, without limitation, all designs, discoveries, formulae, processes, manufacturing techniques, semiconductor designs, computer software, inventions, improvements and ideas. (ii) Disclosure and Assignment of Inventions. Executive will promptly disclose and describe, in confidence, to the Company all Inventions which he may solely or jointly conceive, develop, or reduce to practice during the Employment Term (A) which relate at the time of conception, development, or reduction to practice of the Invention to the Company's business or actual or demonstrably anticipated research or development, or (B) which were developed, in whole or in part, in the Company's time or with the use of any of the Company's equipment, supplies, facilities or trade secret information, or (C) which resulted from any work performed by Executive for the Company (the "Company's Inventions"). Executive hereby assigns all of his right, title and interest world-wide in the Company's Inventions and in all intellectual property rights based upon the Company's Inventions; provided, however, that Executive does not assign or agree to assign any Inventions, whether or not relating in any way to the Company's business or demonstrably anticipated research and development, which were made by him prior to the date of this Agreement, or which were developed by him prior to the date of this Agreement, or which were developed by him independently during the term of this Agreement and not under the conditions stated in Section 5 (b)(ii) above. Any provision in this Agreement requiring Executive to assign his rights in all Inventions to the Company shall not apply to an invention that qualifies fully under the provisions of California Labor Code section 2870. Executive shall bear the full burden of proving that any invention claimed by Executive as his own qualifies fully under California Labor Code section 2870. (c) Documents and Materials. Upon termination of this Agreement or any other time upon the Company's request, Executive will promptly deliver to the Company without retaining any copies, all documents and other materials furnished to him by the Company, prepared by him for the Company, or otherwise relating to the Company's business, including, without limitation, all written and tangible material in his possession incorporating any Proprietary Information. (d) Competitive Employment and Loss of Severance Benefits. During the Employment Term, or from the Effective Date through the Termination Date, as applicable, and for a period of twenty-four (24) months thereafter (collectively, the "Extended Term"), Executive will not engage in any employment, consulting, or other 24 8 activity in any business competitive with either the Company or its subsidiaries without the Company's written consent, which consent shall not be unreasonably withheld. Should Executive compete, or make substantive preparations to compete, with the Company or its subsidiaries during the Extended Term, then, in addition to any other rights that the Company may have at law or in equity, the Company's obligations to Executive under Section 4(g) shall be deemed excused, waived, and of no further force or legal affect. Should Executive engage in activity in violation of this Section 5(d), then Executive agrees that the value of any and all benefits provided to Executive pursuant to Section 4(g) shall be returned, repaid, or forfeited, as applicable, by Executive to the Company. (e) Non-solicitation and Loss of Severance Rights. During the Extended Term, Executive will not solicit or encourage, or cause others to solicit or encourage, any employees of the Company to terminate their employment with the Company. Should Executive solicit, or assist others in soliciting, employees of the Company to terminate employment with the Company during the Extended Term, then, in addition to any other rights that the Company may have at law or in equity, the Company's obligations to Executive under Section 4(g) shall be deemed excused, waived, and of no further force or legal affect. Should Executive engage in activity in violation of this Section 5(e), then Executive agrees that the value of any and all benefits provided to Executive pursuant to Section 4(g) shall be returned or repaid, as applicable, by Executive to the Company. (f) Acts to Secure Proprietary Rights. (i) Further Acts. Executive agrees to perform, during and after the Employment Term, all acts deemed necessary or desirable by the Company to assist, at the Company's expense, in perfecting and enforcing the full benefits, enjoyment, rights and title throughout the world in the Company's Inventions. Such acts may include, without limitation, execution of documents and assistance or cooperation in the registration and enforcement of applicable patents and copyrights or other legal proceedings. Company agrees that with respect to any post employment consultant assistance requested from Executive, beyond the aggregate of two hours, that Company shall reasonably compensate Executive for the reasonable value of his services and to reimburse him for his expenses incurred in connection with such services. (ii) Appointment of Attorney-In-Fact. In the event that the Company is unable, for any reason whatsoever, to secure Executive's signature to any lawful and necessary document required to apply for or execute any patent, copyright or other applications with respect to any of the Company's Inventions (including improvements, renewals, extensions, continuations, divisions or continuations in part thereof), Executive hereby irrevocably appoints the Company and its duly authorized officers and agents as his agents and Attorneys-in-fact to execute and file any such application and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights or other rights thereon with the same legal force and effect as if executed by him, intending hereby to create a so-called "durable power" which will survive any subsequent disability. 25 9 (g) No Conflicting Obligations. Executive's performance of this Agreement does not breach and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him. (h) Corporate Opportunities. Executive agrees that he will first present to the Board, for its acceptance or rejection on behalf of the Company, any opportunity to create or invest in any company which is or will be involved in high density packaging, system design, or manufacturing of rapid innovative solutions, which comes to his attention and in which he, or any affiliate, might desire to participate. If the Board rejects the same or fails to act thereon in a reasonable time, Executive shall be free to invest in, participate or present such opportunity to any other person or entity. (i) Specific Performance. Executive acknowledges that a breach of any of the promises or agreements contained herein could result in irreparable and continuing damage to the Company for which there may be no adequate remedy at law, and the Company shall be entitled to seek injunctive relief and/or a decree for specific performance, and such other relief as may be proper (including monetary damages if appropriate). 