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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 August 31, 1996
- 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, 92641
( 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
outstanding as of September 25, 1996 was 16,949,681.
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DENSE-PAC MICROSYSTEMS, INC.
Balance Sheet
August 31, February 29,
1996 1996
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(unaudited)
ASSETS
Curent Assets:
Cash and cash equivalents $ 4,309,478 $ 4,579,840
Accounts receivable, net 2,443,343 3,574,822
Inventories 5,621,295 5,151,106
Deferred income tax 150,000 150,000
Other current assets 300,504 287,075
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Total current assets 12,824,620 13,742,843
Property, net 4,108,137 3,448,860
Net cash provided by operating activities: 372,652 409,048
CASH FLOWS FROM INVESTING ACTIVITIES: 73,948 67,262
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$17,379,357 $17,668,013
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LIABILITIES AND SHAREHOLDERS' EQUITY
Proceeds from issuance of other
long-term debt
Current portion of long-term debt 390,897 413,851
Accounts payable 1,502,134 1,568,907
Net cash provided by (used in)
financing activities 277,243 572,499
Other accrued liabilities 65,681 61,982
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Total current liabilities 2,235,955 2,617,239
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Net income (loss) per common share 1,900,000 1,900,000
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Other long-term debt 772,678 699,134
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Stockholders' equity
Common stock 16,041,064 15,795,004
Accumlated deficit (3,570,340) (3,343,364)
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Net stockholders' equity 12,470,724 12,451,640
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$17,379,357 $17,668,013
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DENSE-PAC MICROSYSTEMS, INC.
Summary of Operations
(Unaudited)
Quarter ended Six months ended
August 31, August 31.
1996 1995 1996 1995
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Net Sales $3,643,713 $4,439,858 $7,708,135 $8,670,171
Cost of Sales 2,894,223 2,972,861 5,841,843 6,125,573
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Gross Profit 749,490 1,466,997 1,866,292 2,544,598
------------ ------------ ------------ ------------
Deferred income tax
Operating Expenses:
Selling, general and administrative 789,459 820,159 1,608,006 1,457,587
Research and development 298,873 137,738 425,059 238,153
------------ ------------ ------------ ------------
Net cash provided by operating activities: (338,842) 509,100 (166,773) 848,858
CASH FLOWS FROM INVESTING ACTIVITIES:
Other expenses:
Interest expense, net 32,664 62,833 59,403 122,814
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Proceeds from issuance of other long-term
debt tax provision (371,506) 446,267 (226,176) 726,044
Net cash provided by (used in) financing
activities 800 800 800 800
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Net income (loss) ($372,306) $445,467 ($226,976) $725,244
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Net income (loss) per common share ($0.02) $0.03 ($0.01) $0.05
============ ============ ============ ============
Weighted average common and
common equivalent shares
outstanding 16,950,000 15,845,000 16,950,000 15,547,000
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See accompanying notes to condensed financial statements.
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DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
For the six months ended
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August 31, August 31,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($226,976) $725,244
Adjustments to reconcile net
income (loss) to net
cash provided by operating activities:
Depreciation and amortization 465,830 281,470
Changes in operating assets and liabilites:
Accounts receivable 1,131,479 (145,398)
Inventories (470,189) 117,735
Deferred income tax (13,429) (93,929)
Other assets (6,686)
Accounts payable (66,773) (240,334)
Accrued compensation (295,256)
Accured liabilities 3,699 201,404
Deferred revenue (152,194)
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Net cash provided by operating activities: 521,699 693,998
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (1,088,711) (513,424)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other
long-term debt (105,935) (177,944)
Proceeds from issuance of other
long-term debt 156,525
Proceeds from issuance of common stock 246,060 130,704
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Net cash provided by (used in)
financing activities 296,650 (47,240)
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NET INCREASE (DECREASE) IN CASH (270,362) 133,334
CASH AT BEGINNING OF YEAR 4,579,840 356,787
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CASH AT END OF QUARTER $4,309,478 $490,121
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $135,567 $125,899
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Income taxes paid $800 $0
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See accompanying notes to condensed financial statments.
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DENSE-PAC MICROSYSTEMS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Dense-Pac Microsystems, Inc. (the Company) is engaged in the design,
development, manufacture and marketing of a full line of high density,
miniaturized memory surface mount components and subsystems for a variety of
commercial, industrial and military applications.
