<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, 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 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 January 9, 1996 was 16,964,681.
<PAGE> 2
DENSE-PAC MICROSYSTEMS, INC.
Balance Sheet
<TABLE>
<CAPTION>
November 31, February 29,
1996 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,189,705 $ 4,579,840
Accounts receivable, net 1,671,315 3,574,822
Inventories 5,174,539 5,151,106
Deferred income taxes 150,000 150,000
Other current assets 194,274 287,075
------------ ------------
Total current assets 11,379,833 13,742,843
Property, net 4,334,981 3,448,860
Technology & marketing rights, net 354,454 409,048
Other assets 73,948 67,262
------------ ------------
$ 16,143,216 $ 17,668,013
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 433,579 413,851
Accounts payable 1,136,275 1,568,907
Accrued compensation 233,424 572,499
Other accrued liabilities 48,970 61,982
------------ ------------
Total current liabilities 1,852,248 2,617,239
------------ ------------
Note payable to related parties 1,900,000 1,900,000
------------ ------------
Other long-term debt 905,046 699,134
------------ ------------
Stockholders' equity
Common stock 16,041,064 15,795,004
Accumulated deficit (4,555,142) (3,343,364)
------------ ------------
Total stockholders' equity 11,485,922 12,451,640
------------ ------------
$ 16,143,216 $ 17,668,013
============ ============
</TABLE>
<PAGE> 3
DENSE-PAC MICROSYSTEMS, INC.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Nine months ended
November 30, November 30.
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 2,854,686 $ 4,516,778 $ 10,562,821 $ 13,186,949
Cost of sales
Cost of sales (other than item below) 2,273,796 3,037,260 7,650,555 9,162,833
Inventory write-downs 530,808 995,892
------------ ------------ ------------ ------------
Total cost of sales 2,804,604 3,037,260 8,646,447 9,162,833
Gross Profit 50,082 1,479,518 1,916,374 4,024,116
Selling, general and administrative expenses 713,246 717,112 2,320,452 2,174,699
Research and development 242,714 171,253 667,773 409,406
------------ ------------ ------------ ------------
Earnings (loss) from Operations (905,878) 591,153 (1,071,851) 1,440,011
Other expenses:
Loss on the sale of assets 79,322 79,322
Interest expense 43,454 57,669 193,546 184,239
Interest Income (43,852) (6,585) (133,741) (10,341)
------------ ------------ ------------ ------------
78,924 51,084 139,127 173,898
Earnings (loss) before income tax provision (984,802) 540,069 (1,210,978) 1,266,113
Provision for income taxes 800 800
------------ ------------ ------------ ------------
Net income (loss) ($ 984,802) $ 540,069 ($ 1,211,778) $ 1,265,313
============ ============ ============ ============
Net earnings (loss) per common share (0.06) 0.03 (0.07) 0.08
============ ============ ============ ============
Weighted average common and
common equivalent shares
outstanding 16,950,000 16,288,000 16,950,000 15,596,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
November 30, November 30,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,211,778) $ 1,265,313
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 712,841 423,280
Changes in operating assets and liabilites:
Accounts receivable 1,903,507 (649,349)
Inventories (23,433) (703,751)
Other current assets 92,801 (70,845)
Other assets (6,686)
Accounts payable (432,632) 68,382
Accrued compensation (339,075) 209,524
Accrued liabilities (13,012)
Deferred revenue (506,443)
----------- -----------
Net cash provided by operating activities: 682,533 36,111
----------- -----------
CASH USED IN INVESTING ACTIVITIES:
Property additions (1,544,368) (971,304)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (305,364) (305,650)
Proceeds from issuance on other long-term debt 531,004
Proceeds from warrants 1,900,000
Proceeds from issuance of common stock 246,060 296,297
----------- -----------
Net cash provided by financing activities 471,700 1,890,647
----------- -----------
NET INCREASE (DECREASE) IN CASH (390,135) 955,454
CASH AT BEGINNING OF YEAR 4,579,840 356,787
----------- -----------
CASH AT END OF QUARTER $ 4,189,705 $ 1,312,241
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 176,188 $ 184,081
=========== ===========
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 November 30, 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
November 30, 1996, the results of operations and its cash flows for the periods
ended November 30, 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>
November 30, February 29,
1996 1996
<S> <C> <C>
Raw Materials $1,017,177 $1,338,472
Work-in-process 2,560,931 2,650,086
Finished Goods 1,596,431 1,162,548
---------- ----------
$5,174,539 $5,151,106
</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, 1996
are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards,
general business credits, etc $ 1,807,810
Inventories 223,384
-----------
Total gross deferred assets $ 2,031,194
Deferred tax liability
Depreciation and amortization (527,440)
Valuation allowance (1,353,754)
-----------
Net deferred income taxes $ 150,000
===========
</TABLE>
<PAGE> 6
There was no change in the valuation allowance as of November 30, 1996.