6. Amendments. No amendment to this Agreement or any schedule hereto shall be effective unless it shall be in writing and signed by each party hereto. 7. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by telecopy or three days after being mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to the Company, to it at: Dense-Pac Microsystems, Inc. 7321 Lincoln Way Garden Grove, CA 92641 Attention: Corporate Secretary If to Executive, to him at; XXXXXXXX XXXXXXXX 8. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties. 9. Arbitration. In the event of a dispute between the parties as to the meaning or interpretation of this Agreement, or the performance of either party 26 10 hereunder, except for equitable relief, the parties shall submit the matter to binding arbitration in Orange County, California, to the American Arbitration Association, which is expressly permitted and required hereby to include the reasonable costs of arbitration, including reasonable attorney fees, of the prevailing party, in its decision. The decision of the arbitrator shall be final and may be entered as a judgment in any court of competent jurisdiction. 10. Miscellaneous. The invalidity and unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of the State of California and shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE /s/ Edward G. Bruce ------------------------------------ Edward G. Bruce DENSE-PAC MICROSYSTEMS, INC. /s/ Richard J. Dadamo ------------------------------------ Richard J. Dadamo Chairman of the Board of Directors 27 11 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made as of June 7, 2001 (the "Effective Date"), by and between Dense-Pac Microsystems, Inc., a California corporation (the "Company") and John P. Sprint (the "Executive"). RECITALS WHEREAS, Executive has provided services to the Company since April 9, 1990; WHEREAS, the services and ability of Executive have constituted a major factor in the growth and development of the Company; WHEREAS, the Company wishes to continue to employ Executive, to make secure for itself the experience, abilities and services of Executive, and to prevent the loss of such experience, services and abilities; and WHEREAS, Executive wishes to accept such continued employment on the terms and conditions hereafter set forth; NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto, each intending to be legally bound, do hereby agree as follows: 1. Employment. The Company shall employ Executive, and Executive shall perform services for and continue in the employment of the Company, for an initial period of two (2) years commencing on the Effective Date and ending two (2) years thereafter, whereupon Executive's employment hereunder shall automatically be extended from year to year thereafter, until either the Company or Executive gives the other party at least one hundred and twenty (120) days written notice prior to the then-applicable "Expiration Date" (as hereinafter defined) of its or his desire to terminate this Agreement, unless such employment shall have been sooner terminated as hereinafter set forth. For purposes of this Agreement (i) the term "Employment Period" shall mean the initial two (2) year period and all extensions thereof, if any, as aforesaid, and (ii) the term "Expiration Date" shall mean the date two (2) years from the Effective Date or the date this Agreement is last in effect in the event that the Employment Period is extended on and after the date two (2) years from the Effective Date. 2. Position and Duties. Executive shall serve the Company at its Garden Grove location, or at any other location within thirty-five miles of the Garden Grove location, in the capacity of Chief Operating Officer of the Company, or in such other position consistent with Executive's previously (during the two years preceding the date of this Agreement) rendered duties and obligations as the Chief Executive Officer of the Company or the Board of Directors of the Company ("Board") may designate from time to time, and shall be accountable to, and shall have such other executive powers, duties 28 12 and responsibilities, consistent with such capacity. Executive shall perform and discharge, faithfully, diligently and to the best of his ability, such duties and responsibilities. Executive shall devote all of his working time and efforts to the business and affairs of the Company. 3. Compensation. (a) Salary. During the Employment Period, Executive shall receive a salary (the "Salary") payable at the rate of $155,000 per annum. The Board may increase such Salary from time to time without the Executive's consent, which increase shall constitute an amendment to this Agreement. In no event shall the Executive's Salary be adjusted or decreased below the Executive's then current Salary without the Executive's written consent. The Salary shall be payable biweekly or in accordance with the Company's current payroll practices, less all required deductions. The Salary shall be pro-rated for any period of service less than a full year. (b) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by him on behalf of the Company. (c) Fringe Benefits. During the Employment Period, Executive shall be entitled to participate in or receive benefits under any life or disability insurance, health, pension, retirement and accident plans or arrangements made generally available by the Company to its executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. In accordance with the Company policy, Executive shall also be entitled to no less then 21 days of personal time off (PTO) with pay, in any fiscal year during the Employment Period as well as all paid holidays given by the Company to its executives. (d) Options. Through the Employment Period Executive shall be entitled to participate in any applicable option grant of the Company. Upon a Change of Control (as defined below), 100% of all unvested options issued under any of the Company's Stock Plans to Executive shall immediately vest, and all such vested options shall immediately be exercisable. The amount of vesting and acceleration of the option's exercisability in the preceding sentence is separate from, and to the extent applicable in addition to, any vesting or acceleration that may apply to options granted Executive under any of the Company's Stock Plans. Notwithstanding anything to the contrary in any Stock Option Plan of the Company concerning the exercise of options by a person who is no longer an employee of the Company, the Company agrees that following any resignation or termination as a result of a Change of Control, for purposes of exercising options, Executive will continue to be treated as an "Employee" as defined under each of the applicable Stock Plans through which Executive has been granted options with respect to the time within which Executive's options must be exercised. 29 13 (e) Automobile. Without limiting the generality of the foregoing during the Employment Period Executive shall be furnished with an automobile allowance of $500 per month. 