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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 November 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
January 4, 2001 was 20,897,000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TOTAL PAGES: 11
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PART I- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Dense-Pac Microsystems, Inc.
Consolidated Balance Sheets
November 30, February 29,
2000 2000
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(unaudited)
ASSETS
Curent Assets:
Cash and cash equivalents $ 5,765,534 $ 2,949,562
Accounts receivable, net 3,022,463 3,346,318
Inventories, net 2,093,832 1,778,959
Other current assets 296,482 200,120
------------ ------------
Total current assets 11,178,311 8,274,959
Property, net 5,351,442 5,819,824
Goodwill, net 5,310,729 --
Other assets 474,964 29,171
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$ 22,315,446 $ 14,123,954
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 526,070 $ 671,336
Accounts payable 1,061,620 1,152,151
Accrued compensation 681,315 782,996
Income taxes payable 1,606,996 --
Other accrued liabilities 490,256 353,393
Deferred revenue 434,289 450,000
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Total current liabilities 4,800,546 3,409,876
Long-term debt, net of current portion 882,548 1,263,544
Stockholders' equity
Common stock 24,619,173 20,039,109
Unearned compensation expense (5,755) (116,131)
Accumlated deficit (7,981,066) (10,472,444)
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Total stockholders' equity 16,632,352 9,450,534
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$ 22,315,446 $ 14,123,954
============ ============
See accompanying notes to condensed consolidated financial statements.
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Dense-Pac Microsystems, Inc.
Consoidated Statements
of Operations
(Unaudited)
For the quarter ended, For the nine months ended,
November 30, November 30, November 30, November 30,
2000 1999 2000 1999
------------ ------------ ------------ -------------
NET SALES $ 9,649,326 $ 7,544,364 $ 27,834,477 $ 20,940,982
COST OF SALES 6,842,403 4,805,664 19,540,254 14,210,429
------------ ------------ ------------ ------------
GROSS PROFIT 2,806,923 2,738,700 8,294,223 6,730,553
COSTS AND EXPENSES:
Selling, general and administrative 1,620,456 1,448,094 4,596,057 3,974,609
Research and development 397,392 418,715 1,256,336 860,930
------------ ------------ ------------ ------------
Total costs and expenses 2,017,848 1,866,809 5,852,393 4,835,539
PROFIT FROM OPERATIONS 789,075 871,891 2,441,830 1,895,014
OTHER EXPENSE (INCOME)
Interest expense 24,008 55,870 94,421 189,456
Interest income (72,624) (21,003) (181,971) (35,454)
Gain on sale of TypeHaus assets (16,998) -- (16,998) --
------------ ------------ ------------ ------------
Total other expense (income) (65,614) 34,867 (104,548) 154,002
PROFIT BEFORE INCOME TAX PROVISION 854,689 837,024 2,546,378 1,741,012
INCOME TAX PROVISION 2,000 20,000 55,000 40,800
------------ ------------ ------------ ------------
NET PROFIT $ 852,689 $ 817,024 $ 2,491,378 $ 1,700,212
============ ============ ============ ============
BASIC NET INCOME PER SHARE $ 0.04 $ 0.04 $ 0.13 $ 0.09
============ ============ ============ ============
DILUTED NET INCOME PER SHARE $ 0.04 $ 0.04 $ 0.12 $ 0.09
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
USED TO CALCULATE BASIC NET
INCOME PER SHARE 20,261,036 18,858,000 19,828,373 18,594,000
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
USED TO CALCULATE DILUTED
NET INCOME PER SHARE 20,436,622 20,304,000 20,597,218 19,753,000
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
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Dense-Pac Microsystems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended
November 30, November 30,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,491,378 $ 1,700,212
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of TypeHaus assets (16,998) --
Depreciation and amortization 1,158,097 1,294,256
Amortization of unearned compensation 110,376 --
Changes in operating assets and liabilites
(net of effects of acquisition and disposition):
Accounts receivable 1,086,479 (1,645,194)
Inventories 326,028 2,117,306
Other current assets (10,166) 75,759
Accounts payable (722,972) (1,454,474)
Accrued compensation (432,986) 516,268
Other accured liabilities (207,699) 71,577
Deferred revenue (375,000) 300,000
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Net cash provided by operations 3,406,537 2,975,710
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (393,413) (924,662)
Proceeds from sale of TypeHaus assets 25,000 --
Cash paid for acquisition (525,348) --
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Net cash used by investing activities (893,761) (924,662)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (557,849) (1,012,106)
Proceeds from issuance of common stock 861,045 205,282
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Net cash provided by (used in) financing activities 303,196 (806,824)
----------- -----------
...........