The Company is unable to determine whether it will be able to further utilize
the gross deferred tax assets in fiscal year 1997. Further evaluation will be
completed as part of the year end evaluation for the year ending February 28,
1997.
As of February 28, 1996, the Company had net operating loss carryforwards of
$4,466,000 for regular income tax and $4,557,000 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 2010.
As of February 28, 1996, the Company had available tax credit carryforwards of
approximately $164,000 to offset future Federal income taxes, which expire at
various dates through 2006.
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 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 August 31, 1996, 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
RESULT OF OPERATIONS
Net sales for the quarter ended November 30, 1996 decreased $1,662,092 or
37% from the quarter ended November 30, 1995, and for the nine months ended
November 30, 1996, sales decreased $2,624,128 or 20%. The sales decrease can be
attributed to a decrease in sales of the standard 512Kx8 product which was
expected. In the first nine months of the previous fiscal year, 37% of sales
were represented by the 512Kx8 or approximately $4,899,000 as compared to 15% or
$1,615,000 of sales for the first nine months of fiscal year 1997. This
represents a decease of approximately $3,284,000 in 512Kx8 sales from the
previous year. The decrease in the standard product was partially offset by an
increase in sales of first generation technology as well as approximately
$525,000 in sales of the Company's new third generation technology for the nine
month period.
At the end of the last fiscal year the Company introduced a supermemory
board with up to four times the memory of boards available today known as the
SuperSIMM. The Company is also marketing the technology in a subsystem
arrangement for stackable plastic memory devices. The Company believes that
there is significant market potential for this type of stacking technology, but
<PAGE> 7
expected orders for this product have not materialized and competitors have
begun to enter the market. In addition, the significant decrease in DRAM prices
in the current year has reduced the expected sell prices of these products by
approximately 80%.
The Company's inability to offset declining sales of standard 512Kx8
products with orders for the third generation product has been the principal
reason for reduced sales in the current fiscal year. Future operating result
will depend on the Company's ability to increase sales of existing and new
products.*
Cost of sales, excluding any inventory write-down, as a percentage of
sales for the three month period ended November 30, 1996 increased from 67% in
fiscal year 1996 to 80% in fiscal year 1997 and for the nine months increased
from 69% in fiscal 1996 to 72% in fiscal 1997. A majority of the increase in the
cost of percentage of sale can be attributed to maintaining factory staff and
inventory in order to support expected third generation orders. Beginning in May
1996, the Company's variable compensation program resulted in a decrease in
indirect labor costs included in cost of sales.
During the three month period ended November 30, 1996, approximately
$531,000 of inventory was written down to market price. A portion of this
decrease was due to additional decreases in DRAM prices with additional
write-downs being attributed to several SRAM price decreases. For the first nine
months of fiscal year 1997, the Company recognized inventory write-downs of
approximately $996,000. A majority of the write-down was associated with the
recent decrease in the 16 Meg DRAM prices which affected the entire industry.
The balance of the write-down was due to a decrease in SRAM prices for certain
inventory of 512Kx32 that the Company held at the end of the quarter.
Selling, general and administrative expense decreased slightly in the
third quarter of fiscal 1997 by $3,866 from the second quarter of the prior
fiscal year. For the nine months ended November 30, 1996 these expenses
increased $145,753 or 7%. For seven months in the year-to-date results, payroll
costs were reduced as required by the Company's variable compensation program.