4. Termination and Compensation Thereon. (a) Termination Date. The term "Termination Date" shall mean the earlier of (i) the Expiration Date; or (ii) if Executive's employment is terminated (x) by his death, the date of his death; or (y) for any other reason, the date on which such termination is to be effective pursuant to the notice of termination given by the party terminating the employment relationship. (b) Death. Executive's employment hereunder shall terminate upon his death. In such event, the Company shall pay to such person as Executive shall have designated in a notice filed with the Company, or, if no such person shall have been designated, to his estate, a lump sum amount equal to the Salary that would have been due to Executive had this Agreement been in effect from the date of his death until the Expiration Date. (c) Incapacity. If in the reasonable judgment of the Board, as a result of Executive's incapacity due to physical or mental illness or otherwise, Executive shall for at least six consecutive months during the term of this Agreement been unable to perform his duties under this Agreement on a full-time basis, the Company may terminate Executive's employment hereunder by notice to Executive. In such event, the Company shall continue to pay Executive his Salary (at the rate in effect as of the Termination Date) and extend to him the applicable fringe benefits referred to in Section 3(c), 3(d) and 3(e) hereof, until the Expiration Date. Any dispute between the Board and Executive with respect to the Executive's incapacity shall be settled by reference to a competent medical authority mutually agreed to by the Board and Executive, whose decision shall be binding on all parties. (d) Change of Control. For purposes of this Agreement "Change of Control" is defined as any of the following: (i) the sale on a single or series of transactions of all or substantially all the assets of the Company, or (ii) a transaction or series of transactions which results in any person or entity or a group (as defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) becoming the beneficial owner (within the meaning of Rule 13d-3 under the Act), of shares of common stock of the Company (or in the case of any merger, consolidation or reorganization, of the surviving or new entity) constituting in excess of 40% of the voting rights of all outstanding shares of common stock of the Company (or in the case of any merger, consolidation or reorganization, of the surviving or new entity), including for purposes of this calculation, common stock, as to which there is then deemed to be a beneficial owner (within the meaning of said Rule 13d-3), or (iii) a change in the composition of the board of directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are "Incumbent Directors" (for purposes of a Change of Control, Incumbent Directors shall 30 14 mean directors of the Company who (x) are directors of the Company as of the Effective Date of this Agreement, or (y) are elected, or nominated for election, to the board of directors with the affirmative vote of at least a majority of the Incumbent Directors at the time of such election or nomination, but shall not include an individual whose director election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company's board of directors)). If a Change of Control occurs and this Agreement or Executive's employment is terminated during the period six months prior to such Change of Control or the period eighteen months following said Change of Control, by either the Company, or its successors or assigns, or by the executive, other than for Cause pursuant to Section 4(e), then the Company, including its successors or assigns, shall: (A) Within thirty (30) days after the Termination Date, pay to Executive (or in the event of Executive's subsequent death, such person as Executive shall have designated in a notice filed with the Company, or, if no such person shall have been designated, to his estate) a lump sum amount equal to the Executive's unpaid Salary from the Termination Date through the Expiration Date, which amount shall be paid in addition to the Salary due and payable under Section 4(g) below; (B) Until the Expiration Date, continue to extend to the Executive all of the expenses, fringe benefits and options set forth in Section 3(b), 3(c), 3(d) and 3(e) above. The obligations of the Company, its successors, or assigns pursuant to this Section 4(d) shall survive any termination of this Agreement or Executive's employment (other than for Cause pursuant to Section 4(e)), or any resignation of such employment by Executive. (e) Termination by the Company. The Company may terminate Executive's employment hereunder for "Cause." For purposes of this Agreement, Cause shall mean (i) Executive's willful failure to materially perform and discharge his duties and responsibilities hereunder, (ii) willful breach of any fiduciary duties Executive may have with the Company or any subsidiary or affiliate thereof, or (iii) a felony conviction. If the Company pursuant to this Section 4(e) terminates Executive's employment for Cause, then the Company shall have no further obligations to Executive under this Agreement after the Termination Date, except for unpaid Salary and benefits to Executive accrued through the Termination Date. If the Company terminates the Executive's employment prior to the Expiration Date, unless for Cause, then the Company shall pay to the Executive the Executive's unpaid Salary from the Termination Date through the Expiration Date, payable biweekly or in accordance with the Company's current payroll practices, less all required deductions, as well as continue from the Termination Date through the Expiration Date all of the benefits to Executive under Section 3(c), 3(d) and 3(e). (f) Not applicable 31 15 (g) Severance Pay. Except for termination of Executive's Employment by voluntary resignation (other then a change of control as defined in section 4(d)) or for Cause pursuant to Section 4(e), and subject to each of Sections 5(d) and 5(e), in the event the Company terminates the employment of Executive during the Employment Period, or upon the expiration of the Employment Period if the company provides notice of non-renewal, Executive shall be entitled to the additional consideration of, and the Company shall pay Executive, his then current Salary and continue his benefits under Section 3(c), 3(d) and 3(e) as in effect on the Termination Date for a period of Eighteen (18) months following the Expiration Date, commencing on the Expiration Date. In addition (subject to forfeiture under Sections 5(d) and 5(e)), 100% of all unvested options issued under any of the Company's Stock Plans to Executive shall vest as of the termination date, and all such vested options shall immediately be exercisable. The amount of vesting and acceleration of the option's exercisability in the preceding sentence is separate from, and to the extent applicable in addition to, any vesting or acceleration that may apply to options granted Executive under any of the Company's Stock Plans. Notwithstanding anything to the contrary in any Stock Option Plan of the Company concerning the exercise