<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, 1998
[ ] 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
July 10, 1998 was 17,759,800.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
DENSE-PAC MICROSYSTEMS, INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
May 31, February 28,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,763,542 $ 3,626,388
Accounts receivable, net 1,408,996 1,066,553
Inventories 3,013,587 3,090,889
Prepaid expenses and other current assets 153,275 141,538
------------ ------------
Total current assets 7,339,400 7,925,368
Property, net 4,285,234 4,299,795
Other assets 14,360 14,360
------------ ------------
$ 11,638,994 $ 12,239,523
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 428,420 438,125
Accounts payable 1,069,142 1,319,486
Accrued compensation 220,527 240,595
Other accrued liabilities 136,810 121,435
------------ ------------
............
Total current liabilities 1,854,899 2,119,641
------------ ------------
Note payable to related parties 1,900,000 1,900,000
------------ ------------
Other long-term debt 552,250 597,095
------------ ------------
Stockholders' equity
Common stock 17,405,667 17,022,138
Accumulated deficit (10,073,822) (9,399,351)
------------ ------------
Total stockholders' equity 7,331,845 7,622,787
------------ ------------
$ 11,638,994 $ 12,239,523
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 3
DENSE-PAC MICROSYSTEMS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended
May 31, May 31,
1998 1997
------------ ------------
<S> <C> <C>
Net Sales $ 2,204,698 $ 3,448,709
Cost of Sales 1,742,228 3,010,531
------------ ------------
Gross Profit 462,470 438,178
------------ ------------
Costs and Expenses:
Selling, general and administrative 780,923 966,257
Research and development 328,476 154,071
------------ ------------
Loss from operations (646,929) (682,150)
------------ ------------
Other expense (income):
Interest expense 58,854 60,657
Interest income (33,712) (40,306)
------------ ------------
Total other expense 25,142 15,351
Loss before income taxes (672,071) (697,501)
Income tax provision 2,400 800
------------ ------------
Net loss $ (674,471) $ (698,301)
============ ============
Basic and diluted loss per share $ (0.04) $ (0.04)
============ ============
Basic and diluted weighted average shares outstanding 17,800,000 17,006,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
DENSE-PAC MICROSYSTEMS, INC.
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
May 31, May 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (674,471) $ (698,301)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 286,307 265,700
Changes in operating assets and liabilities:
Accounts receivable (342,443) (586,160)
Inventories 77,302 (20,741)
Other current assets (11,737) (61,100)
Other assets
Accounts payable (250,342) 355,177
Accrued compensation (20,068) (24,277)
Accrued liabilities 15,375 133,302
------------ ------------
Net cash used in operating activities: (920,079) (636,400)
------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Property additions (271,746) (209,404)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (54,550) (89,770)
Proceeds from issuance on other long-term debt
Proceeds from issuance of common stock 383,529 19,074
------------ ------------
Net cash provided by (used in) financing activities 328,979 (70,696)
------------ ------------
............
NET DECREASE IN CASH (862,846) (916,500)
CASH AT BEGINNING OF YEAR 3,626,388 4,660,769
------------ ------------
CASH AT END OF QUARTER $ 2,763,542 $ 3,744,269
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 46,854 $ 46,347
============ ============
Income taxes paid $ 2,400 $ 800
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 5
DENSE-PAC MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Dense-Pac Microsystems, Inc. a California corporation, ("Dense-Pac" or
the "Parent Company"), and its wholly-owned subsidiary, TypeHaus, Inc., a Texas
corporation (together, the "Company"), is a technology company that specializes
in designs and automated manufacturing of proprietary and patented
three-dimensional high density memory products, printer media devices, printer
memory, electronic laser printer products, custom memory subsystems, development
of support software for OEM manufacturers of laser printers and Internet
commerce solutions. The Company's web site is at www.dense-pac.com. CommercePac,
a division of Dense-Pac provides internet commerce solution for businesses and
retail operations. Their web site is at www.commercepac.com.
NOTE 2 - As contemplated by the Securities and Exchange Commission ("SEC")under
Item 310 (b) of Regulation S-B, the accompanying consolidated 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, 1998 should be read in conjunction with
the Company's Annual Report on Form 10-KSB for the fiscal year ended February
28, 1998 filed with the SEC.
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly its financial position as of May
31, 1998, and the results of its operations and its cash flows for the quarters
ended May 31, 1998 and 1997. Results for the interim period are not necessarily
indicative of those to be expected for the full year.
NOTE 3 - Recent Accounting Pronouncements -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," applicable to entities with
other comprehensive income. This pronouncement is effective for the year
beginning March 1, 1998. The Company had no items of other comprehensive income,
as defined, for the three months ended March 31, 1998 or 1997. The Company will
also adopt in fiscal 1999, SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company is reviewing the impact of such
statement on its financial statements.
NOTE 4 - Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than three years, computer systems and software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. The Company
believes that its internal systems are Year 2000 compliant and that this will
not result in a material adverse effect on the Company's business, operating
results or financial condition. The Company is currently evaluating its vendors
for their Year 2000 compliancy and believes that it will not result in a
material adverse effect on the Company's business.
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"). 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 common stock of the
<PAGE> 6
Company. 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.
In conjunction with the exercise of the warrants the Company re-negotiated the
interest rate on the 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 common stock of the Company at $7.00 per share. At May 31,
1998, all of the warrants were outstanding and exercisable.
