1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 2001
[ ] 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 13, 2001 was 20,950,589.
================================================================================
TOTAL PAGES: 17
With Exhibits: 44
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Dense-Pac Microsystems, Inc.
Consolidated Balance Sheets
May 31, February 28,
2001 2001
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,929,577 $ 5,346,525
Accounts receivable, net 2,635,681 3,300,702
Inventories, net 1,444,472 1,444,063
Other current assets 276,159 281,504
------------ ------------
Total current assets 8,285,889 10,372,794
Property, net 5,214,139 5,380,800
Goodwill, net 5,443,478 5,630,944
Other assets 375,535 378,565
------------ ------------
$ 19,319,041 $ 21,763,103
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 459,200 $ 456,683
Accounts payable 771,649 1,153,548
Income taxes payable -- 1,545,649
Accrued compensation 431,635 551,623
Other accrued liabilities 538,422 684,540
Deferred revenue 112,561 363,000
------------ ------------
Total current liabilities 2,313,467 4,755,043
Other long-term debt, net of current portion 658,049 786,828
------------ ------------
Stockholders' equity
Common stock 24,887,080 24,871,477
Accumulated deficit (8,539,555) (8,650,245)
------------ ------------
Total stockholders' equity 16,347,525 16,221,232
------------ ------------
$ 19,319,041 $ 21,763,103
============ ============
See accompanying notes to condensed consolidated financial statements.
3
Dense-Pac Microsystems, Inc.
Consolidated Statements of Operations
(Unaudited)
For the quarter ended:
May 31, May 31,
2001 2000
------------ ------------
NET SALES $ 7,453,389 $ 10,980,203
COST OF SALES 5,239,066 7,874,169
------------ ------------
GROSS PROFIT 2,214,323 3,106,034
COSTS AND EXPENSES:
Selling, general and administrative 1,528,654 1,417,312
Amortization of goodwill 193,454
Research and development 417,852 422,149
------------ ------------
Total costs and expenses 2,139,960 1,839,461
INCOME FROM OPERATIONS 74,363 1,266,573
------------ ------------
OTHER INCOME:
Interest income 67,379 42,368
Interest expense (31,052) (36,855)
------------ ------------
Total other income 36,327 5,513
INCOME BEFORE INCOME TAX PROVISION 110,690 1,272,086
INCOME TAX PROVISION -- 40,000
------------ ------------
NET INCOME $ 110,690 $ 1,232,086
============ ============
NET INCOME PER SHARE:
Basic $ 0.01 $ 0.06
============ ============
Diluted $ 0.01 $ 0.06
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 20,943,000 19,359,000
============ ============
Diluted 21,126,000 20,661,000
============ ============
See accompanying notes to condensed consolidated financial statements.
4
Dense-Pac Microsystems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended
May 31, May 31,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 110,690 $ 1,232,086
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 536,411 362,669
Amortization of unearned compensation -- 39,236
Changes in operating assets and liabilities:
Accounts receivable 665,021 (90,498)
Inventories (410) 140,228
Other current assets 8,375 (75,262)
Accounts payable (381,898) (226,905)
Income taxes payable (1,545,000) 4,000
Accrued compensation (119,988) (313,980)
Other accrued liabilities (152,756) (94,940)
Deferred revenue (250,439) 75,000
----------- -----------
Net cash provided by (used in) operations: (1,129,994) 1,051,634
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (176,295) (113,516)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (126,262) (175,239)
Proceeds from issuance of common stock 15,603 92,745
----------- -----------
Net cash used in financing activities (110,659) (82,494)
----------- -----------
NET INCREASE (DECREASE) IN CASH (1,416,948) 855,624
CASH, BEGINNING OF YEAR 5,346,525 2,949,562
----------- -----------
CASH, END OF QUARTER $ 3,929,577 $ 3,805,186
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 31,362 $ 46,242
=========== ===========
Income taxes paid $ 1,545,000 $ 48,000
=========== ===========
See accompanying notes to condensed financial statements.
