<PAGE> 1
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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, 1997
- Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
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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
outstanding as of July 10, 1997 was 17,014,181.
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DENSE-PAC MICROSYSTEMS, INC.
Balance Sheet
<TABLE>
<CAPTION>
May 31, February 28,
1997 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Curent Assets:
Cash and cash equivalents $ 3,744,269 $ 4,660,769
Accounts receivable, net 1,831,845 1,245,685
Inventories 3,551,389 3,530,648
Income tax benefit 0 0
Other current assets 184,088 122,988
------------ ------------
Total current assets 9,311,591 9,560,090
Property, net 3,850,809 3,907,105
Other assets 14,360 14,360
------------ ------------
$ 13,176,760 $ 13,481,555
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 369,118 407,254
Accounts payable 1,429,440 1,074,263
Accured compensation 612,178 636,455
Other accrued liabilities 206,350 73,048
------------ ------------
Total current liabilities 2,617,086 2,191,020
------------ ------------
Note payable to related parties 1,900,000 1,900,000
------------ ------------
Other long-term debt 712,855 764,489
------------ ------------
Stockholders' equity
Common stock 16,084,478 16,065,404
Accumlated deficit (8,137,659) (7,439,358)
------------ ------------
Total stockholders' equity 7,946,819 8,626,046
------------ ------------
$ 13,176,760 $ 13,481,555
============ ============
</TABLE>
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DENSE-PAC MICROSYSTEMS, INC.
Summary of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended
May 31, May 31,
1997 1996
------------ ------------
<S> <C> <C>
Net Sales $ 3,448,709 $ 4,064,422
Cost of Sales 3,010,531 2,947,620
------------ ------------
Gross Profit 438,178 1,116,802
------------ ------------
Operating Expenses:
Selling, general and administrative 966,257 818,547
Research and development 154,071 126,186
------------ ------------
Earnings (loss) from operations (682,150) 172,069
------------ ------------
Other expenses and (income):
Interest expense 60,657 74,332
Interest income (45,306) (47,593)
------------ ------------
Total other expenses (income) 15,351 26,739
Earnings (loss) before income taxes (697,501) 145,330
Income tax expense 800
------------ ------------
Net income (loss) $ (698,301) $ 145,330
============ ============
Net earnings (loss) per common share $ (0.04) $ 0.01
============ ============
Weighted average common
shares outstanding 17,006,000 16,814,000
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended
May 31, May 31,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (698,301) $ 145,330
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 265,700 206,578
Changes in operating assets and liabilities:
Accounts receivable (586,160) 693,900
Inventories (20,741) (1,041,027)
Other current assets (61,100) (76,057)
Other assets (6,686)
Accounts payable 355,177 208,621
Accrued compensation (24,277) (228,625)
Accrued liabilities 133,302 12,984
----------- -----------
Net cash provided by (used in) operating activities: (636,400) (84,982)
----------- -----------
CASH USED IN INVESTING ACTIVITIES:
Property additions (209,404) (568,434)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (89,770) (47,227)
Proceeds from issuance on other long-term debt 156,525
Proceeds from issuance of common stock 19,074 210,560
----------- -----------
Net cash provided by financing activities (70,696) 319,858
----------- -----------
NET INCREASE (DECREASE) IN CASH (916,500) (333,558)
CASH AT BEGINNING OF YEAR 4,660,769 4,579,840
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CASH AT END OF QUARTER $ 3,744,269 $ 4,246,282
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 46,347 $ 75,621
=========== ===========
Income taxes paid $ 800 $ 0
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
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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 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 May 31, 1997 should be read in conjunction with the Company's
Annual Report to Shareholders for the previous year.
In the opinion of the Company management, 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, 1997 and 1996, and the results of operations and its cash flows for
the quarters ended May 31, 1997 and 1996. 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, 1997 February 28, 1997
------------ -----------------
<S> <C> <C>
Raw Materials $1,289,810 $ 772,615
Work-in-process 1,833,606 2,022,493
Finished Goods 427,973 735,540
---------- ----------
$3,551,389 $3,530,648
========== ==========
</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, 1997
are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards,
general business credits, etc. $ 3,198,555
Inventories 239,422
-----------
Total gross deferred assets $ 3,437,977
Deferred tax liability
Depreciation and amortization (237,688)
Valuation allowance (3,200,289)
-----------
Net deferred income taxes $ -0-
===========
</TABLE>
<PAGE> 6
There was no change in the valuation allowance as of May 31, 1997.
The Company is currently unable to determine whether the gross deferred tax
asset will be utilized in fiscal year 1998. The Company will continue to
evaluate the utilization of the deferred tax asset.
As of February 28, 1997, the Company had net operating loss carryforwards of
$7,711,000 for regular income tax and $7,802,000 for alternative minimum tax
available to offset future Federal taxable income (a portion is subject to
limitations of approximately $270,600), expiring at various dates through 2011.