of options by a person who is no longer an employee of the Company, the Company agrees that for purposes of exercising options, Executive will continue to be treated as an "Employee" as defined under each of the applicable Stock Plans through which Executive has been granted options with respect to the time within which Executive's options must be exercised. (h) Out-Placement Assistance. Except for termination of Executive Employment for Cause pursuant to Section 4(e), or the voluntary termination by Executive of his Employment six months before or eighteen months following a Change of Control, upon the termination of Executive's employment, the Company will provide, at its sole expense, executive-level out-placement services to Executive at the out-placement provider of Executive's reasonable choice for a period not to exceed Eighteen (18) months following Executive's Termination Date. 5. Proprietary Rights and Non-Competition. Executive acknowledges that the Company is engaged in a continuous program of research, development and production in connection with its business, present and future and hereby covenants as follows: (a) Confidentiality. Executive will maintain in confidence and will not disclose or use, either during or after the Employment Term, any proprietary or confidential information or know-how belonging to the Company ("Proprietary Information" hereinafter defined), whether or not in written form, except to the extent required to perform duties on behalf of the Company. For purposes of this Agreement, "Proprietary Information" shall mean any information, not generally known to the relevant trade or industry, which was obtained from the Company, or which was learned, discovered, developed, conceived, originated or prepared by Executive in connection with this Agreement. Such Proprietary Information includes, without limitation, software, technical and business information relating to the Company's inventions or products, research and development, production processes, manufacturing and engineering 32 16 processes, machines and equipment, finances, customers, marketing and production and future business plans, information belonging to customers or suppliers of the Company disclosed incidental to Executive's performance under this Agreement, and any other information which is identified as confidential by the Company, but only so long as the same is not generally known in the relevant trade or industry. (b) Inventions. (i) Definition of Inventions. For purposes of this Agreement, "Inventions" shall mean any new or useful art, discovery, contribution, finding or improvement, whether or not patentable, and all related know-how. Inventions shall include, without limitation, all designs, discoveries, formulae, processes, manufacturing techniques, semiconductor designs, computer software, inventions, improvements and ideas. (ii) Disclosure and Assignment of Inventions. Executive will promptly disclose and describe, in confidence, to the Company all Inventions which he may solely or jointly conceive, develop, or reduce to practice during the Employment Term (A) which relate at the time of conception, development, or reduction to practice of the Invention to the Company's business or actual or demonstrably anticipated research or development, or (B) which were developed, in whole or in part, in the Company's time or with the use of any of the Company's equipment, supplies, facilities or trade secret information, or (C) which resulted from any work performed by Executive for the Company (the "Company's Inventions"). Executive hereby assigns all of his right, title and interest world-wide in the Company's Inventions and in all intellectual property rights based upon the Company's Inventions; provided, however, that Executive does not assign or agree to assign any Inventions, whether or not relating in any way to the Company's business or demonstrably anticipated research and development, which were made by him prior to the date of this Agreement, or which were developed by him prior to the date of this Agreement, or which were developed by him independently during the term of this Agreement and not under the conditions stated in Section 5(b)(ii) above. Any provision in this Agreement requiring Executive to assign his rights in all Inventions to the Company shall not apply to an invention that qualifies fully under the provisions of California Labor Code section 2870. Executive shall bear the full burden of proving that any invention claimed by Executive as his own qualifies fully under California Labor Code section 2870. (c) Documents and Materials. Upon termination of this Agreement or any other time upon the Company's request, Executive will promptly deliver to the Company without retaining any copies, all documents and other materials furnished to him by the Company, prepared by him for the Company, or otherwise relating to the Company's business, including, without limitation, all written and tangible material in his possession incorporating any Proprietary Information. (d) Competitive Employment and Loss of Severance Benefits. During the Employment Term, or from the Effective Date through the Termination Date, as 33 17 applicable, and for a period of Eighteen (18) months thereafter (collectively, the "Extended Term"), Executive will not engage in any employment, consulting, or other activity in any business competitive with either the Company or its subsidiaries without the Company's written consent, which consent shall not be unreasonably withheld. Should Executive compete, or make substantive preparations to compete, with the Company or its subsidiaries during the Extended Term, then, in addition to any other rights that the Company may have at law or in equity, the Company's obligations to Executive under Section 4(g) shall be deemed excused, waived, and of no further force or legal affect. Should Executive engage in activity in violation of this Section 5(d), then Executive agrees that the value of any and all benefits provided to Executive pursuant to Section 4(g) shall be returned, repaid, or forfeited, as applicable, by Executive to the Company. (e) Non-solicitation and Loss of Severance Rights. During the Extended Term, Executive will not solicit or encourage, or cause others to solicit or encourage, any employees of the Company to terminate their employment with the Company. Should Executive solicit, or assist others in soliciting, employees of the Company to terminate employment with the Company during the Extended Term, then, in addition to any other rights that the Company may have at law or in equity, the Company's obligations to Executive under Section 4(g) shall be deemed excused, waived, and of no further force or legal affect. Should Executive engage in activity in violation of this Section 5(e), then Executive agrees that the value of any and all benefits provided to Executive pursuant to Section 4(g) shall be returned or repaid, as applicable, by Executive to the Company. (f) Acts to Secure Proprietary Rights. (i) Further Acts. Executive agrees to perform, during and after the Employment