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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, 2000
- 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, 2000 was 19,717,722.
Transitional Small Business Disclosure Format (check one): Yes_______ No___X____
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TOTAL PAGES: 10
Exhibit pages: 15
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PART I- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Dense-Pac Microsystems, Inc.
Consolidated Balance Sheet
May 31, February 29,
2000 2000
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(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,805,186 $ 2,949,562
Accounts receivable, net 3,436,816 3,346,318
Inventories 1,638,731 1,778,959
Other current assets 275,382 200,120
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Total current assets 9,156,115 8,274,959
Property, net 5,570,671 5,819,824
Other assets 29,171 29,171
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$ 14,755,957 $ 14,123,954
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 623,336 671,336
Accounts payable 925,246 1,152,151
Accrued compensation 469,016 782,996
Other accrued liabilities 262,453 353,393
Deferred revenue 525,000 450,000
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Total current liabilities 2,805,051 3,409,876
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Other long-term debt 1,136,305 1,263,544
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Stockholders' equity
Common stock 20,131,854 20,039,109
Unearned compensation expense (76,895) (116,131)
Accumulated deficit (9,240,358) (10,472,444)
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Total stockholders' equity 10,814,601 9,450,534
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$ 14,755,957 $ 14,123,954
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See accompanying notes to condensed consolidated financial statements.
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Dense-Pac Microsystems, Inc.
and Consolidated Subsidiary
Summary of Operations
(Unaudited)
For the quarter ended
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May 31, May 31,
2000 1999
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NET SALES $ 10,980,203 $ 6,041,037
COST OF SALES 7,874,169 4,599,713
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GROSS PROFIT 3,106,034 1,441,324
COSTS AND EXPENSES:
Selling, general and administrative 1,417,312 1,027,226
Research and development 422,149 178,653
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Total costs and expenses 1,839,461 1,205,879
PROFIT FROM OPERATIONS 1,266,573 235,445
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OTHER EXPENSE (INCOME)
Interest expense 36,855 38,590
Interest income (42,368) (6,638)
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Total other expense (income) (5,513) 31,952
INCOME BEFORE INCOME TAX
PROVISION 1,272,086 203,493
INCOME TAX PROVISION 40,000 -
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NET INCOME (LOSS) $ 1,232,086 $ 203,493
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NET INCOME PER SHARE:
Basic $0.06 $0.01
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Diluted $0.06 $0.01
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WEIGHTED AVERAGE SHARES OUTSTANDING:
OUTSTANDING - BASIC 19,359,000 18,300,000
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OUTSTANDING - DILUTED 20,661,000 19,700,000
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See accompanying notes to condensed consolidated financial statements.
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DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
For the three months ended
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May 31, May 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,232,086 $ 203,493
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 362,669 262,072
Amortization of unearned compensation 39,236 --
Changes in operating assets and liabilities:
Accounts receivable (90,498) (298,547)
Inventories 140,228 849,281
Other current assets (75,262) (8,226)
Accounts payable (226,905) (414,751)
Accrued compensation (313,980) 21,177
Other accrued liabilities (90,940) 124,362
Deferred revenue 75,000 --
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Net cash provided by (used in) operations: 1,051,634 738,861
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (113,516) (364,199)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (175,239) (95,330)
Proceeds from issuance of common stock 92,745 18,159
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Net cash used in financing activities (82,494) (77,171)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 855,624 297,491
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,949,562 1,273,887
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CASH AND CASH EQUIVALENTS, END OF QUARTER $ 3,805,186 $ 1,571,378
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 46,242 $ 20,648
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Income taxes paid $ 48,000 $ 0
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisition of property under capital leases $ 0 $ 358,915
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Conversion of notes payable to related parties
to common stock $ 0 $ 1,200,000
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See accompanying notes to condensed financial statements.
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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, 2000 should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 29,
2000 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, 2000 and May 31, 1999, and
the results of its operations and its cash flows for the quarters ended May 31,
2000 and 1999. 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.