As of February 28, 1997, the Company had available tax credit carryforwards of
approximately $164,000 to offset future Federal income taxes, which expire at
various dates through 2006 and available California tax credit carryforwards of
approximately $149,000 which expire at various dates beginning 2004.
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 period. For the quarter
ended May 31, 1997, common equivalent shares were anti-dilutive and were not
included in the earnings per share 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 September
25, 1995, the Company called the warrants. On October 23, 1995, the Company
received $1,900,000 for the exercise of the warrants and extinguished debt for
$100,000.
The Company also re-negotiated the interest rate on the $1,800,000 note to a
rate of 5% per annum. In connection with the amended loan agreement, the Company
issued four year warrants to purchase 375,000 shares of the Company stock at
$7.00 per share. At May 31, 1997, all of the warrants were outstanding and
exercisable.
NOTE 7 - In February 1996, the Company raised $4,297,000, net of offering costs,
from the sale of 900,000 shares of common stock at $5.00 per share to private
investors.
Item 2 - Management's' Discussion and Analyst of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net sales for the quarter ended May 31, 1997 decreased $615,713 or 15%
compared to the quarter ended May 31, 1996. The sales decrease can be attributed
to the anticipated decrease in sales of the standard 512K x 8 product, and a
decrease in sales of first generation products. The decrease in the sales of
512K x 8 product was due to a decrease in material costs and changes in the
market place which reduced product demand. The decrease in sales of first
generation products was due to the timing of shipment of products on the
contracts.
Cost of sales as a percentage of sales increased from 73% for the
quarter ended May 31, 1997, to 87% for the quarter ended May 31, 1997. The
increase in the cost of sales as a percentage of sales was due primarily to
higher material costs. Material costs for the quarter ended May 31, 1997
increased by seven percent over the material costs from the quarter ended May
31, 1996. Additionally, depreciation expense related to manufacturing equipment
increased $50,000 from the same quarter in the previous fiscal year, due to new
testing equipment and manufacturing equipment that the company purchased during
fiscal year 1997.
<PAGE> 7
Selling, general and administrative expenses increased in the first
quarter of fiscal 1998 by $147,710 or 18% from the first quarter of the prior
fiscal year. The increase was attributed to an increase in personnel in the
areas of sales, marketing and administration. There was also an increase of
$50,000 in travel expenses due to increased efforts to introduce new personnel
and products to the marketplace and new customer base. The balance of the
increase in selling, general and administrative expenses are attributed to an
increase in costs to be listed on the national NASDAQ Exchange, an increase in
advertising expenses and an expense of approximately $40,000 for the termination
of a consultant in Europe.
For the quarter ended May 31, 1997, research and development costs
increased $27,885 or 22% from the same quarter in the previous fiscal year. The
increase for the quarter was due to increased research and development efforts
for new stacking technology and the development of products associated with the
third generation technology. The Company also continued to develop other new
military and commercial products.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the first quarter of
fiscal 1998 was $4.3 million cash from the private placement of stock completed
in February 1996. The proceeds from the private placement completed in February
1996, appear to be sufficient to meet the Company's cash needs for the
foreseeable future.
At February 28, 1997, the Company had a $1.8 million loan payable to a
major shareholder with interest at 5% per annum, and a $100,000 loan payable to
a director with interest at 8% per annum, with interest payable quarterly on
both loans and the principal on both loans due in October 1999. These loans are
secured by all of the Company's asset's, although the major shareholder has
agreed to subordinate its security interest in accounts receivable in order to
permit the Company to obtain conventional bank financing for accounts
receivable. These loans preclude the Company from incurring additional debt
without the consent of the lenders except for purchase money indebtedness
incurred for the purchase or lease of equipment and machinery.
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 May 31, 1997, the outstanding
amount was $564,424.
CAUTIONARY STATEMENTS
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, 1997.
<PAGE> 8
PART II.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE> 9
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)
July 11, 1997 /s/ Aaron Uri Levy
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Date Aaron Uri Levy, Chairman of the Board
and Chief Executive Officer
July 11, 1997 /s/ William M. Stowell
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Date William M. Stowell, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
QUARTERLY REPORT - FORM 10-QSB FOR PERIOD MAY 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-QSB FOR QUARTER ENDED MAY 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 3,744,269
<SECURITIES> 0
<RECEIVABLES> 1,881,845
<ALLOWANCES> 50,000
<INVENTORY> 3,551,389
<CURRENT-ASSETS> 9,311,591
<PP&E> 5,658,790
<DEPRECIATION> 1,807,981
<TOTAL-ASSETS> 13,176,760
<CURRENT-LIABILITIES> 2,617,086
<BONDS> 0
0
0
<COMMON> 16,084,478
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,176,760
<SALES> 3,448,709
<TOTAL-REVENUES> 3,448,709
<CGS> 3,010,531
<TOTAL-COSTS> 4,130,859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 60,657
<INCOME-PRETAX> (697,501)
<INCOME-TAX> 800
<INCOME-CONTINUING> (698,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (698,301)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
