<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 1995
[ ] 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, 92641
(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
September 20, 1995 was 14,727,281.
TOTAL PAGES: 9
<PAGE> 2
Dense-Pac Microsystems, Inc.
Balance Sheets
<TABLE>
<CAPTION>
August 31, February 28,
1995 1995
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 490,121 $ 356,787
Accounts receivable, net 2,047,160 1,901,762
Inventories 4,229,470 4,347,205
Other current assets 216,152 122,223
------------ -----------
Total current assets 6,982,903 6,727,977
Property, net 2,780,991 2,512,641
Technology and marketing rights, net 445,444 481,840
Other assets 67,262 67,262
------------ -----------
$ 10,276,600 $ 9,789,720
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 375,553 $ 375,553
Accounts payable 930,663 1,170,997
Deferred revenue 564,829 717,023
Accrued liabilities 534,359 332,955
------------ -----------
Total current liabilities 2,405,404 2,596,528
------------ -----------
Note payable to related parties 2,000,000 2,000,000
------------ -----------
Other long-term debt 815,257 993,201
------------ -----------
Shareholders' equity
Common stock 9,371,740 9,241,036
Accumulated deficit (4,315,801) (5,041,045)
------------ -----------
Total stockholders' equity 5,055,939 4,199,991
------------ -----------
$ 10,276,600 $ 9,789,720
============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 3
Dense-Pac Microsystems, Inc.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Six months ended
August 31, August 31,
1995 1994 1995 1994
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net Sales $4,439,858 $2,815,957 $8,670,171 $5,521,287
Cost of Sales 2,972,861 2,365,827 6,125,573 4,788,855
---------- ---------- ---------- -----------
Gross profit 1,466,997 450,130 2,544,598 732,432
Selling, general and administrative expenses 820,159 607,748 1,457,587 1,217,257
Research and development 137,738 143,805 238,153 342,308
---------- --------- ---------- -----------
Earnings (loss) from operations 509,100 (301,423) 848,858 (827,133)
Other expenses:
Interest, net 62,833 57,805 122,814 100,527
---------- --------- ---------- -----------
Earnings (loss) before income tax provision 446,267 (359,228) 726,044 (927,660)
Provision for income taxes 800 800 800
---------- --------- ---------- -----------
Net income (loss) $445,467 ($359,228) $725,244 ($928,460)
---------- --------- ---------- -----------
Net earnings (loss) per common share $0.03 ($0.02) $0.05 ($0.06)
---------- ---------- ---------- -----------
Weighted average common and common
equivalent shares outstanding
15,845,000 14,603,000 15,547,000 14,603,000
---------- ---------- ---------- -----------
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
Dense-Pac Microsystems, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
August 31, August 31,
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 725,244 $ (928,460)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 281,470 376,236
Changes in operating assets and liabilities:
Accounts receivable (145,398) 333,530
Inventories 117,735 748,039
Other current assets (93,929) 64,106
Other assets (14,839)
Accounts payable (240,334) (28,893)
Accrued liabilities 201,404 (68,682)
Deferred revenue (152,194)
Income taxes payable (9,000)
---------- ----------
Net cash provided by (used in) operating activities: 693,998 472,037
CASH USED IN INVESTING ACTIVITIES:
Property additions (513,424) (601,570)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net addition (repayment) of short-term bank borrowings
(93,149)
Principal payments on other long-term debt (177,944) (119,499)
Proceeds from issuance on other long-term debt 206,654
Proceeds from Issuance of common stock 130,704 12,710
---------- ----------
Net cash provided by financing activities (47,240) 6,716
---------- ----------
NET INCREASE IN CASH 133,334 (122,817)
CASH AT BEGINNING OF YEAR 356,787 438,628
---------- ----------
CASH AT END OF QUARTER $ 490,121 $ 315,811
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 125,899 $ 102,088
========== ==========
Income taxes paid $ 0 $ 9,800
========== ==========
</TABLE>
<PAGE> 5
DENSE-PAC MICROSYSTEMS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Dense-Pac Microsystems, Inc. ( the Company ) is engaged in the
design, development, manufacture and marketing of a full line of high density,
miniaturized memory surface mount components and subsystems for a variety of
commercial, industrial and military applications.
NOTE 2 - As contemplated by the Securities and Exchange Commission
under Item 310 (b) of Regulation S-B, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles. This report on Form
10-QSB for the period ended August 31, 1995 should be read in conjunction with
the Company's Annual Report to Shareholders for the previous year.
In the opinion of the Company, the accompanying unaudited condensed
financial statements contain all adjustments (none of which were other than
normal recurring accruals) necessary to present fairly its financial position
as of August 31, 1995, the results of operations and its cash flows for the
periods ended August 31, 1995 and 1994. Results for the interim period are not
necessarily indicative of those to be expected for the full year.