NOTE 4 - 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:
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Quarter ended May 31, 2000 Dense-Pac TypeHaus Eliminations Total
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Net sales $10,722,652 $257,551 $10,980,203
Net income (Loss) $ 1,268,859 $(36,773) $ 1,232,086
Total assets $14,272,698 $493,259 $(10,000) $14,755,957
Quarter ended May 31, 1999 Dense-Pac TypeHaus Eliminations Total
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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
NOTE 5 - The following table summarizes stock option activity under Dense-Pac's
1985 and 1996 Stock Option Plans for the three months ended May 31, 2000:
Number of Price per Number of
Shares Share Options Exercisable
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Balance, February 29, 2000 2,071,500 $ .94 - $7.56 653,150
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Granted 272,000 $ 5.50 - $8.63
Exercised (78,450) $ 1.00 - $1.81
Canceled (99,500) $ 1.56 - $8.63
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Balance, May 31, 2000 2,165,550 $ .94 - $8.63 700,500
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NOTE 6 - The weighted average shares outstanding during the three month period
ended May 31, 2000 was 19,382,000 and the fully diluted shares outstanding for
the three month period was 20,661,000. 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
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RESULTS OF OPERATIONS
Net sales for the quarter ended May 31, 2000 increased $ 4,939,166 or
82% compared to the quarter ended May 31, 1999. The increase in net sales for
the quarter ended May 31, 2000, when compared to the same quarter in the prior
year was due primarily to an increase in the high-density commercial portion of
the company's business. The overall unit increase in commercial stacks shipped
during the quarter increased by approximately 45% from the previous quarter in
the prior year. Additionally, a larger percentage of the Company's sales
included memory components, which in prior quarters had typically been consigned
and not included in sales and cost of sales. For the commercial high density
product, the revenue of products containing the semiconductor components
increased by 248% from the first quarter in the prior fiscal year. In certain
cases, the Company will purchase material for the commercial order and will
determine the final purchase price prior to the order, in order to avoid any
price volatility in the components. The company continued to focus the sales
effort associated with the Company's high density commercial products. See
"Forward Looking Statements."
For the first quarter, approximately $257,000 of revenue was generated
from the Company's wholly-owned subsidiary as compared to $420,000 in the
previous year's first quarter.
Gross profit as a percentage of sales was 28% for the three month period
ended May 31, 2000, as compared to 24% for the three month period ended May 31,
1999. The increase in the gross margin for the first quarter ended May 31, 2000
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, 2000, without a significant increase in
fixed assets. This was offset slightly by the fact that the Company shipped more
commercial orders for which the company procured the semiconductor. As the cost
of the memory components are included in revenue to the customers the resulting
gross margin decreases. In the prior quarter the majority of commercial orders
had consigned memory associated with the sales.
During the first quarter of fiscal year 2001, the Company continued its
offering of commercial products and focused on those products that relate 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 2001 by $390,000 or 38% 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 $100,000 associated with a patent infringement lawsuit and other legal
expenses.
For the quarter ended May 31, 2000, research and development costs
increased $243,000 or 136% from the same quarter in the previous fiscal year.
The increase is primarily due to continued efforts to allocate resources to the
development and production of unique new technologies into the commercial
marketplace. The Company is continuing to invest in research and development for
new products in the aerospace and commercial marketplace. See "Forward Looking
Statements".
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For the three months ended May 31, 2000, other expenses decreased
$37,000 from the same period last year. This decrease is due to additional
interest income associated with the increase in the cash reserves.
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. The Company continued to
improve its operating performance and generate cash for operation purposes.
Assuming that the Company is successful in its efforts to continue its first
quarter financial performance, the Company believes that the 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 credit facility for
three million dollars from a financial institute if the need should arise for
additional working capital to support operations. See "Forward Looking
Statements."
Net cash provided by operations was approximately $1,052,000 during the
first quarter of fiscal year 2000 which was generated from the profitable
results of operations. These increases included depreciation and amortization of
$362,000 and a decrease in inventories of $140,000, offset by decreases in
accounts payable and accrued compensation of approximately $541,000.
The Company purchased approximately $114,000 in new equipment during the
first quarter of fiscal year 2000. The Company is expecting that it may 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. On November 1, 1999, the remaining
outstanding principal was converted into 386,208 shares of common stock at a
price of $1.8125 per share, based on the terms defined in the amended loan
agreement.
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
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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.
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. On May 31, 2000, the trial, originally
scheduled for June 6, 2000, was rescheduled to February 13, 2001.
On April 11, 2000, Dense-Pac Microsystems filed suit, in Superior Court
for the State of California, Orange County, against Simple Technology, Inc. and
its chief operating officer. The compliant alleges trade secret
misappropriation, unfair competition and intentional and negligent interference
with prospective business advantages. Dense-Pac believes that on or before
September 1997, Simple Technology and its officer obtained Dense-Pac's
proprietary technology concerning Dense-Pac's products without authorization or
consent from Dense-Pac. The complaint alleges that Simple Technology then used
the above proprietary technology to manufacture a product substantially
identical to Dense-Pac's proprietary rail M-Densus product and interfered with
Dense-Pac's business. Dense-Pac is seeking general damages, monetary losses,
attorneys' fees and punitive and exemplary damages. Dense-Pac intends to
aggressively pursue this action.
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
Exhibit 99 - Credit Facility with Imperial Bank dated
May 4, 2000
(b) Reports on Form 8-K -
No reports on Form 8-K were filed during the first
quarter of fiscal 2001 covered by this Form 10-QSB.
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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 12, 2000 /s/ Ted Bruce
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Date Ted Bruce, Chief Executive Officer
July 12, 2000 /s/ William M. Stowell
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Date William M. Stowell, Chief Financial
Officer