Term, all acts deemed necessary or desirable by the Company to assist, at the Company's expense, in perfecting and enforcing the full benefits, enjoyment, rights and title throughout the world in the Company's Inventions. Such acts may include, without limitation, execution of documents and assistance or cooperation in the registration and enforcement of applicable patents and copyrights or other legal proceedings. Company agrees that with respect to any post employment consultant assistance requested from Executive, beyond the aggregate of two hours, that Company shall reasonably compensate Executive for the reasonable value of his services and to reimburse him for his expenses incurred in connection with such services. (ii) Appointment of Attorney-In-Fact. In the event that the Company is unable, for any reason whatsoever, to secure Executive's signature to any lawful and necessary document required to apply for or execute any patent, copyright or other applications with respect to any of the Company's Inventions (including improvements, renewals, extensions, continuations, divisions or continuations in part thereof), Executive hereby irrevocably appoints the Company and its duly authorized officers and agents as his agents and Attorneys-in-fact to execute and file any such application and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights or other rights thereon with the same legal force and effect 34 18 as if executed by him, intending hereby to create a so-called "durable power" which will survive any subsequent disability. (g) No Conflicting Obligations. Executive's performance of this Agreement does not breach and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him. (h) Corporate Opportunities. Executive agrees that he will first present to the Board, for its acceptance or rejection on behalf of the Company, any opportunity to create or invest in any company which is or will be involved in high density packaging, system design, or manufacturing of rapid innovative solutions, which comes to his attention and in which he, or any affiliate, might desire to participate. If the Board rejects the same or fails to act thereon in a reasonable time, Executive shall be free to invest in, participate or present such opportunity to any other person or entity. (i) Specific Performance. Executive acknowledges that a breach of any of the promises or agreements contained herein could result in irreparable and continuing damage to the Company for which there may be no adequate remedy at law, and the Company shall be entitled to seek injunctive relief and/or a decree for specific performance, and such other relief as may be proper (including monetary damages if appropriate). 6. Amendments. No amendment to this Agreement or any schedule hereto shall be effective unless it shall be in writing and signed by each party hereto. 7. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by telecopy or three days after being mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to the Company, to it at: Dense-Pac Microsystems, Inc. 7321 Lincoln Way Garden Grove, CA 92641 Attention: Corporate Secretary If to Executive, to him at; XXXXXXX XXXXXXX 8. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior 35 19 and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties. 9. Arbitration. In the event of a dispute between the parties as to the meaning or interpretation of this Agreement, or the performance of either party hereunder, except for equitable relief, the parties shall submit the matter to binding arbitration in Orange County, California, to the American Arbitration Association, which is expressly permitted and required hereby to include the reasonable costs of arbitration, including reasonable attorney fees, of the prevailing party, in its decision. The decision of the arbitrator shall be final and may be entered as a judgment in any court of competent jurisdiction. 10. Miscellaneous. The invalidity and unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of the State of California and shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE /s/ John P. Sprint ------------------------------------- John P. Sprint DENSE-PAC MICROSYSTEMS, INC. /s/ Edward G. Bruce ------------------------------------- Edward G. Bruce President and Chief Executive Officer 36 20 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made as of June 7, 2001 (the "Effective Date"), by and between Dense-Pac Microsystems, Inc., a California corporation (the "Company") and William M. Stowell (the "Executive"). RECITALS WHEREAS, Executive has provided services to the Company since July 6, 1987; WHEREAS, the services and ability of Executive have constituted a major factor in the growth and development of the Company; WHEREAS, the Company wishes to continue to employ Executive, to make secure for itself the experience, abilities and services of Executive, and to prevent the loss of such experience, services and abilities; and WHEREAS, Executive wishes to accept such continued employment on the terms and conditions hereafter set forth; NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto, each intending to be legally bound, do hereby agree as follows: 1. Employment. The Company shall employ Executive, and Executive shall perform services for and continue in the employment of the Company, for an initial period of two (2) years commencing on the Effective Date and ending two (2) years thereafter, whereupon Executive's employment hereunder shall automatically be extended from year to year thereafter, until either the Company or Executive gives the other party at least one hundred and twenty (120) days written notice prior to the then-applicable "Expiration Date" (as hereinafter defined) of its or his desire to terminate this Agreement, unless such employment shall have been sooner terminated as hereinafter set forth. For purposes of this Agreement (i) the term "Employment Period" shall mean the initial two (2) year period and all extensions thereof, if any, as aforesaid, and (ii) the term "Expiration Date" shall mean the date two (2) years from the Effective Date or the date this Agreement is last in effect in the event that the Employment Period is extended on and after the date two (2) years from the Effective Date. 2. Position and Duties. Executive shall serve the Company at its Garden Grove location, or at any other location within thirty-five miles of the Garden Grove location, in the capacity of Chief Financial Officer of the Company, or in such other position consistent with Executive's previously (during the two years preceding the date of this Agreement) rendered duties and obligations as the Chief Executive Officer of the Company or the Board of Directors of the Company ("Board") may designate from time to time, and shall be accountable to, and shall have such other executive powers, duties 36 21 and responsibilities, consistent with such capacity. Executive shall perform and discharge, faithfully, diligently and to the best of his ability, such duties and responsibilities. Executive shall devote all of his working time and efforts to the business and affairs of the Company. 