<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 May 31, 1999
- 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
June 30 was 18,535,469.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TOTAL PAGES: 10
<PAGE> 2
PART I- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Dense-Pac Microsystems, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
May 31, February 28,
1999 1999
------------ ------------
<S> <C> <C>
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,571,378 $ 1,273,887
Accounts receivable, net 2,055,500 1,756,953
Inventories 2,847,190 3,696,471
Other current assets 174,626 166,400
------------ ------------
Total current assets 6,648,694 6,893,711
Property, net 3,832,351 3,371,309
Other assets 14,360 14,360
------------ ------------
$ 10,495,405 $ 10,279,380
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 424,974 351,731
Accounts payable 2,378,553 2,793,304
Accrued compensation 261,939 240,762
Other accrued liabilities 341,538 217,176
------------ ------------
Total current liabilities 3,407,004 3,602,973
------------ ------------
Note payable to related parties 700,000 1,900,000
------------ ------------
Other long-term debt 459,499 269,157
------------ ------------
Stockholders' equity
Common stock 18,762,426 17,544,267
Accumulated deficit (12,833,524) (13,037,017)
------------ ------------
Total stockholders' equity 5,928,902 4,507,250
------------ ------------
$ 10,495,405 $ 10,279,380
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
Dense-Pac Microsystems, Inc.
and Consolidated Subsidiary
Summary of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended
-----------------------------------
May 31, May 31,
1999 1998
------------ ------------
<S> <C> <C>
NET SALES $ 6,041,037 $ 2,204,698
COST OF SALES 4,599,713 1,742,228
------------ ------------
GROSS PROFIT 1,441,324 462,470
COSTS AND EXPENSES:
Selling, general and administrative 1,027,226 780,923
Research and development 178,653 328,476
Other costs
------------ ------------
Total costs and expenses 1,205,879 1,109,399
PROFIT (LOSS) FROM OPERATIONS 235,445 (646,929)
------------ ------------
OTHER EXPENSE (INCOME)
Interest expense 38,590 58,854
Interest income (6,638) (33,712)
------------ ------------
Total other expense (income) 31,952 25,142
INCOME (LOSS) BEFORE INCOME TAX
PROVISION 203,493 (672,071)
INCOME TAX PROVISION - 2,400
------------ ------------
NET INCOME (LOSS) $ 203,493 $ (674,471)
============ ============
BASIC AND DILUTED NET
LOSS PER SHARE $ 0.01 ($ 0.04)
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 18,300,000 17,800,000
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 19,700,000 17,800,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
---------------------------------
May 31, May 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 203,493 $ (674,471)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 262,072 286,307
Changes in operating assets and liabilities:
Accounts receivable (298,547) (342,443)
Inventories 849,281 77,302
Other current assets (8,226) (11,737)
Accounts payable (414,751) (250,342)
Accrued compensation 21,177 (20,068)
Other accrued liabilities 124,362 15,375
----------- -----------
Net cash provided by (used in) operations: 738,861 (920,077)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (364,199) (271,746)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (95,330) (54,550)
Proceeds from issuance of common stock 18,159 383,529
----------- -----------
Net cash used in financing activities (77,171) 328,979
----------- -----------
NET INCREASE (DECREASE) IN CASH 297,491 (862,844)
CASH, BEGINNING OF YEAR 1,273,887 3,626,388
----------- -----------
CASH, END OF QUARTER $ 1,571,378 $ 2,763,544
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 20,648 $ 46,854
=========== ===========
Income taxes paid $ 0 $ 2,400
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisition of property under capital leases $ 358,915
===========
Conversion of notes payable to related parties to common stock $ 1,200,000
===========
</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. (Dense-Pac or the Parent Company), a
California corporation, and its wholly-owned subsidiary, TypeHaus, Inc.
(TypeHaus) (together, the Company) designs and manufacturers proprietary
chip-stacking components and subsystems. The Company's revenues are generated
primarily from manufacturers of electronic components, as well as from
subcontracts where the primary contractor is the United States government. The
Company grants credit to customers included in the military, aerospace, and a
variety of commercial industries. TypeHaus provides printer media devices,
printer memory, and electronic laser products to a variety of OEM customers. It
also supplies custom memory subsystems and support software for OEM
manufacturers of laser printers.
