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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 May 31, 1996
- 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
outstanding as of July 10, 1996 was 16,909,681.
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TOTAL PAGES: 9
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DENSE-PAC MICROSYSTEMS, INC.
Balance Sheet
<TABLE>
<CAPTION>
May 31, February 29,
1996 1996
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Curent Assets:
Cash and cash equivalents $4,246,282 $4,579,840
Accounts receivable, net 2,880,922 3,574,822
Inventories 6,192,133 5,151,106
Deferred income taxes 150,000 150,000
Other current assets 363,132 287,075
--------------- ---------------
Total current assets 13,832,469 13,742,843
Property, net 3,828,914 3,448,860
Technology and marketing rights, net 390,850 409,048
Other assets 73,948 67,262
--------------- ---------------
$18,126,181 $17,668,013
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 435,685 413,851
Accounts payable 1,777,528 1,568,907
Accured compensation 343,874 572,499
Other accrued liabilities 74,966 61,982
--------------- ---------------
Total current liabilities 2,632,053 2,617,239
Note payable to related parties 1,900,000 1,900,000
--------------- ---------------
Other long-term debt 786,598 699,134
--------------- ---------------
Stockholders' equity
Common stock 16,005,564 15,795,004
Accumlated deficit (3,198,034) (3,343,364)
--------------- ---------------
Total stockholders' equity 12,807,530 12,451,640
--------------- ---------------
$18,126,181 $17,668,013
=============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
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DENSE-PAC MICROSYSTEMS, INC.
Summary of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended
May 31, May 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Net Sales $4,064,422 $4,230,313
Cost of Sales 2,947,620 3,152,712
--------------- ---------------
Gross Profit 1,116,802 1,077,601
--------------- ---------------
Operating Expenses:
Selling, general aand administrative 818,547 637,428
Research and development 126,186 102,583
--------------- ---------------
Income from operations 172,069 337,590
--------------- ---------------
Other expenses:
Interest expense, net 26,739 59,981
--------------- ---------------
Income before income tax provision 145,330 277,609
Income tax provision
--------------- ---------------
Net income 145,330 277,609
Net income per common and
common equivalent share $0.01 $0.02
=============== ===============
Weighted average shares outstanding 16,814,000 15,222,000
=============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
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DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended
May 31, May 31,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $145,330 $277,609
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 206,578 128,931
Changes in operating assets and liabilites:
Accounts receivable 693,900 362,062
Inventories (1,041,027) 243,398
Other current assets (76,057) (38,700)
Other assets (6,686)
Accounts payable 208,621 (319,545)
Accrued compensation (228,625) (26,890)
Accured liabilities 12,984 1,645
Deferred revenue (128,023)
--------------- -------------
Net cash provided by (used in) operating activities (84,982) 500,487
--------------- -------------
CASH USED IN INVESTING ACTIVITIES:
Property additions (568,434) (254,487)
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (47,227) (46,164)
Proceeds from issuance on other long-term debt 156,525
Proceeds from issuance of common stock 210,560 3,609
--------------- -------------
Net cash provided by (used in) financing activities 319,858 (42,555)
--------------- -------------
NET INCREASE (DECREASE) IN CASH (333,558) 203,445
CASH AT BEGINNING OF YEAR 4,579,840 356,787
--------------- -------------
CASH AT END OF QUARTER $4,246,282 $560,232
=============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $75,621 $50,232
=============== =============
Income taxes paid $0 $0
=============== =============
</TABLE>
See accompanying notes to condensed financial statments.
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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. This report on Form
10-QSB for the period ended May 31, 1996 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 May 31, 1996, the results of operations and its cash flows for the
periods ended May 31, 1996 and 1995. 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>
May 31, 1996 February 29, 1996
<S> <C> <C>
Raw materials $1,166,041 $1,338,472
Work-in-process 3,812,615 2,650,086
Finished goods 1,213,477 1,162,548
---------- ----------
$6,192,133 $5,151,106
========== ==========
</TABLE>
NOTE 4 - Net income per common and common equivalent share is computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during the periods.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales for the quarter ended May 31, 1996, decreased $165,891 or 4%
from the quarter ended May 31, 1995. The sales decrease was due to a $1,200,000
decline in sales of the 512kx8 standard commercial product due to product life
cycle. This decrease was partially off-set by increased sales of other
products, including a $231,000 increase in first generation product sales and
$138,000 of sales of the new third generation products. The 512kx8 product
accounted for 34% of sales in fiscal year 1996, but sales in fiscal year 1997
are expected to be insignificant. While the Company has developed a
replacement for the 512kx8 product which incorporates advanced technology, the
Company cannot predict whether such new product will achieve market acceptance.
The Company has introduced a third generation super memory board with
up to four times the memory of boards available today known as the
SuperSIMM (TM). The Company is also marketing this technology in a subsystem
arrangement for stackable plastic memory devices. The Company believes that the
new third generation commercial stacking products will contribute
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to sales in the second half of the fiscal year, although anticipated sales
prices of these new products have been negatively effected by the recent
decrease in DRAM prices. On June 17, 1996, the Company announced a purchase
agreement with Odetics, Inc. which, based on Odetics' estimated product
requirements, could generate up to $6.4 million of sales of the third
generation products in the next 12 months. The Company is currently producing
qualification units for Odetics' approval.
Cost of sales as a percentage of sales for the three month period
ended May 31, decreased from 75% in fiscal year 1996 to 73% in fiscal year
1997. During the first quarter of fiscal year 1997, inventory levels increased
as compared to the previous first quarter resulting in an increase in a
capitalization of overhead costs which would have otherwise been included in
cost of sales. The result was a slight decrease in cost of sales as a
percentage of sales.