3. Compensation. (a) Salary. During the Employment Period, Executive shall receive a salary (the "Salary") payable at the rate of $155,000 per annum. The Board may increase such Salary from time to time without the Executive's consent, which increase shall constitute an amendment to this Agreement. In no event shall the Executive's Salary be adjusted or decreased below the Executive's then current Salary without the Executive's written consent. The Salary shall be payable biweekly or in accordance with the Company's current payroll practices, less all required deductions. The Salary shall be pro-rated for any period of service less than a full year. (b) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by him on behalf of the Company. (c) Fringe Benefits. During the Employment Period, Executive shall be entitled to participate in or receive benefits under any life or disability insurance, health, pension, retirement and accident plans or arrangements made generally available by the Company to its executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. In accordance with the Company policy, Executive shall also be entitled to no less then 21 days of personal time off (PTO) with pay, in any fiscal year during the Employment Period as well as all paid holidays given by the Company to its executives. (d) Options. Through the Employment Period Executive shall be entitled to participate in any applicable option grant of the Company. Upon a Change of Control (as defined below), 100 % of all unvested options issued under any of the Company's Stock Plans to Executive shall immediately vest, and all such vested options shall immediately be exercisable. The amount of vesting and acceleration of the option's exercisability in the preceding sentence is separate from, and to the extent applicable in addition to, any vesting or acceleration that may apply to options granted Executive under any of the Company's Stock Plans. Notwithstanding anything to the contrary in any Stock Option Plan of the Company concerning the exercise of options by a person who is no longer an employee of the Company, the Company agrees that following any resignation or termination as a result of a Change of Control, for purposes of exercising options, Executive will continue to be treated as an "Employee" as defined under each of the applicable Stock Plans through which Executive has been granted options with respect to the time within which Executive's options must be exercised. 37 22 (e) Automobile. Without limiting the generality of the foregoing during the Employment Period Executive shall be furnished with an automobile allowance of $500 per month. 4. Termination and Compensation Thereon. (a) Termination Date. The term "Termination Date" shall mean the earlier of (i) the Expiration Date; or (ii) if Executive's employment is terminated (x) by his death, the date of his death; or (y) for any other reason, the date on which such termination is to be effective pursuant to the notice of termination given by the party terminating the employment relationship. (b) Death. Executive's employment hereunder shall terminate upon his death. In such event, the Company shall pay to such person as Executive shall have designated in a notice filed with the Company, or, if no such person shall have been designated, to his estate, a lump sum amount equal to the Salary that would have been due to Executive had this Agreement been in effect from the date of his death until the Expiration Date. (c) Incapacity. If in the reasonable judgment of the Board, as a result of Executive's incapacity due to physical or mental illness or otherwise, Executive shall for at least six consecutive months during the term of this Agreement been unable to perform his duties under this Agreement on a full-time basis, the Company may terminate Executive's employment hereunder by notice to Executive. In such event, the Company shall continue to pay Executive his Salary (at the rate in effect as of the Termination Date) and extend to him the applicable fringe benefits referred to in Section 3(c), 3(d) and 3(e) hereof, until the Expiration Date. Any dispute between the Board and Executive with respect to the Executive's incapacity shall be settled by reference to a competent medical authority mutually agreed to by the Board and Executive, whose decision shall be binding on all parties. (d) Change of Control. For purposes of this Agreement "Change of Control" is defined as any of the following: (i) the sale on a single or series of transactions of all or substantially all the assets of the Company, or (ii) a transaction or series of transactions which results in any person or entity or a group (as defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) becoming the beneficial owner (within the meaning of Rule 13d-3 under the Act), of shares of common stock of the Company (or in the case of any merger, consolidation or reorganization, of the surviving or new entity) constituting in excess of 40% of the voting rights of all outstanding shares of common stock of the Company (or in the case of any merger, consolidation or reorganization, of the surviving or new entity), including for purposes of this calculation, common stock, as to which there is then deemed to be a beneficial owner (within the meaning of said Rule 13d-3), or (iii) a change in the composition of the board of directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are "Incumbent Directors" (for purposes of a Change of Control, Incumbent Directors shall 38 23 mean directors of the Company who (x) are directors of the Company as of the Effective Date of this Agreement, or (y) are elected, or nominated for election, to the board of directors with the affirmative vote of at least a majority of the Incumbent Directors at the time of such election or nomination, but shall not include an individual whose director election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company's board of directors)). If a Change of Control occurs and this Agreement or Executive's employment is terminated during the period six months prior to such Change of Control or the period eighteen months following said Change of Control, by either the Company, or its successors or assigns, or by the executive, other than for Cause pursuant to Section 4(e), then the Company, including its successors or assigns, shall: (A) Within thirty (30) days after the Termination Date, pay to Executive (or in the event of Executive's subsequent death, such person as Executive shall have designated in a notice filed with the Company, or, if no such person shall have been designated, to his estate) a lump sum amount equal to the Executive's unpaid Salary from the Termination Date through the Expiration Date, which amount shall be paid in addition to the Salary due and payable under Section 4 (g) below; (B) Until the Expiration Date, continue to extend to the Executive all of the expenses, fringe benefits and options set forth in Section 3(b), 3(c), 3(d) and 3(e) above. The obligations of the Company, its successors, or assigns pursuant to this Section 