<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 August 31, 1997
[ ] 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 September 30, 1997 was 17,109,244.
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TOTAL PAGES: 9
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DENSE-PAC MICROSYSTEMS, INC.
Balance Sheet
<TABLE>
<CAPTION>
August 31, February 28,
1997 1997
------------ ------------
<S> <C> <C>
(unaudited)
ASSETS
Curent Assets:
Cash and cash equivalents $ 4,528,016 $ 4,660,769
Accounts receivable, net 1,783,393 1,245,685
Inventories 2,379,605 3,530,648
Other current assets 165,616 122,988
------------ ------------
Total current assets 8,856,630 9,560,090
Property, net 3,728,512 3,907,105
Other assets 14,360 14,360
------------ ------------
$ 12,599,502 $ 13,481,555
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 350,864 407,254
Accounts payable 686,126 1,074,263
Accrued compensation 388,995 636,455
Other accrued liabilities 185,235 73,048
------------ ------------
Total current liabilities 1,611,220 2,191,020
------------ ------------
Note payable to related parties 1,900,000 1,900,000
------------ ------------
Other long-term debt 596,148 764,489
------------ ------------
Stockholders' equity
Common stock 16,122,591 16,065,404
Accumulated deficit (7,630,457) (7,439,358)
------------ ------------
Total stockholders' equity 8,492,134 8,626,046
------------ ------------
$ 12,599,502 $ 13,481,555
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 3
DENSE-PAC MICROSYSTEMS, INC.
Summary of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended Six months ended
------------------------------- -------------------------------
August 31, August 31, August 31, August 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 4,571,050 $ 3,642,713 $ 8,019,759 $ 7,708,135
Cost of Sales 2,848,729 2,894,223 5,859,260 5,841,843
------------ ------------ ------------ ------------
Gross Profit 1,722,321 749,490 2,160,499 1,866,292
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative 907,954 789,459 1,874,211 1,608,006
Research and development 314,441 298,873 468,512 425,059
------------ ------------ ------------ ------------
Earnings (loss) from operations 499,926 (338,842) (182,224) (166,773)
------------ ------------ ------------ ------------
Other expenses and (income):
Interest expense 34,771 93,398 95,428 167,730
Interest income (42,047) (60,734) (87,353) (108,327)
------------ ------------ ------------ ------------
Total other expenses (income) (7,276) 32,664 8,075 59,403
Earnings (loss) before income taxes 507,202 (371,506) (190,299) (226,176)
Income tax expense 800 800 800
------------ ------------ ------------ ------------
Net income (loss) $ 507,202 ($ 372,306) ($ 191,099) ($ 226,976)
============ ============ ============ ============
Net earnings (loss) per common share $ 0.03 ($ 0.02) ($ 0.01) ($ 0.01)
============ ============ ============ ============
Weighted average common
shares outstanding 17,291,000 16,950,000 17,036,000 16,950,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
-----------------------------
August 31, August 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (191,099) $ (226,976)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 533,300 465,830
Changes in operating assets and liabilities:
Accounts receivable (537,708) 1,131,479
Inventories 1,151,043 (470,189)
Other current assets (42,628) (13,429)
Other assets (6,686)
Accounts payable (388,137) (66,773)
Accrued compensation (247,460) (295,256)
Accrued liabilities 112,187 3,699
----------- -----------
Net cash provided by operating activities: 389,498 521,699
----------- -----------
CASH USED IN INVESTING ACTIVITIES:
Property additions (354,707) (1,088,711)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (224,731) (105,935)
Proceeds from issuance on other long-term debt 156,525
Proceeds from issuance of common stock 57,187 246,060
----------- -----------
Net cash provided by (used in) financing activities: (167,544) 296,650
----------- -----------
NET INCREASE (DECREASE) IN CASH (132,753) (270,362)
CASH AT BEGINNING OF YEAR 4,660,769 4,579,840
----------- -----------
CASH AT END OF QUARTER $ 4,528,016 $ 4,309,478
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 95,428 $ 135,567
=========== ===========
Income taxes paid $ 800 $ 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 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, 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 August 31, 1997, and the results of operations and its cash flows for the
quarters ended August 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>
August 31, 1997 February 28, 1997
--------------- -----------------
<S> <C> <C>
Raw Materials $ 792,527 $ 772,615
Work-in-process 1,101,905 2,022,493
Finished Goods 485,173 735,540
---------- ----------
$2,379,605 $3,530,648
---------- ----------
</TABLE>
NOTE 4 - 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 loss
periods, common equivalent shares were anti-dilutive and were not included in
the earnings per share calculation.
