<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 November 30, 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 (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
December 15, 1995 was 15,765,481.
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TOTAL PAGES: 8
<PAGE> 2
DENSE-PAC MICROSYSTEMS, INC.
Balance Sheets
<TABLE>
<CAPTION>
November 30, February 28,
1995 1995
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,312,241 $ 356,787
Accounts receivable, net 2,551,111 1,901,762
Inventories 5,050,956 4,347,205
Other current assets 193,068 122,223
----------- ----------
Total current assets 9,107,376 6,727,977
Property, net 3,115,259 2,512,641
Technology and marketing rights, net 427,246 481,840
Other assets 67,262 67,262
----------- ----------
$12,717,143 $9,789,720
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 384,947 $ 375,553
Accounts payable 1,239,379 1,170,997
Deferred revenue 210,580 717,023
Accrued liabilities 542,479 332,955
----------- ----------
Total current liabilities 2,377,385 2,596,528
----------- ----------
Note payable to related parties 1,900,000 2,000,000
----------- ----------
Other long-term debt 778,157 993,201
----------- ----------
Shareholders' equity
Common stock 11,437,333 9,241,036
Accumulated deficit (3,775,732) (5,041,045)
----------- ----------
Total shareholders' equity 7,661,601 4,199,991
----------- ----------
$12,717,143 $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 Nine months ended
November 30, November 30,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $4,516,778 $2,780,780 $13,186,949 $8,302,067
Cost of Sales 3,037,260 2,146,180 9,162,833 6,935,035
---------- ---------- ----------- ----------
Gross profit 1,479,518 634,600 4,024,116 1,367,032
Selling, general and
administrative expenses 717,112 470,127 2,174,699 1,687,384
Research and development 171,253 100,415 409,406 442,723
---------- ---------- ----------- ----------
Earnings (loss) from
operations 591,153 64,058 1,440,011 (763,075)
Other expenses:
Interest, net 51,084 52,388 173,898 152,915
---------- ---------- ----------- ----------
Earnings (loss) before
income tax provision 540,069 11,670 1,266,113 (915,990)
Provision for income taxes 800 800
---------- ---------- ----------- ----------
Net income (loss) $ 540,069 $ 11,670 $ 1,265,313 $ (916,790)
========== ========== =========== ==========
Net earnings (loss) per
common shares outstanding $0.03 -- $ 0.08 $ (0.06)
========== ========== =========== ==========
Weighted average common and
common equivalent shares
outstanding 16,288,000 14,800,000 15,596,000 14,622,000
========== ========== =========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
DENSE-PAC MICROSYSTEMS, INC.
Statement of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
November 30, November 30,
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,265,313 $ (916,790)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 423,280 569,534
Changes in operating assets and liabilities:
Accounts receivable (649,349) 155,628
Inventories (703,751) 128,355
Other current assets (70,845) 54,571
Other assets (14,839)
Accounts payable 68,382 99,883
Accrued liabilities 209,524 (110,045)
Deferred revenue (506,443)
Income taxes payable (9,000)
---------- ----------
Net cash provided by (used in) operating
activities: 36,111 (42,703)
---------- ----------
CASH USED IN INVESTING ACTIVITIES:
Property additions (971,304) (786,697)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net additions (repayment) of short-term bank
borrowings (683,149)
Principal payments on other long-term debt (305,650)
Proceeds from issuance on other long-term debt 2,206,654
Proceeds from warrants 1,900,000 (160,787)
Proceeds from issuance of common stock 296,297 29,264
---------- ----------
Net cash provided by financing activities 1,890,647 1,391,982
---------- ----------
NET INCREASE IN CASH 955,454 562,582
CASH AT BEGINNING OF YEAR 356,787 438,628
---------- ----------
CASH AT END OF QUARTER $1,312,241 $1,001,210
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 184,081 $ 152,382
========== ==========
Income taxes paid $ 800 $ 9,800
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
<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 Regulations S-B, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles. The report on Form
10-QSB for the period ended November 30, 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 November 30, 1995, the results of operations and its cash flows for the
periods ended November 30, 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>
November 30, 1995 February 28, 1995
<S> <C> <C>
Raw materials $1,346,870 $1,235,939
Work-in-process 2,878,148 2,613,057
Finished goods 825,938 498,209
---------- ----------
$5,050,956 $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:
<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 $ 0
==========
</TABLE>
There was no change in the valuation allowance as of November 30, 1995.
<PAGE> 6
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 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 were callable when the
Company's stock reached a trading price of $4.50 for twenty consecutive days.
On October 10, 1995, the Company called the warrants. On October 23, 1995, the
Company received $1,900,000 for the exercise of the warrants and canceled
$100,000 of debt. The Company also renegotiated the interest rate on the
$1,800,000 note to a rate of 5% per annum.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net sales for the quarter ended November 30, 1995 increased $1,735,998
or 62% from the quarter ended November 30, 1994 and for the nine months ended
November 30, 1995, sales increased $4,884,882 or 59%. 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 26% of sales in the third quarter
and 37% of sales for the nine months ended November 30, 1995. Due to expected
technology advances, the Company cannot predict how long the current demand for
the 512Kx8 product will continue. However, the Company has developed a
replacement product which will incorporate the advanced technology.