4(d) shall survive any termination of this Agreement or Executive's employment (other than for Cause pursuant to Section 4(e)), or any resignation of such employment by Executive. (e) Termination by the Company. The Company may terminate Executive's employment hereunder for "Cause." For purposes of this Agreement, Cause shall mean (i) Executive's willful failure to materially perform and discharge his duties and responsibilities hereunder, (ii) willful breach of any fiduciary duties Executive may have with the Company or any subsidiary or affiliate thereof, or (iii) a felony conviction. If the Company pursuant to this Section 4(e) terminates Executive's employment for Cause, then the Company shall have no further obligations to Executive under this Agreement after the Termination Date, except for unpaid Salary and benefits to Executive accrued through the Termination Date. If the Company terminates the Executive's employment prior to the Expiration Date, unless for Cause, then the Company shall pay to the Executive the Executive's unpaid Salary from the Termination Date through the Expiration Date, payable biweekly or in accordance with the Company's current payroll practices, less all required deductions, as well as continue from the Termination Date through the Expiration Date all of the benefits to Executive under Section 3(c), 3(d) and 3(e). (f) Not applicable 39 24 (g) Severance Pay. Except for termination of Executive's Employment by voluntary resignation (other then a change of control as defined in section 4(d)) or for Cause pursuant to Section 4(e), and subject to each of Sections 5(d) and 5(e), in the event the Company terminates the employment of Executive during the Employment Period, or upon the expiration of the Employment Period if the company provides notice of non-renewal, Executive shall be entitled to the additional consideration of, and the Company shall pay Executive, his then current Salary and continue his benefits under Section 3(c), 3(d) and 3(e) as in effect on the Termination Date for a period of twelve (12) months following the Expiration Date, commencing on the Expiration Date. In addition (subject to forfeiture under Sections 5(d) and 5(e)), 100 % of all unvested options issued under any of the Company's Stock Plans to Executive shall vest as of the termination date, and all such vested options shall immediately be exercisable. The amount of vesting and acceleration of the option's exercisability in the preceding sentence is separate from, and to the extent applicable in addition to, any vesting or acceleration that may apply to options granted Executive under any of the Company's Stock Plans. Notwithstanding anything to the contrary in any Stock Option Plan of the Company concerning the exercise of options by a person who is no longer an employee of the Company, the Company agrees that for purposes of exercising options, Executive will continue to be treated as an "Employee" as defined under each of the applicable Stock Plans through which Executive has been granted options with respect to the time within which Executive's options must be exercised. (h) Out-Placement Assistance. Except for termination of Executive Employment for Cause pursuant to Section 4(e), or the voluntary termination by Executive of his Employment six months before or eighteen months following a Change of Control, upon the termination of Executive's employment, the Company will provide, at its sole expense, executive-level out-placement services to Executive at the out-placement provider of Executive's reasonable choice for a period not to exceed twelve (12) months following Executive's Termination Date. 5. Proprietary Rights and Non-Competition. Executive acknowledges that the Company is engaged in a continuous program of research, development and production in connection with its business, present and future and hereby covenants as follows: (a) Confidentiality. Executive will maintain in confidence and will not disclose or use, either during or after the Employment Term, any proprietary or confidential information or know-how belonging to the Company ("Proprietary Information" hereinafter defined), whether or not in written form, except to the extent required to perform duties on behalf of the Company. For purposes of this Agreement, "Proprietary Information" shall mean any information, not generally known to the relevant trade or industry, which was obtained from the Company, or which was learned, discovered, developed, conceived, originated or prepared by Executive in connection with this Agreement. Such Proprietary Information includes, without limitation, software, technical and business information relating to the Company's inventions or products, research and development, production processes, manufacturing and engineering 40 25 processes, machines and equipment, finances, customers, marketing and production and future business plans, information belonging to customers or suppliers of the Company disclosed incidental to Executive's performance under this Agreement, and any other information which is identified as confidential by the Company, but only so long as the same is not generally known in the relevant trade or industry. (b) Inventions. (i) Definition of Inventions. For purposes of this Agreement, "Inventions" shall mean any new or useful art, discovery, contribution, finding or improvement, whether or not patentable, and all related know-how. Inventions shall include, without limitation, all designs, discoveries, formulae, processes, manufacturing techniques, semiconductor designs, computer software, inventions, improvements and ideas. (ii) Disclosure and Assignment of Inventions. Executive will promptly disclose and describe, in confidence, to the Company all Inventions which he may solely or jointly conceive, develop, or reduce to practice during the Employment Term (A) which relate at the time of conception, development, or reduction to practice of the Invention to the Company's business or actual or demonstrably anticipated research or development, or (B) which were developed, in whole or in part, in the Company's time or with the use of any of the Company's equipment, supplies, facilities or trade secret information, or (C) which resulted from any work performed by Executive for the Company (the "Company's Inventions"). Executive hereby assigns all of his right, title and interest world-wide in the Company's Inventions and in all intellectual property rights based upon the Company's Inventions; provided, however, that Executive does not assign or agree to assign any Inventions, whether or not relating in any way to the Company's business or demonstrably anticipated research and development, which were made by him prior to the date of this Agreement, or which were developed by him prior to the date of this Agreement, or which were developed by him independently during the term of this Agreement and not under the conditions stated in Section 5 (b)(ii) above. Any provision in this Agreement requiring Executive to assign his rights in all Inventions to the Company shall not apply to an invention that