<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended November 30, 1997
[-] Transition report under 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 registrant 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
Thenumber of shares of Dense-Pac Microsystems, Inc. common stock, no par value,
outstanding as of outstanding as of December 31, 1997 was 17,501,300.
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TOTAL PAGES: 12
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DENSE-PAC MICROSYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements: Page Number
Consolidated Balance Sheets 3
February 28, 1997 and November 30, 1997
(unaudited)
Consolidated Statements of Operations 4
Three months and nine months ended
November 30, 1996 and 1997
(unaudited)
Notes to Unaudited Consolidated Financial 7
Statements
ITEM 2. Managements Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
<PAGE> 3
PART - FINANCIAL INFORMATION
ITEM 1. Financial Statements
DENSE-PAC MICROSYSTEMS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
November 30, February 28,
1997 1997
------------ ------------
<S> <C> <C>
(unaudited)
ASSETS
Curent Assets:
Cash and cash equivalents $ 4,192,771 $ 4,660,769
Accounts receivable, net 1,181,587 1,245,685
Inventories 3,052,752 3,530,648
Other current assets 181,017 122,988
------------ ------------
Total current assets 8,608,127 9,560,090
Property, net 4,357,275 3,907,105
Other assets 14,360 14,360
------------ ------------
$ 12,979,762 $ 13,481,555
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 350,883 407,254
Accounts payable 1,019,706 1,074,263
Accured compensation 230,614 636,455
Other accrued liabilities 140,801 73,048
------------ ------------
Total current liabilities 1,742,004 2,191,020
------------ ------------
Note payable to related parties 1,900,000 1,900,000
------------ ------------
Other long-term debt 535,936 764,489
------------ ------------
Stockholders' equity
Common stock 16,925,728 16,065,404
Accumlated deficit (8,123,906) (7,439,358)
------------ ------------
Total stockholders' equity 8,801,822 8,626,046
------------ ------------
$ 12,979,762 $ 13,481,555
============ ============
</TABLE>
See accompanying note to condensed financial statements.
3
<PAGE> 4
DENSE-PAC MICROSYSTEMS, INC.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended Nine months ended
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 3,268,299 $ 2,854,686 $ 11,288,058 $ 10,562,821
Cost of Sales
Cost of sales 2,525,541 2,273,796 8,384,801 7,650,555
Inventory write-downs 530,808 995,892
------------ ------------ ------------ ------------
2,525,541 2,804,604 8,384,801 8,646,447
Gross Profit 742,758 50,082 2,903,257 1,916,374
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative 685,651 713,246 2,559,862 2,320,452
Research and development 556,690 242,714 1,025,202 667,773
------------ ------------ ------------ ------------
Loss from operations (499,583) (905,878) (681,807) (1,071,851)
------------ ------------ ------------ ------------
Other expenses and (income):
Loss on the sale of assets 79,322 79,322
Interest expense 38,911 43,454 134,339 193,546
Interest income (45,045) (43,852) (132,398) (133,741)
------------ ------------ ------------ ------------
Total other expenses (income) (6,134) 78,924 1,941 139,127
Loss before income taxes (493,449) (984,802) (683,748) (1,210,978)
Provision for income taxes 800 800
------------ ------------ ------------ ------------
Net loss ($ 493,449) ($ 984,802) ($ 684,548) ($ 1,211,778)
============ ============ ============ ============
Net loss per common share ($ 0.03) ($ 0.06) ($ 0.04) ($ 0.07)
============ ============ ============ ============
Weighted average common
shares outstanding 17,577,000 16,950,000 17,577,000 16,950,000
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
DENSE-PAC MICROSYSTEMS, INC.
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
November 30, November 30,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (684,548) $ (1,211,778)
Adjustments to reconcile net loss
cash provided by operating activities net
of the effect of the acquisition:
Depreciation and amortization 831,792 712,841
Changes in operating assets and liabilites:
Accounts receivable 64,098 1,903,507
Inventories 477,896 (23,433)
Other current assets (58,029) 92,801
Other assets (6,686)
Accounts payable (54,557) (432,632)
Accrued compensation (405,841) (339,075)
Accrued liabilities 67,753 (13,012)
------------ ------------
Net cash provided by operating activities: 238,564 682,533
------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Property additions (976,962) (1,544,368)
Cash paid for acquisition (130,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES: (1,106,962) (1,544,368)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (284,924) (305,364)
Proceeds from issuance on other long-term debt 531,004
Proceeds from issuance of common stock 685,324 246,060
------------ ------------
Net cash provided by financing activities: 400,400 471,700
------------ ------------
NET INCREASE (DECREASE) IN CASH (467,998) (390,135)
CASH AT BEGINNING OF YEAR 4,660,769 4,579,840
------------ ------------
CASH AT END OF QUARTER $ 4,192,771 $ 4,189,705
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE> 6
DENSE-PAC MICROSYSTEMS, INC.