The increase in selling, general and administrative expenses was due to an
increase in filing fees and maintenance for Nasdaq national market companies, an
increase in selling expense in advertising and travel and an increase in
commissions for independent sales representatives as more territories are being
represented by independent sales representative companies as compared to the
previous year.
In the fourth quarter of fiscal year ending February 28, 1997, the Company
hired a new chief executive officer at an annual salary of $175,000, plus, among
other benefits, a signing bonus of $17,500 and reimbursement of relocation
expenses up to $25,000. The former chief executive officer will continue as an
employee and chairman of the board at an annual salary of $120,000, compared to
his prior $157,500 annual salary. Neither the chief executive officer nor the
chairman are subject to the Company's variable compensation plan through the
year ending February 28, 1998. The additional compensation related to the new
chief executive officer will increase selling, general and administrative
expenses in the fourth quarter of the current fiscal year.
For the three months ended November 30, 1996, research and development
costs increased $71,461 or 42% from the same quarter in the previous period and
for the nine months ended November 30, 1996 expenses have increased $258,367 or
63%. The increase for the nine months is due to the efforts on the new SuperSIMM
technology and the numerous related products that are being developed in
associated with the third generation technology. The Company is also continuing
to develop other new military and commercial products.
<PAGE> 8
During the three months ended November 30, 1996, the Company sold unused
equipment at a loss of approximately $79,000. Interest income increased $37,267
from same quarter in the previous period and for the nine months ended November
30, 1996 interest income increased $123,400. This increase was due to the
invested capital received from the February 1996 private placement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the third quarter of fiscal
1997 was $4.3 million cash from the private placement of stock completed in
February 1996. The Company had cash and cash equivalents of $4.2 million at
November 30, 1996 and working capital of $9,527,585, which are expected to be
sufficient to meet the Company's cash needs for the foreseeable future. The
Company has no bank lines of credit or other sources of capital.
The Company purchased approximately $1.5 million ($531,000 financed) in
capital equipment during the first nine months of fiscal year 1997, some of
which will be used to set up the third generation product line.
The Company 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, 1996, the outstanding
principal amount was $634,977.
The Company has 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
($24,500) and the principal on both loans due in October 1999. These loans are
secured by all of the Company's assets, 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.
CAUTIONARY STATEMENTS
Statements in the foregoing discussion followed by an asterisk (*) and
their 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, under the caption "Cautionary Statements" in item 6, which is
hereby incorporated herein by reference.
Item 5 - Other Information
The Company elected Uri Levy as chief executive officer, president and
director effective January 2, 1997. James G. Turner, former chief executive
officer and president, will remain an employee and chairman of the board. The
company has agreed to the following compensation for Mr. Levy: annual salary of
$175,000, which will be exempt from the variable compensation plan through the
fiscal year ending February 28, 1998; a $17,500 signing bonus; a guaranteed
bonus of 50% of base salary for fiscal year 1998; a $700 per month car
allowance; 500,000 stock options
<PAGE> 9
at an exercise price of $1.25 which vest 25% per year beginning March 1, 1997;
relocation expenses not to exceed $25,000; and other benefits generally provided
to the Company's management. The Company's press release dated January 7, 1997
filed herewith as Exhibit 10.1 hereto is hereby incorporated herein by
reference.
Item 6 -- Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith.