Selling, general and administrative expense increased in the first
quarter of fiscal 1997 by $181,119 or 28% from the first quarter of the prior
fiscal year. The increase in these expenses was primarily due to an increase
in commissions to independent sales representatives who accounted for a greater
percentage of revenues in the current first quarter. Additionally, expenses
associated with the Company being listed on the NASDAQ National Market
increased as compared to the same period in the previous fiscal quarter.
For the three months ended May 31, 1996, research and development
costs increased $23,603 or 23% from the same quarter in the previous period as
the Company is continuing to developing numerous new products for the military
as well as the commercial marketplace.
For the three months ended May 31, 1996, net interest expense
decreased $33,242 or 55% from same period in the prior year. This decrease was
due to more invested capital, resulting in interest income of $47,000 for the
quarter as compared to $2,000 in the first quarter of the previous year. The
increase in the interest expense was due to additional leases entered into
during the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity for the first quarter of
fiscal 1997 were the $4.3 million net proceeds from the private placement of
stock completed in February 1996; the proceeds from the issuance of long term
debt; and the proceeds from the issuance of common stock. The Company believes
that existing working capital, together with a commitment for a $2.5 million
line of credit will be sufficient to meet the Company's cash needs for the
foreseeable future.
CAUTIONARY STATEMENT
Statements regarding the Company's expectations about new and existing
products and its future financial performance are forward looking statements
which are subject to various risks and uncertainties, including, without
limitation, demand for and acceptance of new and existing products,
technological advances and product obsolescence, availability of semiconductor
devices at reasonable prices, competitive factors and the 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 Form 10-KSB for the year ended
February 29, 1996.
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
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memory density as the Company's modules. As a result, memory products
typically have a product life of only three to five years.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
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. For example, pre-production delays associated with the second
generation Dense-Stack product line caused the Company to lose its source of
acceptable SRAM die because the supplier discontinued production of the die
that the second generation product had been designed for. The Company believes
that the second generation technology remains valid and it may redesign this
product to incorporate new die technology when market conditions are
appropriate.
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 produce development and
promotion.
UNCERTAINTY OF MARKET ACCEPTANCE OR PROFITABILITY OF NEW PRODUCTS
The introduction of the SuperSIMM (TM) product or other new products
which the Company may introduce in the future will require the expenditure of
funds for research and development, tooling, manufacturing processes, inventory
and marketing. In order to achieve high volume production of the SuperSIMM (TM)
product, the Company will have to make substantial investments in inventory and
increase production rates. 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 sales of its
products. There can be no assurance that the SuperSIMM (TM) product or future
new products will achieve market acceptance, result in increased revenues, or be
profitable. Such products could also be subject to technological obsolescence
or price erosion resulting from competition or other factors.
PARTS SHORTAGES AND DEPENDENCE ON SUPPLIERS
The semiconductor industry is characterized by periodic shortages of
parts which have in the past and may in the future negatively affect the
Company's operations. The Company is dependent on a limited number of
suppliers for semiconductor devices used in its products, but 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 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.
DEPENDENCE OF DEFENSE-RELATED BUSINESS
The Company has historically derived a substantial 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
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developing products with commercial applications, although such products
generally have lower margins than defense-related products.
PATENT 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 development or commercialization of the Company's
products.
MANAGEMENT OF GROWTH
The Company intends to use the net proceeds of approximately $4.3
million from a private offering of Common Stock completed in February 1996 to
finance expected 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 effect its ability to satisfy
customer demand in a timely fashion. Failure to manage growth effectively
could adversely effect the Company's financial condition and results of
operations.
COMPETITION
Numerous memory companies are in the process of developing
three-dimensional products, including IBM, Irvine Sensors, Texas Instruments,
Mitsubishi, Motorola, Staktek, Cubic memory and Thompson CSF in France such
companies have substantially 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 competitive with existing or
future products, or that the Company will be able to establish or maintain a
profitable price structure for its products.
MANUFACTURING LICENSES
In order to obtain large orders for the its commercial products from
OEMs, the Company may be required to provide royalty-free manufacturing
licenses to third parties as second sources to ensure that the customer's
requirements are met. Such second sources could then compete directly with the
Company could become dependent on the efforts and abilities of its licensees,
if any, to manufacture and market its products.
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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)
July 11, 1996
s/s James G. Turner
- ---------------------------- ------------------------------------
Date James G. Turner, Chairman of the Board
and Chief Executive Officer
July 11, 1996
s/s William M. Stowell
- ---------------------------- ------------------------------------
Date William M. Stowell, Chief Financial
Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDING MAY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-QSB-QUARTERLY REPORT
PURSUANT TO SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY
31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 4,246,282
<SECURITIES> 0
<RECEIVABLES> 2,880,922
<ALLOWANCES> 40,000
<INVENTORY> 6,192,133
<CURRENT-ASSETS> 13,832,469
<PP&E> 5,657,651
<DEPRECIATION> 1,828,737
<TOTAL-ASSETS> 18,126,181
<CURRENT-LIABILITIES> 2,632,053
<BONDS> 0
0
0
<COMMON> 16,005,564
<OTHER-SE> (3,198,034)
<TOTAL-LIABILITY-AND-EQUITY> 12,807,530
<SALES> 4,064,422
<TOTAL-REVENUES> 4,064,422
<CGS> 2,947,620
<TOTAL-COSTS> 2,947,620
<OTHER-EXPENSES> 944,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,739
<INCOME-PRETAX> 145,330
<INCOME-TAX> 0
<INCOME-CONTINUING> 145,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,330
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