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,815,972 1,244,224
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,949,562 1,273,887
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 5,765,534 $ 2,518,111
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 94,421 $ 151,720
=========== ===========
Income taxes paid $ 63,000 $ 800
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisition of property under capital leases $ 2,281,426
===========
Conversion of notes payable to related parties to common stock $ 1,900,000
===========
See accompanying notes to condensed consolidated financial statments.
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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 subsidiaries, Productivity
Enhancement Products, Inc.(PEP) and 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 the design of electronic and
communication systems. PEP, purchased by Dense-Pac in October, 2000, provides
engineering and manufacturing services to a variety of OEM customers. It also
supplies custom memory subsystems and support software for OEM manufacturers.
TypeHaus, Inc. a supplier of printer components was sold to previous management
on November 3, 2000. See Note 6.
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 November 30, 2000 should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 29,
2000 and Form 8-KA filed on January 11, 2001 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 November 30, 2000 and the results
of operations and its cash flows for the three and nine month periods ended
November 30, 2000 and 1999, respectively. 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 December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB101"). SAB 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective beginning after December 15, 1999. The adoption of SAB 101 is not
expected to have a material impact on the Company's financial statements, as the
Company believes its revenue recognition policies comply with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25 ("FIN 44"). FIN 44 clarifies the definition of an employee for purposes of
applying Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25"), the criteria for determining
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whether a plan qualifies as a noncompensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000 but certain
conclusions in the Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a
material impact on the Company's financial statements.
NOTE 4 - The following table summarizes stock option activity under Dense-Pac's
1985 and 1996 Stock Option Plans for the nine-months ended November 30, 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 798,500 $5.50 - $8.63
Exercised (662,650) $1.00 - $4.50
Canceled (146,750) $1.00 - $8.63
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Balance, November 30, 2000 2,060,600 $ .94 - $8.63 391,300
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NOTE 5 - The Company computes net income per share in accordance with SFAS No.
128, Earnings per Share. Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
by including other common stock equivalents, including stock options, in the
weighted average number of common shares outstanding for a period, if dilutive.
The table below sets forth the reconciliation of the denominator of the earnings
per share calculations:
Quarter Ended Nine Months Ended
November 30, November 30,
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2000 1999 2000 1999
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Shares used in computing basic net
income per share 20,261,036 18,858,000 19,828,373 18,594,000
Dilutive effect of stock options 175,586 1,446,000 768,845 1,159,000
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Shares used in computing diluted net
income per share 20,304,000 20,436,622 19,753,000 20,597,218
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NOTE 6 - On November 3, 2000, Dense-Pac sold certain assets of its wholly-owned
subsidiary, TypeHaus, to the previous management of TypeHaus for $25,000 in cash
and a promissory note of $350,000. The note is secured by the assets of the new
company, personal limited guarantees and 44,000 shares of Dense-Pac common
stock. Dense-Pac's retained the cash, accounts receivable and accounts payable
of the corporation. The sale of assets resulted in a gain of
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approximately $17,000. The cash, accounts receivables and proceeds from the note
will be used to liquidate the outstanding liabilities of TypeHaus as of November
3, 2000. Within a ninety day period, it is the intention of Dense-Pac to
dissolve the TypeHaus corporation and cease all of its operations. This is not
expected to have a significant financial impact on the Company.
NOTE 7 - On October 26, 2000, Dense-Pac acquired all of the outstanding common
stock of Productivity Enhancement Products, Inc. (PEP) in exchange for 884,167
shares of common stock of the Company valued at $3,719,000, the assumption of
approximately $1,531,000 in tax liabilities of PEP, and $212,000 in direct
acquisition costs. Fifteen percent of the Dense-Pac shares issued in the
acquisition are being held in escrow for six months to compensate for any
unknown liabilities that may have existed at the date of acquisition. The
acquisition was accounted for as a purchase, and the purchase price was
allocated as follows (in thousands):
Current assets $ 1,754
Property 405
Goodwill 5,377
Liabilities assumed (2,073)
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Total purchased price $ 5,463
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Note: The above allocation may change once the audit of PEP's closing Balance
Sheet is completed and other valuation information is received.