99.1 Press release on new Chief Executive Officer and President
dated January 7, 1997
Exhibit 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)
January 13, 1997 /S/ James G. Turner
________________ ______________________________________
Date James G. Turner, Chairman of the Board
and Chief Executive Officer
January 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) BALANCE
SHEET & STATEMENT OF OPERATIONS FOR PERIOD ENDING NOVEMBER 30, 1996. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-Q QUARTERLY REPORT
PURSUANT TO SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD (QUARTERLY) ENDED
NOVEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-1-1996
<PERIOD-END> NOV-30-1996
<CASH> 4,189,705
<SECURITIES> 0
<RECEIVABLES> 1,711,315
<ALLOWANCES> 40,000
<INVENTORY> 5,174,539
<CURRENT-ASSETS> 11,379,833
<PP&E> 6,325,539
<DEPRECIATION> 1,990,558
<TOTAL-ASSETS> 16,143,216
<CURRENT-LIABILITIES> 1,852,248
<BONDS> 0
0
0
<COMMON> 16,041,064
<OTHER-SE> (4,555,142)
<TOTAL-LIABILITY-AND-EQUITY> 16,143,216
<SALES> 2,854,686
<TOTAL-REVENUES> 2,854,686
<CGS> 2,804,604
<TOTAL-COSTS> 2,804,604
<OTHER-EXPENSES> 955,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,454
<INCOME-PRETAX> (984,802)
<INCOME-TAX> 0
<INCOME-CONTINUING> (984,802)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (984,802)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PRESS RELEASE
FOR IMMEDIATE RELEASE
FROM: STERN & COMPANY Contact: Richard Stern
215 Park Avenue So. Ste.2013 Henry Ling
New York, NY 10003 (212) 777-7722
FOR: DENSE-PAC MICROSYSTEMS, INC. Contact: William Stowell
7321 Lincoln Way (714) 898-0007
Garden Grove, CA 92841-1431
DENSE-PAC MICROSYSTEMS NAMES NEW
CHIEF EXECUTIVE OFFICER AND PRESIDENT
GARDEN GROVE, CALIF., January 7, 1997 - Dense-Pac Microsystems, Inc.,
(Nasdaq:DPAC) announced today the appointment of Uri Levy as its new Chief
Executive Officer, Director and President.
Mr. Levy previously served in several positions as president, chief operating
officer and director of Centennial Technologies, Inc. (NYSE: CTN) which
specializes in customized PCMCIA/PC card solutions. Mr. Levy then (from Aug
1996) served as president of Centennial Capital Corporation, a new wholly-owned
subsidiary of Centennial Technologies, specializing in investment in technology
companies, and he also served on the board of directors of these companies.
During his tenure at Centennial (Aug 1994 to Nov 1996), revenues increased by
more than 360% ($8.2 million to $37.8 million, June of 1996) and the Company was
listed in the Top 200 fastest growth companies by Forbes Magazine (Nov 1995).
Business Week and Barron's rated Centennial as the best performing stock in
1996.
Prior to Centennial, Mr. Levy served as president and chief operating officer of
Acom Computer Inc. (1989-1994), specializing in laser printing applications and
network connectivity solutions for IBM AS400 and RS6000 multi-user server
networked systems. During his tenure sales rose by 300%. Mr. Levy also worked
for Citicorp in the development of Citibank's touch screen ATM.
Mr. Levy stated that he is looking forward to the challenge of expanding
Dense-Pac's numerous applications with the company's excellent and experienced
team members. His strategies for growth will include expansion of sales into
emerging market segments, the introduction of innovative and customized products
to meet our customers' needs, strategic alliances with related technology firms,
licensing of Dense-Pac technology, as well as potential acquisitions of related
technology firms.
<PAGE> 2
Mr. Levy's experience includes leading edge design, manufacturing, OEM sales and
capital investments in technologies in fields such as, surface mount designs,
PCMCIA card systems, chip-on-board, optical imaging, internet, video
conferencing, laser printers, memory storage devices and network server
communications. Mr. Levy has over 18 years experience with high technology
industry, including founding Cygnus Engineering, a computer aided design
engineering firm, and VIVID Communication, a video conferencing firm. He holds
Bachelors and Masters Degrees in engineering. Mr. Levy is also the author of the
book "Electronic Printing", published by Interquest in 1993, a member of IEEE
and the Young President's Organization.
Mr. Levy succeeds James G. Turner who stepped down from his position as Chief
Executive Officer and President.
Statements regarding the Company's expectations about growth strategies, new and
existing products, future financial performance and other forward looking
statements are subject to various risks and uncertainties, including, without
limitation, demand 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 risks are discussed in greater detail in the
Company's filings with Securities and Exchange Commission.
Dense-Pac Microsystems, Inc. is a designer and manufacturer of proprietary
computer chip stacking technologies that allows the Company's government and
commercial customers to pack huge amounts of memory into small spaces. Its
memory technology can be used in such diverse areas as space satellites and
space missiles, high performance auto engines, computer servers and cellular
telephones.
# # # #