5
DENSE-PAC MICROSYSTEMS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Dense-Pac Microsystems, Inc. including its wholly owned subsidiaries
("we," "us," Dense-Pac" or the "Company"), is a technology company that provides
products and services for the Integration Age. Dense-Pac was founded in 1982 and
has three operating units, the System Design Group, the Advanced Packaging
Group, and the Added Value Manufacturing Group, each of which is certified ISO
9001 compliant.
The Advanced Packaging Group provides patented component packaging technology to
create high-density, board space-saving products. The System Design/Value Added
Manufacturing Group provides contract manufacturing of prototype devices and
medium volume production runs of circuit boards as well as outsourced design,
product development, production and engineering for telecommunications,
networking, Internet devices, and industrial markets, with expertise in
providing networking and DSL product development solutions. DPAC's products are
used in electronic circuits found in network servers, computer storage devices,
medical instrumentation and communication devices. The DPAC Web site is at
www.dense-pac.com.
NOTE 2 - Basis of Presentation - The accompanying unaudited interim consolidated
financial statements of Dense-Pac Microsystems, Inc. a California Corporation,
as of May 31, 2001 and for the three months ended May 31, 2000 and 2001 reflect
all adjustments (consisting of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of the results for the
interim periods presented. These financial statements have been prepared in
accordance with generally accepted accounting principles of interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
These financial statements should be read in conjunction with the audited
financial statements included in the Company's Annual report on Form 10-KSB for
the year ended February 28, 2001. Effective March 1, 2001, the Company no longer
qualifies as a "small business issuer" under Rule 12b-2 and is required to file
this report and hereafter under the general rules and regulations applicable to
quarterly and annual reports of non-small business issuers.
Operating results for the three months ended May 31, 2001 are not necessarily
indicative of the results that may be expected for the full year ended February
28, 2002.
NOTE 3 - Recent Accounting Pronouncements - In September 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). SFAS No. 133, as amended, is effective for all fiscal years
beginning after June 15, 2000, and establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS No. 133,
certain contracts that were not formerly considered derivatives may now meet the
definition of a derivative which would be required to be reported as assets or
liabilities and carried at fair value. The Company adopted SFAS No. 133
effective March 1, 2001. The adoption of SFAS No. 133 did not have a significant
impact on the financial position, results of operations, or cash flows of the
Company.
5
6
NOTE 4 - Acquisition - The results of operations of Productivity Enhancements
Products, the company acquired in fiscal 2001 is included in the consolidated
financial statements from the date of acquisition, October 26, 2000. The first
quarter of fiscal 2002 includes actual operating results of this acquisition.
The following unaudited pro forma information assumes that the acquisition had
occurred on the first day of the Company's fiscal year ended February 29, 2001.
The pro forma information is based on historical information and does not
necessarily reflect the actual results that would have occurred, nor is it
necessarily indicative of future results of the combined enterprise.
Quarter ended May 31
2000
(unaudited)
Net sales $ 12,707,000
Net income $ 872,000
Net income per share:
Basic $ 0.05
Diluted $ 0.05
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, 2001:
Number of Price per Number of
Shares Share Options Exercisable
---------- ------------- -------------------
Balance, February 28, 2001 2,187,300 $ .94 - $7.56
---------- -------------
Granted 346,000 $5.50 - $1.56
Exercised (14,500) $1.00 - $1.72
Canceled (44,875) $1.00 - $6.00
---------- -------------
Balance, May 31, 2001 2,473,925 $ .94 - $7.56 803,926
========== ============= ==================
NOTE 6 - 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 earning per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options,
in the weighted average number of shares outstanding, if dilutive.
The table below sets forth the reconciliation of the denominator of the earnings
per share calculations:
Quarter Ended
May 31,
2001 2000
---------- ----------
Shares used in computing basic net
income per share 20,943,000 19,382,000
Dilutive effect of stock options 183,000 1,279,000
---------- ----------
Shares used in computing diluted net 21,126,000 20,661,000
income per share
6
7
NOTE 7- SEGMENT INFORMATION - Operating segments are defined as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the Company's chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The operating segments of the Company are managed separately
because each segment represents a strategic business unit that offers different
products or services.