The Company has introduced a supermemory board with up to four times
the memory of boards available today known as the SuperSIMMTM. The Company
believes there is a substantial market for this product and has begun sampling
the product to potential customers. Depending on the response to the marketing
of this product, the Company may need additional capital to fully exploit the
potential market for this product.
Cost of sales as a percentage of sales, for the three month period
ended November 30, 1995 decreased from 77% in fiscal year 1995 to 67% in fiscal
year 1996 and for the nine months decreased from 84% in fiscal year 1995 to 69%
in fiscal year 1996. During the first six months of fiscal year 1995,
approximately $750,000 was expensed in 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 and the various margins
in the products that the Company sells.
<PAGE> 7
Selling, general and administrative expense increased in the third
quarter of the prior fiscal year by $246,985 or 52% from the third quarter of
the prior fiscal year. For the nine months ended November 30, 1995, these
expenses increased $487,315 or 29%. The increase in these expenses was due to
payroll costs at full levels for the nine 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 $71,000 in the first nine months
of fiscal year 1996 introducing new products and existing technologies. Sales
commissions have also increased due to the 59% increase in sales for the first
nine months of fiscal year 1996 as compared to the first nine months of fiscal
year 1995.
For the three months ended November 30, 1995, research and development
costs increased $70,838 or 71% from the same quarter in the previous period and
for the nine months ended November 30, 1995 expenses have decreased $33,317 or
8%. The increase in the third quarter is due to the fact that the Company is
designing and developing numerous new products for the military as well as the
commercial marketplace. While the SuperSIMMTM module is fully developed, the
Company is continuing to develop products that will enhance the Company's
position in the marketplace. The decrease in the nine month period is directly
attributable to the efforts geared toward the second generation technology
development during the first quarter of the prior fiscal quarter.
For the three months ended November 30, 1995, net interest expense has
decreased $1,304 or 2% from same period in the prior year. For the nine months
ended November 30, 1995, interest expense has increased $20,983 or 14% 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 third quarter of
fiscal 1996 were cash flow from operations and $1.9 million cash received from
the exercise of warrants in October 1995.
In consideration for a major shareholder's agreement to exercise
warrants for $1.8 million cash rather than cancellation of a loan, in October
1995 the interest rate on the loan was reduced from 8% to 5% per annum and the
Company issued to the shareholder five year warrants to purchase 375,000 shares
at a price to be determined by August 1, 1996. The warrants will be callable
when the common stock trades at $2.00 above the warrant exercise price.
At November 30, 1995, the Company had a $1.8 million loan payable to a
major shareholder with the interest at 5% per annum, and a $100,000 loan
payable to a director with interest at 8% per annum, with interest payable
quarterly and the principal due in October 1999. These loans are secured by all
of the Company's assets, except that as part of the loan renegotiation
described above, the shareholder agreed to subordinate its security interest in
accounts receivable in order to permit the Company to obtain conventional bank
financing for accounts receivable.
In the third quarter of fiscal year 1996, the Company received a new
$250,000 lease facility to purchase manufacturing equipment. The Company
intends to utilize this facility in the fourth quarter of FY'96. At November
30, 1995, the Company had aggregate borrowing under equipment lease facilities
of $355,347 of which are repaid monthly over a three year period and bear
interest at rates of 8.88% to 9.35% per annum.
<PAGE> 8
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 payable semi-annually. At November 30, 1995 the
outstanding principal amount was $776,083.
At November 30, 1995, the Company had working capital of $6,730,000
and no bank lines or other sources of 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 the SuperSIMMTM product (primarily to
finance inventory purchases) and other new product offerings. Accordingly, the
Company is seeking a $1,000,000 accounts receivable line of credit and is
exploring other sources of financing. There can be no assurance that the
Company will be able to obtain additional debt or equity financing or that such
financing as may be available will be on terms that are acceptable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - Schedule 27 - Financial Data Schedule
(b) Reports on Form 8-K
- October 23, 1995 - Renegotiated terms of $1,800,000
note with Euroventures Benelux II
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 of the
undersigned thereunto duly authorized.
DENSE-PAC MICROSYSTEMS, INC.
(Small Business Issuer)
<TABLE>
<S> <C>
January 3, 1996 s/s James G. Turner
- ---------------------------------- ----------------------------------
Date James G. Turner, Chairman of the
Board and Chief Executive Officer
January 3, 1996 s/s William M. Stowell
- ---------------------------------- ----------------------------------
Date William M. Stowell,
Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT FORM 10-QSB FOR PERIOD NOVEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-QSB FOR QUARTER ENDED NOVEMBER 30, 1995
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 1,312,241
<SECURITIES> 0
<RECEIVABLES> 2,601,111
<ALLOWANCES> 50,000
<INVENTORY> 5,050,956
<CURRENT-ASSETS> 9,107,376
<PP&E> 4,664,929
<DEPRECIATION> 1,549,670
<TOTAL-ASSETS> 3,115,259
<CURRENT-LIABILITIES> 2,377,385
<BONDS> 0
<COMMON> 11,437,333
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,717,143
<SALES> 13,186,949
<TOTAL-REVENUES> 13,186,949
<CGS> 9,162,833
<TOTAL-COSTS> 11,746,938
<OTHER-EXPENSES> 173,898
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 173,898
<INCOME-PRETAX> 1,266,113
<INCOME-TAX> 800
<INCOME-CONTINUING> 1,265,313
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,265,313
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