NOTE 2 - As contemplated by the Securities and Exchange Commission 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 August 31, 1996 should be read in conjunction with the Company's
Annual Report to Shareholders for the previous year.
In the opinion of the Company, the accompanying unaudited condensed
financial statements contain all adjustments (none of which were other than
normal recurring accruals) necessary to present fairly its financial position
as of August 31, 1996, the results of operations and its cash flows for the
periods ended August 31, 1996 and 1995. Results for the interim period are not
necessarily indicative of those to be expected for the full year.
NOTE 3 - Inventories consisted of the following:
August 31, 1996 February 29, 1996
Raw Materials $ 1,303,247 $ 1,338,472
Work-in-process 3,044,995 2,650,086
Finished Goods 1,273,053 1,162,548
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$ 5,621,295 $ 5,151,106
NOTE 4 - Accounting for Income Taxes
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," effective March 1, 1993.
Deferred income taxes reflect the net tax effect of (a) temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax asset as of February 29, 1996
are as follows:
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Deferred tax assets:
Operating loss carryforwards, general
business credits, etc. $ 1,807,810
Inventories 223,384
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Total gross deferred assets 2,031,194
Deferred tax liability
Depreciation & amortization (527,440)
Valuation allowance (1,353,754)
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Net deferred income taxes $ 150,000
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There was no change in the valuation allowance as of August 31, 1996.
The Company is unable to determine whether it will be able to further
utilize the gross deferred tax assets in fiscal year 1997. Further evaluation
will be completed as part of the year end evaluation of the Company's income
tax situation for the year ending February 28, 1997.
As of February 29, 1996, the Company had net operating loss
carryforwards of $4,466,000 for regular income tax and $4,557,000 for
alternative minimum tax available to offset future Federal taxable income (a
portion is subject to limitations of approximately $270,600), expiring at
various dates through 2010. As of February 29, 1996, the Company had available
tax credit carryforwards of approximately $164,000 to offset future Federal
income taxes, which expire at various dates through 2006.
NOTE 5 - Net income (loss) per common and common equivalent share is
computed by dividing net income by the weighted average number of common and
common equivalent shares (if applicable) outstanding during the periods. For
the loss periods, common equivalent shares were anti- dilutive and were not
included in the E.P.S. calculation.
NOTE 6 - In October 1994, the Company borrowed $2,000,000 from a principal
shareholder and director evidenced by a five year, interest only, eight percent
note. The note is secured by all of the Company's assets. As consideration
for the loan, the Company issued 1,000,000 warrants exercisable for five years
at $2.00 per share for Company stock. The warrants were callable when the
Company's stock reached a trading price of $4.50 for twenty consecutive days.
On September 25, 2995, the Company called the warrants. On October 23, 1995,
the Company received $1,900,000 for the exercise of the warrants and
extinguished debt for $100,000.
The Company also re-negotiated the interest rate on the $1,800,000 note to a
rate of 5% per annum. In connection with the amended loan agreement, the
Company issued four-year warrants to purchase 375,000 shares of the Company
stock at $7.00 per share. At August 31, 1996, all of the warrants were
outstanding and exercisable.
NOTE 7 - In February 1996, the Company raised $4,297,000, net of offering
costs, from the sale of 900,000 shares of common stock at $5.00 per share to
private investors.
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Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net sales for the quarter ended August 31, 1996 decreased $796,145 or
18% from the quarter ended August 31, 1995, and for the six months ended August
31, 1996, sales deceased $962,036 or 11%. The sales decrease can be attributed
to a decrease in sales of the standard 512k x 8 product which was expected. In
the first six months of the previous fiscal year, 40% of sales were represented
by the 512k x 8 or approximately $3,470,000 as compared to 13% or $1,040,000
of sales for the first six months of fiscal year 1997. This represents a
decrease of approximately $2,430,000 in 512k X 8 sales from the previous year
standard product was partially offset by an increase in sales of $392,000 in
sales of the Company's new third generation technology for the six month
period.
The Company has introduced a supermemory board with up to four times
the memory of boards available today known as the SuperSIMTM. The Company is
also marketing the technology in a subsystem arrangement for stackable plastic
memory devices. The Company believes that there is significant market benefit
as this technology becomes known. Expected orders for this product have not
materialized, however, and competitors have begun to enter the market. In
addition, the significant decrease in DRAM prices in the current year has
reduced the expected selling prices of these products by approximately 75%.