The Company engages in business activity primarily in three operating segments;
the design and automated manufacturing of proprietary and patented
three-dimensional, high-density memory products ("Advanced Component
Packaging"), system engineering design services, and value-added manufacturing
services. System engineering and value-added manufacturing services do not
qualify as reportable segments (neither segment has net sales greater than 10%
of total company net sales) and separate information has not been provided.
The Company does not separately allocate operating expenses to these segments,
nor does it allocate specific assets to the segments. Therefore, segment
information reported includes only net sales, cost of sales, and gross profit.
Operating segment data for the first quarter ended May 31, 2001 and 2000 were as
follows:
QUARTER ENDED MAY 31, 2001
ADVANCED
COMPONENT
PACKAGING OTHER ELIMINATIONS TOTAL
-------------- ------------- ------------- --------------
Net sales $6,468,000 $1,024,000 $ (39,000) $7,453,000
Cost of sales 4,556,000 722,000 $ (39,000) 5,239,000
Gross profit 1,912,000 302,000 2,214,000
QUARTER ENDED MAY 31, 2000
ADVANCED
COMPONENT
PACKAGING OTHER ELIMINATIONS TOTAL
-------------- ------------- ------------- --------------
Net sales $10,723,000 $ 257,000 $10,980,000
Cost of sales 7,713,000 161,000 7,874,000
Gross profit 3,010,000 96,000 3,106,000
License revenues for the quarter ended May 31, 2001 and 2000 were $146,000 and
$414,000, respectively.
The Company had export sales (primarily to Western European customers)
accounting for approximately 4% and 5% of net sales for the quarters ended May
31, 2001 and 2000, respectively.
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 statements are "forward-looking." Some forward-looking statements also can
be identified by words such as "the Company believes." Forward-looking
statements reflect the Company's current expectations.
7
8
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 potential risks associated with uncertain demand
for and acceptance of new and existing products, changes in customer preferences
and buying patterns, rapid technological advances and product obsolescence,
uncertain availability of semiconductor devices at reasonable prices,
competitive factors, costs and risks concerning litigation, the uncertain
ability to protect proprietary intellectual property, limited experience in
acquisitions and the uncertain 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, 2001
under the heading "Cautionary Statements". Investors are cautioned against
ascribing undue weight to any forward-looking statements herein
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
Net sales for the quarter ended May 31, 2001 decreased $3,527,000 or 32%
compared to the quarter ended May 31, 2000. The decrease in net sales for the
quarter ended May 31, 2001, when compared to the same quarter in the prior year
was due primarily to a decrease in sales of high-density commercial products.
The overall unit decrease in commercial stacks shipped during the quarter was
42% from the same quarter in the prior year. Additionally, the product mix
within the commercial business changed as to the relationship between consigned
material and material purchased on behalf of the customer. For the commercial
high density product, the revenue of products containing purchased memory
components decreased to 64% of total revenue as compare to 80% from the first
quarter in the prior fiscal year. In cases where the memory components are
included in sales of products, 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. See "Forward Looking
Statements."
Gross profit as a percentage of sales was 30% for the three month period
ended May 31, 2001, as compared to 28% for the three month period ended May 31,
2000. The increase in the gross margin for the first quarter ended May 31, 2001
can be attributed to approximately $300,000 in revenue from non-refundable
deposits on expired contracts and the mix of products that the company was
selling during the comparable quarter. Specifically, the Company's production
during the first quarter ending May 31, 2001 had a higher percentage of
consigned material, therefore decreasing our cost of goods sold and increasing
the gross margin for the quarter. This increase in gross margin percentage
occurred, even with a decrease in the number of commercial memory stacks that
were produced by the company. The Company shipped commercial orders (included in
the Advanced Component Packaging segment) for approximately $2,950,000 during
the quarter ended May 31, 2001, where the margin was lower due to the fact that
the Company procured the memory for the order as compared to $5,700,000 in the
previous years first quarter. The balance of the commercial orders in each such
quarter had consigned memory associated with the sale.
During the first quarter of fiscal year 2002, 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 our products that use a
unique proprietary stacking technology and to market
8
9
these products to a defined market. Subject to the future impact of our
product mix, the Company believes that margins could improve due to increased
production if sales increase. See "Forward-Looking Statements."