NOTE 3 - Inventories consisted of the following:
<TABLE>
<CAPTION>
August 31, 1995 February 28, 1995
<S> <C> <C>
Raw Materials $ 960,923 $ 1,235,939
Work-in-process 2,535,421 2,613,057
Finished Goods 733,126 498,209
------------ ------------
$ 4,229,470 $ 4,347,205
============ ============
</TABLE>
NOTE 4 - Accounting for Income Taxes
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," effective March 1, 1993. This
Statement supersedes SFAS No. 96, "Accounting for Income Taxes," which was
adopted by the Company in 1987.
Deferred income taxes reflect the net tax effect of (a) temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax asset as of February 28, 1995
are as follows:
<PAGE> 6
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards,
general business credits, etc. $ 1,925,360
Inventories 428,433
-------------
Total gross deferred assets $ 2,353,793
Deferred tax liability
Depreciation and amortization (203,185)
Valuation allowance (2,150,608)
-------------
Net deferred income taxes $ -
=============
</TABLE>
There was no change in the valuation allowance as of August 31,1995.
The Company is unable to determine whether it will be able to utilize
the gross deferred tax assets in fiscal year 1996. Further evaluation will be
completed as part of the year end evaluation for the year ending February
28, 1996.
As of February 28, 1995, the Company had net operating loss
carryforwards of $4,650,000 for regular income tax and $4,725,000 for
alternative minimum tax available to offset future Federal taxable income
(principally subject to limitations of approximately $270,600), expiring at
various dates through 2008. As of February 28, 1995, the Company had available
tax credit carryforwards of approximately $153,000 to offset future Federal
income taxes, which expire at various dates through 2005.
NOTE 5 - Net income (loss) per common and common equivalent share is
computed by dividing net income by the weighted average number of common and
common equivalent shares (if applicable) outstanding during the periods. For
the loss periods, common equivalent shares were anti-dilutive and were not
included in the E.P.S. calculation.
NOTE 6 - In October 1994, the Company borrowed $ 2,000,000 from a
principal shareholder and a director evidenced by a five year, interest only,
eight percent note. The note is secured by all of the Company's assets. As
consideration for the loan, the Company issued 1,000,000 warrants exercisable
for five years at $2.00 per share for Company stock. The warrants are
callable when the Company's stock reaches a trading price of $4.50 for twenty
consecutive days.
<PAGE> 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net sales for the quarter ended August 31, 1995, increased $1,623,901
or 58% from the quarter ended August 31, 1995 and for the six months ended
August 31, 1995, sales increased $3,148,884 or 57%. The sales increase can be
attributed to a significant rise in the sale of the Company's patented
stackable first generation product as well as the 512K x 8 standard commercial
product, which accounted for approximately 43% of sales in the second quarter
and 40% of sales for the six months ended August 31, 1995. Due to expected
technology advances, the Company cannot predict how long the current strong
demand for the 512K x 8 product will continue. However, the Company has
developed a replacement product which will incorporate the advanced technology.
The Company has introduced prototypes of a supermemory board with up
to four times the memory of boards available today known as the SuperSIMM(TM).
The Company believes there is a substantial market for this product, but the
Company would require additional capital resources to be able to fully exploit
this product's potential.
Cost of sales as a percentage of sales for the three month period
ended August 31, 1995 decreased from 84% in fiscal year 1995 to 67% in fiscal
year 1996 and for the six months decreased from 87% in fiscal year 1995 to 71%
in fiscal year 1996. During the first six months of fiscal year 1995,
approximately $750,000 was expensed in development and preproduction costs
associated with the second generation product, facilities and related overhead.
Due to the inability to obtain specific memory die necessary for the second
generation product, the Company is presently unable to market this product.
The balance of the decrease in cost of sales can be attributed to increased
efficiencies associated with the increase in the level of business.
Selling, general and administrative expense increased in the second
quarter of fiscal 1996 by $212,411 or 35% from the second quarter of the prior
fiscal year. For the six months ended August 31, 1995, these expenses
increased $240,330 or 20%. The increase in these expenses was due to payroll
costs at full levels for the six month period in fiscal year 1996 compared to
reduced levels required by the Company's variable compensation plan for the
first quarter in the prior year. Additionally, the Company began an
advertising campaign and spent approximately $57,000 in the first six months of
fiscal year 1996 introducing new products and existing technologies. Sales
commissions have also increased due to the 57% increase in sales for the first
six months of fiscal year 1996 as compared to the first six months of fiscal
year 1995.