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 135,027 $ 176,188
========= =========
Income taxes paid $ 800 $ 800
========= =========
DETAIL OF BUSINESSES ACQUIRED IN PURCHASE
BUSINESS COMBINATIONS:
On September 8, 1997, the Company acquired certain assets of
TypeHaus, Inc. (a Texas Corporation). A summary of the
transaction is as follows:
Tangible assets acquired $ 245,000
Intangible assets acquired 60,000
Common stock issued (175,000)
Cash paid for acquisition (130,000)
---------
Liabilities assumed $ --
=========
</TABLE>
See accompanying notes to condensed financial statments.
6
<PAGE> 7
DENSE-PAC MICROSYSTEMS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Dense-Pac Microsystems, Inc., a California Corporation, ("Dense-Pac")
and its wholly-owned subsidiary (collectively, the "Company") are 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. TypeHaus, Inc. was
incorporated on September 8, 1997 and commenced operations, after buying certain
assets of TypeHaus, Inc. a Texas corporation. TypeHaus, Inc. designs,
manufactures and sells a full line of memory products and other printer products
(fonts, programmable SIMMS, and primarily printer cartridges) (Note 7).
NOTE 2 - As contemplated by the Securities and Exchange Commission 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 November 30, 1997 should be read in conjunction with the
Company's Annual Report to Shareholders for the previous year.
In the opinion of the Company's management, the accompanying unaudited
consolidated 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, 1997, and the results of operations and its cash
flows for the three and nine months ended November 30, 1997 and 1996. Results
for the interim period are not necessarily indicative of those to be expected
for the full year.
NOTE 3 - Net loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. 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
periods ending after December 15, 1997. Early adoption is not permitted. When
adopted, all previously reported earnings per share amounts must be restated
based upon the provisions of the new standard. Proforma basic and diluted loss
per share calculated in accordance with SFAS No. 128 would be ($.03) and ($.06)
for the three months ended November 30, 1997 and 1996 and (.04) and (.07) for
the nine months ended November 30, 1997 and 1996, respectively.
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.
<PAGE> 8
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 Common Stock. The warrants were callable when the Company's
Common 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 common stock
at $7.00 per share. At November 30, 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 - In September 1997, the Company acquired substantially all of the assets
of TypeHaus, Inc. for $305,000, including acquisition costs, consisting of
$130,000 in cash and $175,000 in Common Stock of the Company. TypeHaus, Inc. was
a privately held Texas corporation providing printer media devices, printer
memory and electronic laser printer products to a variety of OEM customers.
TypeHaus also supplied custom memory subsystems and support software for OEM
manufacturers of laser printers. The acquisition was primarily accounted for
under the purchase method of accounting and the purchase price was allocated to
assets acquired ($110,000), intangible assets acquired ($135,000) and covenant
not to compete ($60,000). A wholly owned subsidiary of Dense-Pac was formed to
purchase the assets.
Note 8 - The following table summarizes stock option activity under the
Dense-Pac's 1985 and 1996
Stock Option Plan for the nine months ended November 30, 1997:
<TABLE>
<CAPTION>
Number of
Number of Options
Shares Price per Share Exercisable
--------- --------------- -----------
<S> <C> <C> <C>
Balance, February 28, 1997 2,090,000 $ .24 - $4.41 685,514
=======
Granted 618,000 2.00 - 3.14
Exercised (502,619) .24 - 2.70
Canceled (256,937) 1.59 - 4.41
---------
Balance, November 30, 1997 1,948,444 691,320
========= =======
</TABLE>
<PAGE> 9
Item 2 - Management's Discussion and Analysis or Plan of Operations.
RESULTS OF OPERATIONS
Net sales for the quarter ended November 30, 1997 increased $413,613 or
14% compared to the quarter ended November 30, 1996. For the nine months ended
November 30, 1997, sales increased $725,237 or 7% from the comparable prior nine
month period. The increase in the quarterly sales from the prior periods of
three and nine month can be attributed to the sale of new DRAM SIMM modules to
the commercial marketplace. During the quarter approximately $1,065,000 of DRAM
commercial product was sold as compared to none in the previous quarter last
year. While revenues increased the gross margin for this product were very small
as a result of expenses incurred while the Company took steps to establish
itself as a commercial supplier of memory products.
The increase in the sales of the DRAM commercial product were offset by
a decrease of sales of $ 540,000 in the first nine months in First Generation
ceramic based stackable products. The decrease in the ceramic products can be
attributed to the timing of military contracts. Other product sales were similar
to the previous quarter. Revenue attributed to the 512K x 8 for the nine months
ended November 30, 1997 was $ 1,853,000 as compared to $ 1,615,000 for the nine
months ended November 30, 1996. 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 and as discussed in the previous 10-QSB, the
Company expanded into more standard type of DRAM commercial products, which
produced lower margins than military or higher end commercial products.