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), was
issued in February 1997. This Statement supersedes APB Opinion No. 15, "Earnings
Per Share" (Opinion 15) and requires dual presentation of basic and diluted EPS
for entities with complex capital structures. Basic EPS excludes dilution and
replaces primary EPS. Diluted EPS is computed similar to fully diluted EPS
pursuant to Opinion 15. FAS 128 is effective for financial statements issued for
period ending after December 15, 1997. For the period ending August 31, 1997,
the net earnings under the basic and diluted method of accounting would be $ .03
for the period.
NOTE 5 - 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.
<PAGE> 6
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 August 31, 1997, all of the warrants were outstanding and
exercisable.
NOTE 6 - For the years beginning after July 1, 1998, the Company will adopt SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The Company is reviewing the
impact of such statements on its financial statements.
NOTE 7 - Subsequent event- On September 8, 1997, the Company completed the
acquisition of the assets of TypeHaus, a Texas based business, for $ 300,000 in
cash and common stock. TypeHaus provides printer media devices, printer memory
and electronic laser printer products to a variety of OEM customers. TypeHaus
also supplies custom memory subsystems and develops support software for OEM
manufacturers of laser printers. A wholly-owned subsidiary was formed to
purchase the assets and will be consolidated with Dense-Pac.
Item 2 - Management's Discussion and Analyst of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Net sales for the quarter ended August 31, 1997, increased $928,337 or 25%
compared to the quarter ended August 31, 1996. For the six months ended August
31, 1997, sales increased $311,624 or 4%. The sales increase during the quarter
can be attributed to the shipment of a large order to one customer for a
customized and specialized commercial memory product. Other product sales were
similar to the previous quarter with the 512k x 8 products continuing to
contribute to revenue as well as the commercial stacking products. Revenue of
512k x 8 for the three months ended August 31, 1997 was $ 1,121,000 as compared
to the $ 507,000 in the same period in the period year. For the six months ended
August 31, 1997, revenue of the 512k x 8 was $ 1,568,000 or 20% of sales as
compared to $ 1,040,000 of 512k x 8 shipped for the six months ended August 31,
1996, representing approximately 13% of sales. The continuing level of 512k x 8
activity can not be determined due to the timing of technology changeover.
During the third quarter the sales organization re-structured into two
divisions, military and commercial, and more emphasis was placed on the past
successful commercial products, as a result, more orders were produced for the
512K x 8 product line.
During the third quarter, the Company will be expanding into more standard
type of DRAM commercial products, which typically have lower margins than
military or higher end commercial products. Competitive pricing to enter this
market will also affect margin, although the Company believes that margins
should improve with increased sales volume and reputation in the market. The
Company is willing to incur the cost of entering this market for the standard
commercial products in order to gain access to new markets for its high end,
high density memory products. The Company has also incurred acquisition and
start-up costs related to the purchase of the TypeHaus business at the beginning
of the third quarter. (See Not 7 of Notes to the Condensed Financial
Statements.) The Company also plans to invest in R&D, engineering, new
technologies, manufacturing and test equipment and it continues to build its
capacity, infrastructure and sales/marketing efforts aimed at the commercial
sector and new military opportunities. All of these
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activities will affect the Company's ability to achieve profitability in the
third quarter. See "Cautionary Statements."
Gross profit as a percentage of sales for the three month period ended
August 31, 1997, increased to 38% in fiscal year 1998 from 21% in fiscal year
1997. The increase in the gross margin for the second quarter ended August 31,
1997 can be attributed to lower material cost for the mix of product sold during
the quarter. Gross margin also improved in the second quarter due to operating
efficiencies associated with increased revenue over a fixed amount of
manufacturing overhead expenses. Additionally, the Company recognized
approximately $ 80,000 in income from the reversal of severance costs which had
been accrued at February 28, 1997.