The results of operations of PEP are included in the consolidated financial
statements from the date of acquisition. The pro forma statement of operations
data below assumes that PEP was acquired at the beginning of fiscal 2000. This
pro forma data includes amortization of goodwill from that date. This pro forma
data is presented for informational purposes only, and is not necessarily
indicative of the results of future operations nor of the results that would
have been achieved had the acquisitions taken place at the beginning of fiscal
2000.
Nine Months Ended November 30,
2000 1999
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(in 000's, except per share data)
Revenue $33,256 $ 25,401
Net Income $ 1,412 $1,390
Net income per share -basic and diluted $ 0.06 $ 0.07
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
Net sales for the quarter ended November 30, 2000 increased approximately $
2,105,000 or 28% compared to the quarter ended November 30, 1999. The increase
in net sales when compared to the same quarter in the prior year was due
primarily to the increased purchased memory content of the product mix in the
respective quarter, as well as an increase in the royalty revenue for the
company. PEP contributed approximately $925,000 of revenue during the quarter
since the acquisition date. Additionally, during the quarter, the overall units
shipped for the commercial stack business decreased by 51% as compared to the
same quarter in the previous year, but did not materially affect revenue due to
the product mix. During the previous quarter
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ended August 31, 2000, the temporary limited supply of DRAM chips became
allocated to the end users, and as a result, many of the silicon suppliers
during the shortage were selling directly into the marketplace, instead of using
their products for stacking.
The product mix changed for the third quarter ended November 30, 2000
within the commercial stack business, as the relationship with customers shifted
between customer bought and owned consigned material, and material purchased on
behalf of the customer. For the commercial high-density product, approximately
59% of the revenue for the quarter ended November 30, 2000 was represented by
the memory cost contained in the revenue. In these 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. This compares to no memory contained in the stacked revenue for the
same period in the prior year's quarter. See "Forward Looking Statements."
Net sales for the nine-months ended November 30, 2000 increased $6,893,000
or 33% compared to the same period in the previous year. The increase for the
nine-month period was primarily due to the commercial high-density product, of
which approximately 55% of the commercial stack sales were comprised of memory
costs for the nine months ended November 30, 2000, as compared to 10% in the
same period for the previous fiscal year.
Certain assets of the Company's wholly-owned subsidiary (TypeHaus) were
sold to its previous management on November 3, 2000. For the quarter ended
November 30, 2000, revenues recorded from TypeHaus were $218,000 as compared to
$323,000 in the previous year's third quarter. For the nine month period ended
November 30, 2000, TypeHaus accounted for approximately $1,013,000 of the total
revenue as compared to $1,171,000 for the same period in the prior year.
TypeHaus had a loss for the third quarter and nine-month period ended November
30, 2000 of $87,000 and $125,000, respectively, as compared to a loss of
$126,000 and $20,000, respectively, for the same periods in the previous year.
Gross profit as a percentage of sales was 29% for the three month period
ended November 30, 2000, as compared to 36% for the three month period ended
November 30, 1999. For the nine month period ended November 30, 2000, the gross
margin for the period was 30% as compared to 32% for the nine month period ended
November 30, 1999. The change in the gross margins can typically be attributed
to the type of products that the company sold during the comparable quarters as
well as the royalty income generated during the periods. The Company increased
its production during the first quarter of fiscal year 2001 creating an increase
in the capacity utilization, a measure of operating efficiency, and other
measures of production. The Company has been very aware during the various peak
periods as well as during the slower periods that the labor force should be
adjusted to acceptable cost levels. The Company also shipped commercial orders
of approximately $3,978,000 for the three month period ended November 30, 2000
and $11,588,000 for the nine month period ended November 30, 2000, where the
margin was lower due to the fact that the Company procured the memory for the
customer's order as compared to none in the previous year's third quarter and
$1,205,000 for the nine months. The balance of the commercial orders had
consigned memory associated with the sale. Additionally, PEP contributed
approximately $450,000 in gross margin during the quarter since the date of
acquisition.