Selling, general and administrative expenses increased in the first
quarter of fiscal 2002 by $146,000 or 10% from the first quarter of the prior
fiscal year. The increase in general and administrative expenses can be
attributed to an increase in sales and marketing expense as new personnel were
added in this area. Additionally, the Company increased the occupied square
footage in its facility resulting in an increase in rent expense.
Amortization of goodwill was $193,000 for the quarter ended May 31, 2001
as compared to no expense in the prior year's first quarter. The amortization is
related to the acquisition of Productivity Enhancement Products, Inc. completed
in the third quarter of fiscal year 2001. The current net balance of the
goodwill at May 31, 2001 is $5,443,000 and is being amortized over a seven year
period which will result in approximately $200,000 of amortization expense per
quarter for the foreseeable future.
For the quarter ended May 31, 2001 research and development costs were
approximately the same as the same quarter in the prior fiscal year. The Company
is continuing to invest in research and development for new products in the
advanced technology marketplace. See "Forward Looking Statements".
For the three months ended May 31, 2001, other income increased $31,000
from the same period last year. This increase is due to additional interest
income associated with the increase in average cash reserve balances and a
decrease in interest expense is associated with debt repayments.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was approximately $1,130,000 during the
first quarter of fiscal year 2002 which principally related to the payment of
$1.5 million of tax liability associated with the purchase of Productivity
Enhancement Products, Inc. Excluding this cash payment, cash generated from
operating activities was approximately $400,000 consisting principally of net
income of $111,000, depreciation and amortization of $536,000, and a decrease in
accounts payable of $665,000. This was offset by decreases in accounts payable
and accrued liabilities of approximately $700,000, and a decrease in deferred
revenue of $250,000.
The Company purchased approximately $176,000 in new equipment during the
first quarter of fiscal year 2002. The Company is expecting that it may incur
additional lease-related 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 fiscal year.
See "Forward-Looking Statements".
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 institution. The Company anticipates using the credit
facility if the need should arise for additional working capital to support
operations. See "Forward Looking Statements."
9
10
CAUTIONARY STATEMENTS
Statements in this 10-Q which are not historical facts, including all statements
about the Company's business strategy or expectations, or information about new
and existing products and technologies or market characteristics and conditions,
are forward-looking statements that involve risks and uncertainties. These
include, but are not limited to, the factors described below which could cause
actual results to differ from those contemplated by the forward-looking
statements.
Product Development and Technological Change
The semiconductor and memory module industries are characterized by rapid
technological change and are highly competitive with respect to timely product
innovation. The Company's memory products are subject to obsolescence or price
erosion because semiconductor manufacturers are continuously introducing chips
with the same or greater memory density as the Company's modules. As a result,
memory products typically have a product life of not more than three to five
years.
The Company's future success depends on its ability to develop new products and
product enhancements to keep up with technological advances and to meet customer
needs. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in product development or introduction, could have a material adverse effect on
the Company's financial condition and results of operations.
There can be no assurance that the Company will be successful in its product
development or marketing efforts, or that the Company will have adequate
financial or technical resources for future product development and promotion.
Uncertainty of Market Acceptance or Profitability of New Products
The introduction of new products will require the expenditure of funds for
research and development, tooling, manufacturing processes, inventory and
marketing. In order to achieve high volume production, the Company will need to
make substantial investments in inventory and capital equipment or, as currently
contemplated, the Company will need to out-source production to third parties.
The Company has limited marketing capabilities and resources and is dependent
upon internal sales and marketing personnel and a network of independent sales
representatives for the marketing and sale of its products. There can be no
assurance that our products will achieve or maintain market acceptance, result
in increased revenues, or be profitable.
Parts Shortages and Over-Supplies and Dependence on Suppliers
The semiconductor industry is characterized by periodic shortages or
over-supplies of parts which have in the past and may in the future negatively
affect the Company's operations. For example, an over-supply of 16 meg DRAMs in
1996 resulted in significant price declines which required the Company to make
significant inventory reductions in Fiscal Year 1997. The Company is dependent
on a limited number of suppliers for semiconductor devices used in its products,
and it has no long-term supply contracts with any of them. For example, the
Company was not able to market its second-generation Dense-Stack product when it
lost its source of SRAM die.