For the first six months, gross profit as a percentage of sales increased
to 27% for fiscal year 1998 from 24% in fiscal year 1997. Material cost for the
six months ended August 31, 1997, as compared to the previous six months was
relatively the same as a percentage of revenue. Additionally, approximately $
90,000 has been recognized in inventory writedowns for the current six month
period as compared to approximately $ 570,000 in inventory writedowns in the
previous six month period associated with price decreases in the 16 meg DRAM
market. For the six months ended August 31, 1997, capitalized engineering
decreased by approximately $ 200,000. Additionally, depreciation expense related
to manufacturing equipment increased $90,000 from the same six month period in
the previous fiscal year, due to new testing equipment and manufacturing
equipment that the company purchased during fiscal year 1997 and the beginning
of fiscal year 1998.
Selling, general and administrative expenses increased in the second
quarter of fiscal 1998 by $118,495 or 15% from the second quarter of the prior
fiscal year. For the six months ended August 31, 1997 these expenses increased $
266,205 or 17%. The increase in general and administrative expense can be
attributed in an increase in personnel expenses in the area of sales, marketing
and administration. There was also an increase of $60,000 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.
Additionally, inside sales commissions increased by approximately $ 80,000 as
the internal compensation for inside sales was restructured at the beginning of
the fiscal year.
For the three months ended August 31, 1997, research and development costs
increased $15,568 or 5% from the same quarter in the previous fiscal year and
for the six months ended August 31, 1997 expenses have increased $ 43,453 or
10%. The slight increase for the quarter and for the six months was due to the
Company continuing to expand efforts into new products and the commitment to
develop new unique high memory technology.
For the six month ended August 31, 1997 interest expense has decreased
$72,302 or 43% from the same period in the previous year due to lower debt
principal outstanding. There are several leases and notes that have come to the
end of the payment period during this time frame and as a result the interest
expense associated with these leases and notes has decreased.
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the second 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 appear to be sufficient
to meet the Company's cash needs at least for the next twelve months.
Net cash from operating activities was approximately $ 390,000 during the
first six months of fiscal year 1998 due to a decrease in depreciation expense
and inventories offset primarily by the increases in accounts receivable,
accounts payable, accrued liabilities, and the net loss for the period.
The Company purchased approximately $ 350,000 in new equipment during the
first six months of fiscal year 1998. The Company expects that it will purchase
an additional $ 500,000 in new equipment during the third quarter ending
November 30, 1997. While the Company does have sufficient cash to pay for these
additional capital expenditures, it will evaluate the opportunity to finance
these items, in order to insure a sufficient cash reserve for future growth.
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 August 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> 9
PART II
Item 4 - Submission of Matters to a vote of Security Holders
1. (a) Annual Shareholders' Meeting - August 15, 1997
(b) Election of Directors: Votes For Withheld
Aaron Uri Levy 13,702,310 70,900
Roger Claes 13,702,310 70,900
Robert Southwick 13,702,310 70,900
Trude Taylor 13,702,300 70,910
James Turner 13,702,300 70,910
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
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 13, 1997 /s/ Aaron Uri Levy
- ---------------------------------- -----------------------------------------
Date Aaron Uri Levy, Chairman of the Board
and Chief Executive Officer
October 13, 1997 /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 (A)
QUARTERLY REPORT - FORM 10-QSB FOR PERIOD AUGUST 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-QSB FOR QUARTER ENDED AUGUST 31,
1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 4,528,016
<SECURITIES> 0
<RECEIVABLES> 1,853,393
<ALLOWANCES> 70,000
<INVENTORY> 2,379,605
<CURRENT-ASSETS> 8,856,630
<PP&E> 5,804,093
<DEPRECIATION> 2,075,581
<TOTAL-ASSETS> 12,599,502
<CURRENT-LIABILITIES> 1,611,220
<BONDS> 0
0
0
<COMMON> 16,122,591
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,599,502
<SALES> 8,019,759
<TOTAL-REVENUES> 8,019,759
<CGS> 5,859,260
<TOTAL-COSTS> 8,201,983
<OTHER-EXPENSES> 8,075
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 95,428
<INCOME-PRETAX> (190,299)
<INCOME-TAX> 800
<INCOME-CONTINUING> (191,299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (191,099)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