The Company continued to focus the sales effort upon the Company's high
density commercial products. During the third 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 stacking technology. In this
manner, the Company believes that it 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. See "Forward-Looking Statements."
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Selling, general and administrative expenses increased in the third quarter
of fiscal 2001 by $172,000 or 12% from the level in the third quarter of the
prior fiscal year. For the nine month period ended November 30, 2000, these
expenses increased by $621,000 or 16% over the level in the same period in the
prior year. The majority of the increase in general and administrative expenses
can be attributed to an increase in legal expenses for the quarter ended
November 30, 2000, as compared to the same quarter in the prior year and for the
nine month period ended November 30, 2000 as compared to the previous year's
comparable period. The legal expense increase is associated with a patent
infringement and trade secret theft lawsuit and other legal expenses, but
excluding some acquisition related legal expenses. Additionally, during the
quarter and nine months ended, November 30, 2000, there was a decrease in the
bonus/profit sharing expense, which partially offset the increase in legal
expense.
For the quarter ended November 30, 2000, research and development costs
decreased slightly, by $22,000 or 5% from the same quarter in the previous
fiscal year. For the nine months ended November 30, 2000, research and
development costs increased $395,000 or 49% from the same period in the prior
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".
For the three months ended November 30, 2000, other expenses decreased
$83,000, and for the nine-months ended November 30, 2000, decreased $240,000
from the same periods last year. This decrease is due to additional interest
income associated with a relative increase in the cash and cash equivalents and
a reduction in interest expense due to payments on outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the third quarter of fiscal
2001 was cash generated from operations. The Company currently 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 institution if the
need should arise for additional working capital to support operations. The
credit facility bears interest at the bank's prime rate and is renewable in
November 2001. See "Forward Looking Statements."
Net cash provided by operations was approximately $3,407,000 during the
first nine months of fiscal year 2001, which was mainly generated from the
profitable results of operations. Non-cash expense items included depreciation
and amortization of $1,158,000 and cash from operations was also increased as a
result of a decrease in accounts receivable of $1,086,000. The Company also
generated cash of $861,000 from the exercise of employee's stock options during
the nine month period ended November 30, 2000.
The Company purchased approximately $393,000 in new equipment during the
first nine months of fiscal year 2001. The Company is expecting that it may
incur additional lease debt with the purchase of additional equipment during the
next six months. The Company expects that it will not purchase or lease more
than one million dollars in additional equipment for the remainder of the year.
See "Forward-Looking Statements".
On December 4, 2000, Dense-Pac's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock. Under the
stock repurchase program Dense-Pac may purchase shares from time to time over
the next 12 months at prevailing prices in the open market, subject to market
conditions.
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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 several statements that do not present historical information. All of
these are forward-looking statements These forward-looking statements reflect
the Company's current expectation and several factors limit our ability to know
or to be certain what will happen or is happening. 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 uncertain or variable demand for and
acceptance of new and existing products, technological advances and the danger
of rapid product obsolescence, sporadic or shifting availability of
semiconductor devices at the potential of frequent reasonable prices,
competitive factors, costs and risks concerning litigation, the ability to
protect proprietary intellectual property, and the availability of capital to
finance acquisition growth and if necessary, operations. 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, 2000 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
The information is incorporated on Form 10-QSB filing May 31, 2000. There
has been no significant change in the status of these legal cases.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
There are no exhibits filed with the Securities and Exchange
Commission as part of the Quarterly Report.
(b) Reports on Form 8-K -
The following Form 8-K was filed during the third quarter of
fiscal year 2001, covered by this Form 10-QSB.
- Form 8-K filed November 13, 2000, reporting under Items 2 & 7
in reference to the acquisition of Productivity Enhancement
Products, Inc. This report was amended on January 12, 2001 to
include the historical financial statements of Productivity
Enhancement Products, Inc. and pro forma financial information.
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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)
January 12, 2000 /s/ Ted Bruce
- ------------------------------ -------------------------------------------
Date Ted Bruce, Chief Executive Officer
January 12, 2000 /s/ William M. Stowell
- ------------------------------ -------------------------------------------
Date William M. Stowell, Chief Financial Officer