Due to the cyclical nature of the semiconductor industry and competitive
conditions, the Company may experience difficulties in meeting its supply
requirements in the future. Any inability to obtain adequate deliveries of
parts, either due to the loss of a supplier or industry-wide shortages, could
delay shipments of the Company's products, increase its cost of goods sold and
have a material adverse effect on its business, financial condition and results
of operations.
10
11
Concentration of Credit Risk
The Company grants credit to customers included in the military, aerospace, and
a variety of commercial industries. Credit is extended based on an evaluation of
the customer's financial condition and collateral is not required. Estimated
credit losses are provided for in the financial statements. During the quarter
ended May 31, 2001, sales to two major customers accounted for 34% and 17% of
net sales. Accounts receivable from these two customers accounted for 32% of
total net accounts receivable at May 31, 2001. During the quarter ended May 31,
2000, sales to two major customers accounted for 55% and 16% of net sales.
Accounts receivable from these two customers accounted for 52% of total net
accounts receivable at May 31, 2000. A decision by a significant customer to
substantially decrease or delay purchases from the Company or the Company's
inability to collect receivables from these customers could have a material
adverse effect on the Company's business financial condition, and results of
operations.
Dependence on Defense-Related Business
The Company has historically derived a portion of its revenues from
defense-related contracts. As a result, the Company's business has been impacted
by reductions in the federal defense budget and will continue to be subject to
risks affecting the defense industry, including changes in governmental
appropriations and changes in national defense policies and priorities. The
Company has sought to reduce its dependence on defense-related business by
developing products with commercial applications, although such products
generally have lower margins than defense-related products.
Intellectual Property Rights
The Company's ability to compete effectively is dependent on its proprietary
know-how, technology and patent rights. The Company holds U.S. patents on
certain aspects of its 3-D stacking technology and has applied for additional
patents. There can be no assurance that the Company's patent applications will
be approved, that any issued patents will afford the Company's products any
competitive advantage or will not be challenged or circumvented by third
parties, or that patents issued to others will not adversely affect the sales,
development or commercialization of the Company's present or future products.
Management of Growth
Successful expansion of the Company's operations will depend on, among other
things, the ability to obtain new customers, to attract and retain skilled
management and other personnel, to secure adequate sources of supply on
commercially reasonable terms and to successfully manage growth. To manage
growth effectively, the Company will have to continue to implement and improve
its operational, financial and management information systems, procedures and
controls. As the Company expands, it may from time to time experience
constraints that will adversely affect its ability to satisfy customer demand in
a timely fashion. Failure to manage growth effectively could adversely affect
the Company's financial condition and results of operations.
Competition
There are memory companies which offer or are in the process of developing
competitive products, including Irvine Sensors, Staktek, Kentron, Legacy and
White Electronics. Some of such companies have greater financial, manufacturing
and marketing capabilities than the Company. The Company could also experience
competition from established and emerging computer memory companies. There can
be no assurance that the Company's products will be
11
12
competitive with existing or future products, or that the Company will be able
to establish or maintain a profitable price structure for its products.
Product Liability
In the course of its business, the Company may be subject to claims for product
liability for which its insurance coverage is excluded or inadequate.
Variability of Gross Margin
Any change in the gross margins can typically be attributed to the type of
products that the Company was selling during the year as well as the royalty
income generated during the periods. As the Company markets its products both to
military and aerospace, and commercial customers, the product mix that each
category of the customers orders may be different and result in changes in the
gross margin. Due to the various configuration and applications of the Company's
product, prices range from less than $5 for commercial modules to over five
thousand dollars for high-end military specification modules.
The Company expects that its net sales and gross margin may vary significantly
based on these and other factors, including the mix of products sold and the
manufacturing services provided, the channels through which the Company's
products are sold, changes in product selling prices and component costs, the
level of manufacturing efficiencies achieved and pricing by competitors. The
selling prices of the Company's products may decline depending upon the price
changes of DRAM, SRAM and Flash semiconductors, which would have a material
adverse effect on the Company's net sales and could have a material adverse
effect on the Company's business, financial condition and results of operation.