Competitive pricing to enter this market also affected the gross margin,
although the Company believes that gross 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 Note 7 of
Notes to the Condensed Financial Statements.) The Company also plans to continue
to invest in R&D, engineering, new technologies, manufacturing and test
equipment and it continues to build its capacity, infrastructure and
sales/marketing force in its efforts to target the commercial sector and new
military opportunities. The Company received several "design wins" during the
quarter. Designs wins are Dense-Pac products which have been qualified or
designed into a customers future or current products. All expenses related to
achieving our goals in each of these activities may affect the Company's ability
to achieve profitability in the fourth quarter.
Gross profit as a percentage of sales for the three month period ended
November 30, 1997, increased to 23% from 2% in same period in 1997. Included in
the cost of sales for the previous year was $ 530,808 related to the write-down
of inventory. The overall gross margin for the third quarter ended November 30,
1997 decreased by 4% of sales, taking the effect of inventory write-off from the
analysis from the previous years quarter. During the third quarter of the
current fiscal year, a portion of the business was generated from lower margin
DRAM business.
<PAGE> 10
For the first nine months of fiscal 1998, gross profit as a percentage
of sales increased to 26% for fiscal year 1998 from 18% in the comparable period
in fiscal year 1997. Included in the nine months results for fiscal year 1997
was $995,892 in inventory write-downs. Material cost for the nine months ended
November 30, 1997, as compared to the previous nine months was 3 1/2 percent of
sales higher than the previous nine month period, mainly due to the higher
material cost associated with the DRAM commercial business. Depreciation expense
related to manufacturing equipment increased $222,000 from the same nine 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 decreased slightly during
the three months ended November, 1997 by $27,595 or 4% of the fiscal 1998 year.
For the nine months ended November 30, 1997 these expenses increased $239,410 or
10% from the comparalbe period in fiscal 1997. The increase for the nine months
in general and administrative expense can be attributed to an increase in
personnel expenses in the area of sales, marketing and administration. There was
also an increase of $83,000 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 Nasdaq Stock Market, Inc.
and related investor relation expenses, an increase in the bad debt reserve by
$50,000, and an $40,000 expense for the termination of a consultant in Europe.
Additionally, inside sales commissions increased by approximately $98,000 as the
internal compensation for inside sales was restructured at the beginning of the
fiscal 1998 year and additional personnel were added.
For the three months ended November 30, 1997, allocated expenses related
to research and development increased $313,976 or 129% from the same quarter in
the previous fiscal 1997 year and for the nine months ended November 30, 1997
expenses have increased $357,429 or 54%. The increase for the quarter and for
the nine months was due to the Company making a definite thrust towards new
products without customer orders based on continuing efforts to expand into new
products and the commitment to develop new unique high memory technology.
For the nine month ended November 30, 1997 interest expense decreased
$59,207 or 31% from the same period in the previous year due to lower debt
principal outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the third 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 $238,564 during the
first nine months of fiscal year 1998, due primarily to depreciation expense,
decreases in inventories and increased in assumed liabilities, offset by
decreases in accounts payable and accrued liabilities, and the net loss for the
period.
The Company purchased approximately $1,107,000 in new equipment during
the first nine months of fiscal year 1998. The Company expects that it will not
purchase any major additional new equipment during the fourth quarter ending
February 28, 1998. While the Company does have sufficient cash to pay for these
additional capital expenditures, it established a lease line of $285,000 to
partially pay for the fixed asset additions, in order to insure a sufficient
cash reserve for future growth.
<PAGE> 11
At November 30, 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 November 30, 1997, the outstanding amount
was $564,424.
For the nine months ended November 30, 1997, stock options have been
exercised for approximately $685,000. These proceeds were mainly received from
previously management exercising stock options during the period.
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.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed below are hereby filed with the Securities
and Exchange Commission as part of this Quarterly Report.
Exhibits No. 27
Financial Data Schedule
(b) Reports on Form 8-K -
No reports on Form 8-K were filed during the third quarter of
fiscal 1998 covered by this Form 10-QSB.
<PAGE> 12
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/ Aaron Uri Levy
- -------------------------------- --------------------------------------------
Date Aaron Uri Levy, 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 QUARTERLY
REPORT -- FORM 10-QSB FOR PERIOD ENDED NOVEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB FOR QUARTER ENDED NOVEMBER 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 4,192,771
<SECURITIES> 0
<RECEIVABLES> 1,281,587
<ALLOWANCES> 100,000
<INVENTORY> 3,052,752
<CURRENT-ASSETS> 8,608,127
<PP&E> 6,731,348
<DEPRECIATION> 2,374,073
<TOTAL-ASSETS> 12,979,762
<CURRENT-LIABILITIES> 1,742,004
<BONDS> 0
0
0
<COMMON> 16,925,728
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,979,762
<SALES> 11,288,058
<TOTAL-REVENUES> 11,288,058
<CGS> 8,384,801
<TOTAL-COSTS> 11,969,865
<OTHER-EXPENSES> (6,134)
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 134,339
<INCOME-PRETAX> (683,748)
<INCOME-TAX> 800
<INCOME-CONTINUING> (684,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (684,548)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