qualifies fully under the provisions of California Labor Code section 2870. Executive shall bear the full burden of proving that any invention claimed by Executive as his own qualifies fully under California Labor Code section 2870. (c) Documents and Materials. Upon termination of this Agreement or any other time upon the Company's request, Executive will promptly deliver to the Company without retaining any copies, all documents and other materials furnished to him by the Company, prepared by him for the Company, or otherwise relating to the Company's business, including, without limitation, all written and tangible material in his possession incorporating any Proprietary Information. (d) Competitive Employment and Loss of Severance Benefits. During the Employment Term, or from the Effective Date through the Termination Date, as 41 26 applicable, and for a period of twelve (12) months thereafter (collectively, the "Extended Term"), Executive will not engage in any employment, consulting, or other activity in any business competitive with either the Company or its subsidiaries without the Company's written consent, which consent shall not be unreasonably withheld. Should Executive compete, or make substantive preparations to compete, with the Company or its subsidiaries during the Extended Term, then, in addition to any other rights that the Company may have at law or in equity, the Company's obligations to Executive under Section 4(g) shall be deemed excused, waived, and of no further force or legal affect. Should Executive engage in activity in violation of this Section 5(d), then Executive agrees that the value of any and all benefits provided to Executive pursuant to Section 4(g) shall be returned, repaid, or forfeited, as applicable, by Executive to the Company. (e) Non-solicitation and Loss of Severance Rights. During the Extended Term, Executive will not solicit or encourage, or cause others to solicit or encourage, any employees of the Company to terminate their employment with the Company. Should Executive solicit, or assist others in soliciting, employees of the Company to terminate employment with the Company during the Extended Term, then, in addition to any other rights that the Company may have at law or in equity, the Company's obligations to Executive under Section 4(g) shall be deemed excused, waived, and of no further force or legal affect. Should Executive engage in activity in violation of this Section 5(e), then Executive agrees that the value of any and all benefits provided to Executive pursuant to Section 4 (g) shall be returned or repaid, as applicable, by Executive to the Company. (f) Acts to Secure Proprietary Rights. (i) Further Acts. Executive agrees to perform, during and after the Employment Term, all acts deemed necessary or desirable by the Company to assist, at the Company's expense, in perfecting and enforcing the full benefits, enjoyment, rights and title throughout the world in the Company's Inventions. Such acts may include, without limitation, execution of documents and assistance or cooperation in the registration and enforcement of applicable patents and copyrights or other legal proceedings. Company agrees that with respect to any post employment consultant assistance requested from Executive, beyond the aggregate of two hours, that Company shall reasonably compensate Executive for the reasonable value of his services and to reimburse him for his expenses incurred in connection with such services. (ii ) Appointment of Attorney-In-Fact. In the event that the Company is unable, for any reason whatsoever, to secure Executive's signature to any lawful and necessary document required to apply for or execute any patent, copyright or other applications with respect to any of the Company's Inventions (including improvements, renewals, extensions, continuations, divisions or continuations in part thereof), Executive hereby irrevocably appoints the Company and its duly authorized officers and agents as his agents and Attorneys-in-fact to execute and file any such application and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights or other rights thereon with the same legal force and effect 42 27 as if executed by him, intending hereby to create a so-called "durable power" which will survive any subsequent disability. (g) No Conflicting Obligations. Executive's performance of this Agreement does not breach and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him. (h) Corporate Opportunities. Executive agrees that he will first present to the Board, for its acceptance or rejection on behalf of the Company, any opportunity to create or invest in any company which is or will be involved in high density packaging, system design, or manufacturing of rapid innovative solutions, which comes to his attention and in which he, or any affiliate, might desire to participate. If the Board rejects the same or fails to act thereon in a reasonable time, Executive shall be free to invest in, participate or present such opportunity to any other person or entity. (i) Specific Performance. Executive acknowledges that a breach of any of the promises or agreements contained herein could result in irreparable and continuing damage to the Company for which there may be no adequate remedy at law, and the Company shall be entitled to seek injunctive relief and/or a decree for specific performance, and such other relief as may be proper (including monetary damages if appropriate). 6. Amendments. No amendment to this Agreement or any schedule hereto shall be effective unless it shall be in writing and signed by each party hereto. 7. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by telecopy or three days after being mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to the Company, to it at: Dense-Pac Microsystems, Inc. 7321 Lincoln Way Garden Grove, CA 92641 Attention: Corporate Secretary If to Executive, to him at; XXXXXXXXX XXXXXXXXX 8. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior 43 28 and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties. 9. Arbitration. In the event of a dispute between the parties as to the meaning or interpretation of this Agreement, or the performance of either party hereunder, except for equitable relief, the parties shall submit the matter to binding arbitration in Orange County, California, to the American Arbitration Association, which is expressly permitted and required hereby to include the reasonable costs of arbitration, including reasonable attorney fees, of the prevailing party, in its decision. The decision of the arbitrator shall be final and may be entered as a judgment in any court of competent jurisdiction. 10. Miscellaneous. The invalidity and unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of the State of California and shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE /s/ William M. Stowell ----------------------------------------- William M. Stowell DENSE-PAC MICROSYSTEMS, INC. /s/ Edward G. Bruce ----------------------------------------- Edward G. Bruce President and Chief Executive Officer 44 -----END PRIVACY-ENHANCED MESSAGE-----