NOTE 2 - As contemplated by the Securities and Exchange Commission ("SEC") under
Item 310 (b) of Regulation S-B, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles. This report on Form 10-QSB
for the period ended May 31, 1999 should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1999 filed with the SEC.
In the opinion of the Company management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the Company's financial position as of May 31, 1999 and May 31, 1998, and
the results of its operations and its cash flows for the quarters ended May 31,
1999 and 1998. Results for the interim periods are not necessarily indicative of
those to be expected for the full year.
NOTE 3 - Recent Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The Company
does not invest in derivative investments nor does it engage in hedging activity
and, therefore, does not believe that the adoption of SFAS No. 133 will have an
impact on the Company's financial statements.
In fiscal 1999, the Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosure about
products and services, geographic areas, and major customers. The Company
engages in business activity primarily in two operating segments: the design and
manufacturing of proprietary and patented three-dimensional, high-density
semiconductor products and the design and manufacturing of memory and memory
related products for the laser printer industry (through its wholly-owned
subsidiary, TypeHaus, Inc.). Required operating segment data were as follows:
<TABLE>
<CAPTION>
Quarter ended May 31, 1999: Dense-Pac TypeHaus Eliminations Total
- --------------------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 5,628,177 $ 419,860 ($ 7,000) $ 6,041,037
Net income $ 141,948 $ 61,545 - $ 203,493
Total assets $ 9,755,003 $ 750,402 ($ 10,000) $10,495,405
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Quarter ended May 31, 1998: Dense-Pac TypeHaus Eliminations Total
- --------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 1,920,193 $ 284,505 - $ 2,204,698
Net income ($ 749,793) $ 75,322 - ($ 674,471)
Total assets $ 11,037,752 $ 611,246 ($ 10,000) $ 11,638,998
</TABLE>
NOTE 4 - The following table summarizes stock option activity under Dense-Pac's
1985 and 1996 Stock Option Plans for the three months ended May 31, 1999:
<TABLE>
<CAPTION>
Number of Price per Number of
Shares Share Options Exercisable
--------- -------------- -------------------
<S> <C> <C> <C>
Balance, February 28, 1999 1,811,550 $ .81 - $ 4.41 617,247
--------- -------------- =======
Granted 205,000 1.58 - 2.25
Exercised ( 15,000) 1.00
Canceled -0-
--------- --------------
Balance, May 31, 1999 2,001,550 $ .81 - $ 4.41 649,602
========= ============== =======
</TABLE>
NOTE 5 - The weighted average shares outstanding during the three month period
ended May 31, 1999 was 18,300,000 and the fully diluted shares outstanding for
the three month period was 19,700,000. Options and warrants to purchase shares
of common stock during these periods were included in the above calculations.
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
Net sales for the quarter ended May 31, 1999 increased $ 3,836,339 or
174% compared to the quarter ended May 31, 1998. The increase in net sales for
the quarter ended May 31, 1999, when compared to the same quarter in the prior
year was due primarily to a focused sales effort associated with the Company's
high density commercial products. In the prior quarter ended May 31, 1998, the
Company marketed a significant number of off-the-shelf type commercial products
and concentrated a majority of its efforts on selling these lower margin
commercial products. In August 1998, the Company changed its marketing strategy
to offer only the patented technology in and a form to support a larger customer
base. Additionally in August 1998, the sales department was re-structured to
differentiate sales personnel in the areas of commercial sales or in the area of
industrial, defense and aerospace sales. This has increased the effectiveness of
the sales personnel as individuals could be utilized based on their experience.
With each quarter, these changes have made the sales efforts were more
productive, increasing the revenue associated with the Company's focused product
line. See "Forward Looking Statements."
<PAGE> 7
For the first quarter, approximately $420,000 of revenue was generated
from the Company's wholly-owned subsidiary as compared to $443,000 in the
previous year's first quarter.