Cost of sales as a percentage of sales for the three month period
ended August 31, 1996 increased from 67% in fiscal year 1996 to 79% in fiscal
year 1997 and for the six months increased from 71% in fiscal 1996 to 76% in
fiscal 1997. During the first six months of fiscal year 1997, the Company
recognized inventory writedowns of approximately $570,000. A portion of the
writedowns was associated with the recent decrease in the 16 meg DRAM prices
which affected the entire industry. The balance of the write down was due to a
decrease in SRAM prices for certain inventory of 512K x 32 that the Company
held at the end of the quarter. Beginning in May 1996, the Company's variable
compensation program resulted in a decrease in indirect labor costs included in
cost of sales.
Selling, general and administrative expense decreased slightly in the
second quarter of fiscal 1997 by $30,700 or 4% from the second quarter of the
prior fiscal year. For the six months ended August 31, 1996 these expenses
increased $150,419 or 10%. For four months in the year-to-date results,
payroll costs were reduced as required by the Company's variable compensation
program. The increase in selling, general and administrative expenses is
attributed to an increase in filing fees and maintenance for national NASDAQ
market companies, an increase in selling expenses due to advertising and travel
and an increase in commissions for independent sales representatives as more
territories are being represented by independent sales representative companies
as compared to the previous year.
For the three months ended August 31, 1996, research and development
costs increased $161,135 or 117% from the same quarter in the previous period
and for the six months ended August 31, 1996 expenses have increased $186,906
or 78%. The increase for the six months is due to the efforts on the new
SuperSIMMTM technology and the numerous related products that are being
developed in association with the third generation technology. The Company is
also continuing to develop other new military and commercial products.
For the three months ended August 31, 1996, net interest expense has
decreased $30,169 or 48% from the same quarter in the previous period and for
the six months ended
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August 31, 1996 net interest expenses have decreased $63,411 or 52%. This
decrease is due to more invested capital, resulting in interest income of
approximately $90,000 for the six month period ended August 31, 1996, as
compared to approximately $4,000 in the previous six month period. The
offsetting increase in interest expense was due to additional equipment leases
entered into during the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the second quarter of
fiscal 1997 was $4.3 million cash from the private placement of stock completed
in February 1996. The proceeds from the private placement completed in
February 1996, appear to be sufficient to meet the Company's cash needs for the
foreseeable future.
The Company purchased approximately $1.1 million ($225,000 financed)
in capital equipment during the first six months of fiscal year 1997. A
portion of the purchases can be attributed to the setting up of the third
generation product line.
The Company also has a loan from a Belgium bank due November 2000,
which provides for semi-annual principal payments of $70,533. The interest
rate is two points over the LIBOR rate in effect at the time of each principal
payment, and interest is payable semi-annually. At August 31, 1996, the
outstanding principal amount was $634,977.
CAUTIONARY STATEMENT
Statements regarding the Company's expectations about new and existing
products and its future financial performance are forward looking statements
which are subject to various risks and uncertainties, including, without
limitation, demand for and acceptance of new and existing products,
technological advances and product obsolescence availability of semiconductor
devices at reasonable prices, competitive factors and the availability of
capital to finance growth. These and other factors which could cause actual
results to differ materially from those in the forward looking statements are
discussed in greater detail in the Company's Form 10-KSB for the year ended
February 29, 1996.
Item 4 - Submission of Matters to a vote of Security Holders
1. (a) Annual Shareholders' Meeting - August 12, 1996
(b) Election of Directors: Votes For Withheld
James G. Turner 14,559,711 129,534
Roger Claes 14,559,711 129,534
Trude C. Taylor 14,559,711 129,534
Bob Southwick 14,559,711 129,534
(c) Amendment to Articles of Incorporation to increase
authorized shares of Common Stock:
For: 14,111,815
Against 497,865
Abstain 79,565
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(d) Approval of 1996 Stock Option Plan:
For 7,862,977
Against 1,093,533
Abstain 166,940
Broker
non-votes 5,565,795
Item 5 - Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 3.1 - Restated Articles of Incorporation
Exhibit 10.1 - 1996 Employee Stock Option Plan
Exhibit 27 - Financial Data Schedule
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)
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Date James G. Turner, Chairman of the Board
and Chief Executive Officer
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Date William M. Stowell, Chief Financial Officer
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