Accordingly, the Company's ability to maintain or increase net sales will be
highly dependent upon its ability to increase unit sales volumes of existing
products and to introduce and sell new products in quantities sufficient to
compensate for the anticipated declines in selling prices. Declining product
selling prices may also materially and adversely affect the Company's gross
margin unless the Company is able to reduce its cost per unit to offset declines
in product selling prices. There can be no assurance that the Company will be
able to increase unit sales volumes, introduce and sell new products or reduce
its cost per unit. The Company also expects that its business may experience
significant seasonality to the extent it sells a material portion of its
products in Europe and to the extent its exposure to the personal computer
market remains significant.
Decline of Demand for Product Due to Downturn of Related Industries
The Company may experience substantial period-to-period fluctuations in
operating results due to factors affecting the semiconductor, computer,
telecommunications and networking industries. From time to time, each of these
industries has experienced downturns, often in connection with, or in
anticipation of, declines in general economic conditions. A decline or
significant shortfall in growth in any one of these industries could have a
material adverse impact on the demand for the Company's products and therefore a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company's net sales
and results of operations will not be materially and adversely affected in the
future due to changes in demand from individual customers or cyclical changes in
the semiconductor, computer, telecommunications, networking or other industries
utilizing the Company's products.
Fluctuations in Operating Results
The Company's results of operations and gross margin have been subject to
fluctuations from period to period. The primary factors that have affected and
may in the future affect the Company's results of operations include adverse
changes in the mix of products sold, the inability
12
13
to procure required components, and the partial or complete loss of a principal
customer or the reduction in orders from a customer due to, among other things,
excess product inventory accumulation by such customer. Other factors that have
affected and may in the future affect the Company's results of operations
include fluctuating market demand for and declines in the selling prices of the
Company's products, decreases or increases in the costs of the components of the
Company's products, market acceptance of new products and enhanced versions of
the Company's products, the Company's competitors selling products that compete
with the Company's products at lower prices or on better terms than the
Company's products, delays in the introduction of new products and enhancements
to existing products, manufacturing inefficiencies associated with the start up
of new product introductions, and the Company's semiconductor customers
manufacturing memory modules, internally or with other third parties, outside of
the United States due to concerns about United States antidumping investigations
and laws.
The Company's operating results may also be affected by the timing of new
product announcements and releases by the Company or its competitors, the timing
of significant orders, the ability to produce products in volume, delays,
cancellations or rescheduling of orders due to customer financial difficulties
or other events, inventory obsolescence, including the reduction in value of the
Company's inventories due to price declines, unexpected product returns, the
timing of expenditures in anticipation of increased sales, cyclicality in the
Company's targeted markets, and expenses associated with acquisitions. In
particular, declines in DRAM, SRAM and Flash semiconductor prices could affect
the valuation of the Company's inventory which could result in adverse changes
in the Company's business, financial condition and results of operations.
Sales of the Company's individual products and product lines toward the end of a
product's life cycle are typically characterized by steep declines in sales,
pricing and gross margin, the precise timing of which may be difficult to
predict. The Company has experienced and could continue to experience unexpected
reductions in sales of products as customers anticipate new product purchases.
In addition, to the extent that the Company manufactures products in
anticipation of future demand that does not materialize, or in the event a
customer cancels outstanding orders during a period of either declining product
selling prices or decreasing demand, the Company could experience an
unanticipated decrease in sales of products. These factors could give rise to
charges for obsolete or excess inventory, returns of products by distributors,
or substantial price protection charges or discounts. In the past, the Company
has had to write-down and write-off excess or obsolete inventory. To the extent
that the Company is unsuccessful in managing product transitions, its business,
financial condition and results of operations could be materially and adversely
affected.
The need for continued significant expenditures for capital equipment purchases,
research and development and ongoing customer service and support, among other
factors, will make it difficult for the Company to reduce its operating expenses
in any particular period if the Company's expectations for net sales for that
period are not met. Accordingly, there can be no assurance that the Company will
be able to continue to be profitable. The Company believes that period-to-period
comparisons of the Company's financial results are not necessarily meaningful
and should not be relied upon as indications of future performance. Due to the
foregoing factors, it is likely that in some future period the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, the market price of the Company's securities would be
materially and adversely affected.