Gross profit as a percentage of sales was 24% for the three month period
ended May 31, 1999, as compared to 21% for the three month period ended May 31,
1998. The slight increase in the gross margin for the first quarter ended May
31, 1999 can be attributed to the type of products that the company was selling
during the comparable quarters. Specifically, the Company increased its
production during the first quarter ending May 31, 1999 creating an increase in
the economics of production. The Company also shipped orders for approximately
$1,600,000, where the margin was low due to fact that the Company procured the
memory for the order. The practice of buying memory for stacking orders was
stopped in the first quarter when the Company decided that it would no longer
purchase commercial memory for the customer's order, but rather required the
customer to consign the memory to the Company.
During the third quarter of fiscal year 1999, the Company reduced its
offering of commercial products and focused on those products that related to
the Company's proprietary packaging technology. In this manner, the Company
believes that the Company has been able to define a niche for the products that
use a unique proprietary stacking technology and has been marketing these
products to a defined market. The Company believes that margins should improve
due to increased production. See "Forward-Looking Statements."
Selling, general and administrative expenses increased in the first
quarter of fiscal 2000 by $ 246,000 or 32% from the first quarter of the prior
fiscal year. The increase in general and administrative expenses can be
attributed to an increase in recruitment expenses and employee costs associated
with the increase in business volume. There were also increases in legal expense
of $137,000 associated with a patent infringement lawsuit and other legal
expenses.
For the quarter ended May 31, 1999, research and development costs
decreased $150,000 or 46% from the same quarter in the previous fiscal year. The
decrease is primarily due to the completion in the first quarter of fiscal 1999,
of the research necessary to develop and produce the commercial plastic product
that the Company is currently selling. The Company is continuing to invest in
research and development for new products in the aerospace and commercial
marketplace. See "Forward Looking Statements".
For the three months ended May 31, 1999, other expenses increased $7,000
from the same period last year. This increase is due to additional interest
expense associated with the utilization of debt to finance equipment purchases
and a decrease in interest income due to the lower cash balance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the first quarter of
fiscal 2000 was the cash generated from the operations and the $4.3 million cash
from the private placement of stock completed in February 1996. The Company is
seeking to continue improving its operating performance in order to generate
cash for operation purposes. Assuming that the Company is successful in its
efforts to significantly improve its financial performance, the Company believes
that the remaining proceeds from the private placement and cash from operations
will be sufficient to meet the Company's operating cash needs for the next
twelve months. Additionally, the Company has received a written commitment from
an accounts receivable factoring company for
<PAGE> 8
a one million dollar credit facility if the need should arise for additional
working capital to support operations. See "Forward Looking Statements."
Net cash provided by operations was approximately $739,000 during the
first quarter of fiscal year 2000 which was generated from the profitable
results of operations. These increases were offset by depreciation and
amortization of $262,000 and a decrease in inventories of $849,000.
The Company purchased approximately $723,000 in new equipment during the
first quarter of fiscal year 2000. The Company is expecting that it will incur
additional lease debt with the purchase of additional equipment during the next
quarter. The Company expects that it will not purchase more than one million
dollars in additional equipment for the remainder of the year. See
"Forward-Looking Statements".
On April 8, 1999, the Company amended the terms of its $1.8 million loan
payable to a major shareholder, and a $100,000 loan payable to a director. Under
the terms of the amendment, $1,200,000 of the outstanding principal was
converted into 662,069 shares of common stock at $1.8125 per share, the
approximate fair market value of the Company's common stock at the date of the
amendment. The remaining outstanding principal will accrue interest at 8.75% per
annum, with interest only payments due quarterly and the principal due on
December 31, 2000. At the election of the lenders, the remaining outstanding
principal may be converted into common stock at the price of $1.8125, based on
the terms defined in the agreement.
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, 1999, the outstanding amount was
$282,212.
CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS
Year 2000 Disclosure Statement
Many currently installed computer systems and software products are
coded to accept only two digits in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
the 20th century dates. As a result, in less than one year, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements.