For the three months ended August 31, 1995, research and development
costs decreased $6,067 or 1% from the same quarter in the previous period and
for the six months ended August 31, 1995 expenses have decreased $104,155 or
30%. The significant decrease is directly attributable to the efforts geared
toward the second generation technology development during the first quarter of
the prior fiscal quarter. The Company is continuing to devote resources
towards new products.
<PAGE> 8
For the three months ended August 31, 1995, net interest expense has
increased $5,028 or 9% from the same period in the prior year. For the six
months ended August 31, 1995, interest expense has increased $22,287 or 22%
from the same period in the previous year. This increase is due to less
invested capital and increased borrowings for fixed assets and working capital
in the current period as compared to the prior period as the Company borrowed
$2,000,000 in October 1994 as described in note 8 above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity for the second quarter of
fiscal 1996 were cash flow from operations, and use of the proceeds from the
$2,000,000 note.
In October 1994, the Company reached an agreement, with a major
shareholder and a director for a $2,000,000 loan. The loan has a five year
term with quarterly interest of 8%. The lenders received a security interest in
all of the Company assets and five year warrants to purchase one million shares
of Company stock at $2.00 per share. The warrants will be callable by the
Company at $.001 per warrant when the Company's stock price reaches $4.50 per
share, for 20 consecutive trading days. The proceeds of the loan were used to
repay outstanding borrowings under the bank line of credit, to expand marketing
of the second generation product and for general working capital.
On September 23, 1995, the market price of the Company's common stock
reached $4.50 for twenty consecutive trading days. Accordingly, on September
25, 1995, the Company gave notice to the warrant holders that the Company
intended to redeem all of the warrants which remain outstanding and unexercised
on October 25, 1995. The Company was advised that the warrant holders intend
to exercise the warrants prior to October 25, 1995. If the exercise of the
1,000,000 warrants at $2.00 per warrant occurs, the Company will receive either
$2,000,000 cash or retire the $2,000,000 note payable to the lenders or a
combination of the two. If a significant portion of the loan is retired in
lieu of receiving cash, the Company will seek alternative conventional
financing for working capital. Although the Company has adequate working
capital and cash flow to support the current level of operations, it requires
substantial additional capital resources to support future growth and to be
able to exploit new products.
In the third quarter of fiscal year 1994, the Company received a
$600,000 lease facility to purchase manufacturing equipment. As of November
30, 1994, the Company had drawn all available funds against this facility.
Borrowings are repaid monthly over a three year period and bear interest at
rates of 8.88% to 9.35% per annum.
The Company also has a loan from a Belgium bank due November 2000,
which provides for semi-annual principal payments of $70,533. The interest
rate is two points over the LIBOR rate in effect at the time of each principal
payment, and interest is
<PAGE> 9
payable semi-annually. At August 31, 1995 the outstanding principal amount was
$776,083.
PART II
Item 4 - Submission of Matters to a vote of Security Holders
<TABLE>
<S> <C> <C>
1. (a) Annual Shareholders' Meeting - August 4, 1995
(b) Election of Directors: Votes For Withheld
James G. Turner 13,417,370 10,800
Roger Claes 13,417,370 10,800
Trude C. Taylor 13,418,370 9,800
Bob Southwick 13,418,370 9,800
</TABLE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K - none
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.
(Small Business Issuer)
October 11, 1995 /s/ James G. Turner
- ---------------- -----------------------------------
Date James G. Turner, Chairman of the
Board and Chief Executive Officer
October 11, 1995 /s/ William M. Stowell
- ---------------- -----------------------------------
Date William M. Stowell, Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDING AUGUST 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB - QUARTERLY
REPORT PURSUANT TO SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED AUGUST 31, 1995.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> AUG-31-1995
<CASH> 490,121
<SECURITIES> 0
<RECEIVABLES> 2,087,160
<ALLOWANCES> 40,000
<INVENTORY> 4,229,470
<CURRENT-ASSETS> 6,982,903
<PP&E> 4,354,517
<DEPRECIATION> 1,573,526
<TOTAL-ASSETS> 10,276,600
<CURRENT-LIABILITIES> 2,405,404
<BONDS> 0
<COMMON> 9,371,740
0
0
<OTHER-SE> (4,315,801)
<TOTAL-LIABILITY-AND-EQUITY> 10,276,600
<SALES> 4,439,858
<TOTAL-REVENUES> 4,439,858
<CGS> 2,972,861
<TOTAL-COSTS> 2,972,861
<OTHER-EXPENSES> 957,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,833
<INCOME-PRETAX> 446,267
<INCOME-TAX> 800
<INCOME-CONTINUING> 445,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 445,467
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