International Sales
For quarter ended May 31, 2001, approximately 2% of the Company's sales were
export sales, primarily to Western Europe as compared to 6% in for the previous
quarter ended May 31, 2000. Foreign sales are made in U.S. dollars. The decline
was primarily due to a decrease in memory prices resulting in lower revenue, but
also due to the overall increase in the domestic commercial
13
14
business of the Company. International sales may be subject to certain risks,
including changes in regulatory requirements, tariffs and other barriers, timing
and availability of export licenses, political and economic instability,
difficulties in accounts receivable collections, natural disasters, difficulties
in staffing and managing foreign subsidiary and branch operations, difficulties
in managing distributors, difficulties in obtaining governmental approvals for
telecommunications and other products, foreign currency exchange fluctuations,
the burden of complying with a wide variety of complex foreign laws and
treaties, potentially adverse tax consequences and uncertainties relative to
regional, political and economic circumstances. Moreover and as a result of
currency changes and other factors, certain of the Company's competitors may
have the ability to manufacture competitive products in Asia at lower costs than
the Company.
The Company is also subject to the risks associated with the imposition of
legislation and regulations relating to the import or export of high technology
products. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions upon the importation or exportation of the Company's
products will be implemented by the United States or other countries. Because
sales of the Company's products have been denominated to date in United States
dollars, increases in the value of the United States dollar could increase the
price of the Company's products so that they become relatively more expensive to
customers in the local currency of a particular country, leading to a reduction
in sales and profitability in that country. Future international activity may
result in increased foreign currency denominated sales. Gains and losses on the
conversion to United States dollars of accounts receivable, accounts payable and
other monetary assets and liabilities arising from international operations may
contribute to fluctuations in the Company's results of operations. Some of the
Company's customer's purchase orders and agreements are governed by foreign
laws, which may differ significantly from United States laws. Therefore, the
Company may be limited in its ability to enforce its rights under such
agreements and to collect damages, if awarded. There can be no assurance that
any of these factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Substantial Influence of Existing Shareholders
Euroventures I and Euroventures beneficially own approximately 18% of our common
stock. As a result, they have the ability to exert significant or controlling
influence on all matters requiring approval by our shareholders, including the
election and removal of directors, approval of significant corporate
transactions and the decision of whether a change in control will occur.
Limited Experience in Acquisition
While we have no agreements or negotiations currently underway, we intend to
pursue selective acquisitions to complement our internal growth. If we make any
future acquisitions, we could issue stock that would dilute our shareholders'
percentage ownership, incur substantial debt or assume contingent liabilities.
We have limited experience in acquiring other businesses, product lines and
technologies. In addition, the attention of our small management team may be
diverted from our core business if we undertake an acquisition. Potential
acquisitions also involve numerous risks, including, among others:
- Problems assimilating the purchased operations, technologies or
products;
- Costs associated with the acquisition;
- Adverse effects on existing business relationships with suppliers and
customers;
- Risks associated with entering markets in which we have no or limited
prior experience;
- Potential loss of key employees of purchased organizations; and
14
15
- Potential litigation arising from the acquired company's operations
before the acquisition.
Our inability to overcome problems encountered in connection with such
acquisitions could divert the attention of management, utilize scarce
corporate resources and harm our business. In addition, we are unable to
predict whether or when any prospective acquisition candidate will become
available or the likelihood that any acquisition will be completed.
Cyclical Nature of Semiconductor Industry
The semiconductor industry, including the memory markets in which we compete, is
highly cyclical and is characterized by constant and rapid technological change,
rapid product obsolescence and price erosion, evolving standards, short product
life cycles and wide fluctuations in product supply and demand. The industry has
experienced significant downturns, often connected with, or in anticipation of,
maturing product cycles of both semiconductor companies' and their customers'
products and declines in general economic conditions. These downturns have been
characterized by diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling prices. Any future
downturns could have a material adverse effect on our business and operating
results. Furthermore, any upturn in the semiconductor industry could result in
increased demand for, and possible shortages of, components we use to
manufacture and assemble our ICs. Such shortages could have a material adverse
effect on our business and operating results.