NOTE 6 - The following table summarizes stock option activity under the
Dense-Pac's 1985 and 1996 Stock Option Plan for the three months ended May 31,
1998:
<TABLE>
<CAPTION>
Number of Price per Share Number of
Shares Options Exercisable
---------- ----------------- -------------------
<S> <C> <C> <C>
Balance, February 28, 1998 1,902,244 $ .24 - $ 4.41 711,840
Granted 225,000 1.89 - 2.00 =======
Exercised (163,619) 1.59 - 2.875
Canceled (77,100) 2.03 - 2.875
--------- ----------------- -------
Balance, May 31, 1998 1,886,525 $ .81 - $ 4.41 580,698
========= ================ =======
</TABLE>
ITEM 2 Managements' Discussion and Analysis or Plan of Operations
RESULTS OF OPERATIONS
Net sales for the quarter ended May 31, 1998 decreased $ 1,244,011 or
36% compared to the quarter ended May 31, 1997. The sales decrease can be
attributed to the decreasing prices of memory components in the world-wide
market. During the period from June 1, 1997 to May 31, 1998, prices of
components that the Company uses for production of its memory related products
has experienced price decreases in the range of 50%, depending on the product
and type of memory product. For the quarter ended May 31, 1998, the total number
of units shipped increased by approximately 32% as compared to the same quarter
in the previous year. Of the revenue shipped during the first quarter, $ 284,505
was generated from the Company's wholly-owned subsidiary, TypeHaus, which
Dense-Pac had purchased in September 1997.
Cost of sales as a percentage of sales decreased from 87% for the
quarter ended May 31, 1997, to 79% for the quarter ended May 31, 1998. The
decrease in the cost of sales as a percentage of sales was due primarily to the
product mix shipped during the quarters and the contribution to sales from the
wholly-owned subsidiary, TypeHaus. The products sold by TypeHaus typically have
a higher gross margin. Material cost for the quarter ended May 31, 1998
decreased by 19% percent compared to the same quarter in the previous year. This
decrease was due to the mix of products sold, as more product was shipped to
military contracts which typically is higher margin business.
<PAGE> 7
Selling, general and administrative expenses decreased in the first
quarter of the fiscal year ending February 28, ( "Fiscal 1999" ) by $185,334 or
19% compared to the first quarter of the prior fiscal year. The decrease was
attributable to a decrease of approximately $85,000 in recruitment, relocation
and travel expenses that were recognized in the first quarter of the prior year.
Additionally, commission expenses decreased by approximately $172,000 from the
previous comparable quarter due to the decrease in overall revenue. This
decrease in selling, general and administrative expenses was partially offset by
an increase in costs associated with Investor Relations and patent fees for new
patents that the Company is obtaining.
For the quarter ended May 31, 1998, research and development costs
increased by $174,405 or 113% from the same quarter in the previous fiscal year.
The increase for the quarter was due to a significant increase in research and
development efforts for new stacking technology and the development of products
associated with the commercial plastic stacking 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 1999 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.
Net cash used in operations was approximately $920,000 during the first
quarter of Fiscal 1999. A majority of the cash used in operations resulted from
the loss for the quarter of $674,471. During the quarter, accounts receivable
increased by approximately $340,000 and accounts payable decreased by
approximately $250,000. The Company also received approximately $ 383,000 in
proceeds from the issuance of stock options from the employee stock option plan
in the first quarter of Fiscal 1999 which contributed to the cash provided by
financing activities.
The Company purchased approximately $270,000 new equipment during the
first quarter of Fiscal 1999. The Company does not expect to have any additional
major equipment purchases for the remainder of the year. The Company expects the
new purchases will be made through the use of credit facilities.
At May 31, 1998, 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 has
begun the process of re-negotiating this loan with the major shareholder in
order to extend the due date beyond the October 1999 due date. It is
undetermined whether the Company will be successful in re-negotiating this loan
and the Company has not determined the effects on its working capital if the
loan is not able to be extended beyond the October 1999 due date.
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, 1998, the outstanding principal
balance was $423,318.
<PAGE> 8
FORWARD-LOOKING STATEMENTS
Included in the Notes to Consolidated Financial Statements, this Item 2.
Management's Discussion and Analysis or Plan of Operation and elsewhere in this
Report are certain forward-looking statements reflecting the Company's current
expectations. Although the Company believes that its expectations are based on
reasonable assumptions, there can be no assurance that the Company's financial
goals or expectations will be realized. Numerous factors may affect the
Company's actual results and may cause results to differ materially from those
expressed in forward-looking statements made by or on behalf of the Company.
Some of these factors include 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 Annual Report on
Form 10-KSB for the year ended February 28, 1998.
PART II. - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 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 caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DENSE-PAC MICROSYSTEMS, INC.
July 13, 1998 /s/ Aaron Uri Levy
- - ------------------------------- -------------------------------------
Date Aaron Uri Levy, Chairman of the Board
and Chief Executive Officer
July 13, 1998 /s/ William M. Stowell
- - ------------------------------- -------------------------------------
Date William M. Stowell,
Chief Financial Officer
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT - FORM 10-QSB FOR PERIOD ENDED MAY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB FOR QUARTER ENDED MAY 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 2,763,542
<SECURITIES> 0
<RECEIVABLES> 1,493,996
<ALLOWANCES> 85,000
<INVENTORY> 3,013,587
<CURRENT-ASSETS> 7,339,400
<PP&E> 6,985,802
<DEPRECIATION> 2,700,568
<TOTAL-ASSETS> 11,638,994
<CURRENT-LIABILITIES> 1,854,899
<BONDS> 0
0
0
<COMMON> 17,405,667
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,638,994
<SALES> 2,204,698
<TOTAL-REVENUES> 2,204,698
<CGS> 1,742,228
<TOTAL-COSTS> 2,851,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 85,000
<INTEREST-EXPENSE> 58,854
<INCOME-PRETAX> (672,071)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (674,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (674,471)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