The Company has recently completed a program to assess and address year
2000 compliance of its software and systems in its internal business processes,
and obtained assurances of compliance from the manufacturers of these products
and their agreement to modify or replace all non-compliant products. In
addition, the Company converted certain of its software and systems to
commercial products that are believed to be Year 2000 compliant. Based on the
information available to date, the Company believes it has completed its Year
2000 compliance review and made the necessary modifications. Nevertheless,
particularly to the extent the Company is relying on the representations of
vendors that they are Year 2000 compliant, there can be no assurances that the
these representations are accurate. If key systems, or a significant number of
systems were to fail as a result of Year 2000 problems or the Company were to
experience problems in the represented Year 2000 compliant products, the Company
could incur substantial costs and disruption of its business, which would
potentially have a material effect on the Company's business and results of
operations.
<PAGE> 9
The Company, in its ordinary course of business, tests and evaluates its
own products. The Company believes that its products are generally Year 2000
ready, meaning that that use or occurrence of dates on or after January 1, 2000
will not affect the performance of the Company's products with respect to four
digits dependent data or the ability of such products to correctly create,
store, process and output information related to such date data. The Company has
warranted that the use or occurrence of dates on dates on or after January 1,
2000 will not adversely affect the performance of the Company's products with
respect to four digits date dependent data or the ability to create, store,
process and output information related to such data.
To date, the Company has not created a separate budget for investigating
and remedying issues related to Year 2000 compliance involving the Company's own
software or systems used in its internal operations. The Year 2000 program has
cost the Company approximately $100,000. There can be no assurances that future
Company resources spent on investigating and remedying Year 2000 compliance
issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products, which could have an adverse effect on the Company's business,
results of operations and financial condition.
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 statements that do not present historical information. These
forward-looking statements reflect the Company's current expectations. Although
the Company believes that its expectations are based on reasonable assumptions,
there can 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, costs and
risks concerning litigation, the ability to protect proprietary intellectual
property, 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 29, 1999 under the
heading "Cautionary Statements". Investors are cautioned against ascribing undue
weight to any forward looking statements herein.
<PAGE> 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On September 23, 1998, Dense-Pac Microsystems, Inc. was served with a
complaint from Simple Technology, Inc., filed in U.S. District Court for the
Central District of California, Santa Ana Division for an undetermined amount,
alleging that Dense-Pac's stacking technology infringes on a Simple Technology
patent. Dense-Pac intends to vigorously defend itself against such charges. On
October 23, 1998, Dense-Pac filed a cross-compliant in the U.S. District Court
for the Central District of California, Santa Ana for patent infringement
against Simple Technology. The suit alleges that the Simple Technology
infringement has benefited Simple Technology and unlawfully interfered with
Dense-Pac's sales efforts. In April 1999, Dense-Pac filed two motions for
summary judgement, one relating to non-infringement of the Simple patent and the
second relating to previous public art, which may invalidate the claims in the
Simple Technology patent. The ultimate outcome or any resulting potential loss
cannot be determined at this time.
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 the
Quarterly Report.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K -
No reports on Form 8-K were filed during the third
quarter of fiscal 1999 covered by this Form 10-QSB.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENSE-PAC MICROSYSTEMS, INC.
(Small Business Issuer)
July 14, 1999 /s/ TED BRUCE
- ---------------------------- ---------------------------------------------
Date Ted Bruce, Chief Executive Officer
July 14, 1999 /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 MAY 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB FOR QUARTER ENDED MAY 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> MAY-31-1999
<CASH> 1,571,378
<SECURITIES> 0
<RECEIVABLES> 2,165,500
<ALLOWANCES> 110,000
<INVENTORY> 2,847,190
<CURRENT-ASSETS> 6,648,694
<PP&E> 6,757,804
<DEPRECIATION> 2,925,453
<TOTAL-ASSETS> 10,495,405
<CURRENT-LIABILITIES> 3,407,004
<BONDS> 0
18,762,426
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,495,405
<SALES> 6,041,037
<TOTAL-REVENUES> 6,041,037
<CGS> 4,599,713
<TOTAL-COSTS> 5,805,592
<OTHER-EXPENSES> 31,952
<LOSS-PROVISION> 110,000
<INTEREST-EXPENSE> 38,590
<INCOME-PRETAX> 203,493
<INCOME-TAX> 0
<INCOME-CONTINUING> 203,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203,493
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