Product Returns And Order Cancellation
To the extent we manufacture products in anticipation of future demand that does
not materialize, or in the event a customer cancels outstanding orders, we could
experience an unanticipated increase in our inventory. A majority of our sales
through aftermarket channels include limited rights to return unsold inventory.
In addition, while we may not be contractually obligated to accept returned
products, we may determine that it is in our best interest to accept returns in
order to maintain good relations with our customers. Product returns would
increase our inventory and reduce our revenues. We have had to write-down
inventory in the past for reasons such as obsolescence, excess quantities and
declines in market value below our costs.
We have no long-term volume commitments from our customers except those subject
to cancellation by the customer. Sales of our products are made through
individual purchase orders and, in certain cases, are made under master
agreements governing the terms and conditions of the relationships. Customers
may change, cancel or delay orders with limited or no penalties. We have
experienced cancellations of orders and fluctuations in order levels from
period-to-period and we expect to continue to experience similar cancellations
and fluctuations in the future which could result in fluctuations in our
revenues.
Additional Capital Funding to Impair Value of Investment
If we expand more rapidly than currently anticipated or if our working capital
needs exceed our current expectations, we may need to raise additional capital
through public or private equity offerings or debt financings. Our future
capital requirements depend on many factors including our research, development,
sales and marketing activities. We do not know whether additional financing will
be available when needed, or will be available on terms favorable to us. If we
cannot raise needed funds on acceptable terms, we may not be able to develop or
enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements. To the extent we raise
additional capital by issuing equity securities, our shareholders may experience
substantial dilution and the new equity securities may have greater rights,
preferences or privileges than our existing common stock.
15
16
Geographic Concentration of Operation
All of our manufacturing operations are located in our facility in garden Grove,
California. Due to this geographic concentration, a disruption of our
manufacturing operations, resulting from sustained process abnormalities, human
error, government intervention or natural disasters such as earthquakes, fires
or floods could cause us to cease or limit our manufacturing operations and
consequently harm our business, financial condition and results of operations.
Compliance with Environmental Laws and Regulations
We are subject to a variety of environmental laws and regulations governing,
among other things, air emissions, waste water discharge, waste storage,
treatment and disposal, and remediation of releases of hazardous materials. Our
failure to comply with present and future requirements could harm our ability to
continue manufacturing our products. Such requirements could require us to
acquire costly equipment or to incur other significant expenses to comply with
environmental regulations. The imposition of additional or more stringent
environmental requirements, the results of future testing at our facilities, or
a determination that we are potentially responsible for remediation at other
sites where problems are not presently known to us, could result in expenses in
excess of amounts currently estimated to be required for such matters.
Stock Price Volatility
The stock market in general, and the market for shares of technology companies
in particular, has experienced extreme price fluctuations. These price
fluctuations are often unrelated to the operating performance of the affected
companies. Many technology companies, including the Company, have experienced
dramatic volatility in the market prices of their common stock. If our future
operating results are below the expectations of stock market analysts and
investors, our stock price may decline. We cannot be certain that the market
price of our common stock will remain stable in the future. Our stock price may
undergo fluctuations that are material, adverse and unrelated to our performance
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The information is incorporated from Form 10-KSB filing from February
28, 2001. There has been no significant changes in the status of these legal
proceedings.
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 10.11A - Executive Employment Agreements made as
of June 7, 2001 between Dense-Pac Microsystems, Inc., a
California Corporation and Ted Bruce, CEO, John Sprint,
COO and William Stowell, CFO, respectively*.
* Management compensatory plan or arrangement
16
17
(b) Reports on Form 8-K -
No reports on Form 8-K were filed during the first quarter
of fiscal 2002 covered by this Form 10-Q.
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.
(Registrant)
July 13, 2001 /s/ Ted Bruce
- ----------------------------- --------------------------------------------
Date Ted Bruce, Chief Executive Officer
July 13, 2001 /s/ William M. Stowell
- ----------------------------- --------------------------------------------
Date William M. Stowell, Chief Financial Officer
17