1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1999
- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________to_________________
Commission file number 0-14843
DENSE-PAC MICROSYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
CALIFORNIA 33-0033759
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
7321 LINCOLN WAY
GARDEN GROVE, CALIFORNIA 92841
(Address of Principal Executive Offices)
(714) 898-0007
Issuer's Telephone Number, Including Area Code
Not Applicable
(Former Name, Former Address and Former Fiscal Year
if Changed Since Last Year)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of common stock, no par value, outstanding as of
September 20, 1999 was 18,612,519.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
- --------------------------------------------------------------------------------
TOTAL PAGES: 11
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Dense-Pac Microsystems, Inc.
Consolidated Balance Sheet
August 31, February 28,
1999 1999
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,908,303 $ 1,273,887
Accounts receivable, net 3,181,643 1,756,953
Inventories 2,183,422 3,696,471
Other current assets 115,296 166,400
------------ ------------
Total current assets 7,388,664 6,893,711
Property, net 3,998,777 3,371,309
Other assets 14,360 14,360
------------ ------------
$ 11,401,801 $ 10,279,380
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 473,801 351,731
Accounts payable 2,315,048 2,793,304
Accrued compensation 493,707 240,762
Other accrued liabilities 175,723 217,176
------------ ------------
Total current liabilities 3,458,279 3,602,973
------------ ------------
Note payable to related parties 700,000 1,900,000
------------ ------------
Other long-term debt 571,875 269,157
------------ ------------
Stockholders' equity
Common stock 18,825,476 17,544,267
Accumulated deficit (12,153,829) (13,037,017)
------------ ------------
Total stockholders' equity 6,671,647 4,507,250
------------ ------------
$ 11,401,801 $ 10,279,380
============ ============
See accompany notes to consolidated financial statements.
3
Dense-Pac Microsystems, Inc.
and Consolidated Subsidiary
Summary of Operations
(Unaudited)
For the quarter ended Six months ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
NET SALES $ 7,355,581 $ 2,775,525 $ 13,396,618 $ 4,980,223
COST OF SALES
Cost of sales 4,805,052 3,149,496 9,404,765 4,891,724
Inventory write-down 773,954 773,954
------------ ------------ ------------ ------------
Total cost of sales 4,805,052 3,923,450 9,404,765 5,665,678
GROSS PROFIT (LOSS) 2,550,529 (1,147,925) 3,991,853 (685,455)
COSTS AND EXPENSES:
Selling, general and administrative 1,499,289 835,037 2,526,515 1,615,960
Research and development 263,562 326,553 442,215 655,029
Other costs 372,447 372,447
------------ ------------ ------------ ------------
Total costs and expenses 1,762,851 1,534,037 2,968,730 2,643,436
PROFIT (LOSS) FROM OPERATIONS 787,678 (2,681,962) 1,023,123 (3,328,891)
------------ ------------ ------------ ------------
OTHER EXPENSE (INCOME)
Interest expense 94,996 70,897 133,586 129,751
Interest income (7,813) (36,253) (14,451) (69,965)
------------ ------------ ------------ ------------
Total other expense (income) 87,183 34,644 119,135 59,786
PROFIT (LOSS) BEFORE INCOME
TAX PROVISION 700,495 (2,716,606) 903,988 (3,388,677)
INCOME TAX PROVISION 20,800 2,400 20,800 800
------------ ------------ ------------ ------------
NET PROFIT (LOSS) $ 679,695 $ (2,719,006) $ 883,188 $ (3,389,477)
============ ============ ============ ============
BASIC NET INCOME
(LOSS) PER SHARE $ 0.04 ($ 0.15) $ 0.05 ($ 0.19)
============ ============ ============ ============
DILUTED NET INCOME
(LOSS) PER SHARE $ 0.03 ($ 0.15) $ 0.04 ($ 0.19)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
USED TO CALCULATE BASIC
INCOME (LOSS) PER SHARE 18,595,000 17,732,000 18,460,000 17,740,000
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
USED TO CALCULATE DILUTED
INCOME (LOSS) PER SHARE 19,876,000 17,732,000 19,689,000 17,740,000
============ ============ ============ ============
See accompanying notes to condensed financial statements.
4
DENSE-PAC MICROSYSTEMS, INC.
Statements of Cash Flow
(Unaudited)
For the six months ended
August 31, August 31,
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 883,188 $(3,391,077)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 679,704 574,873
Write-off of fixed assets 373,196
Inventory write-down 773,954
Changes in operating assets and liabilities:
Accounts receivable (1,424,690) (359,539)
Inventories 1,513,049 (38,969)
Other current assets 51,104 18,206
Accounts payable (478,256) (7,286)
Accrued compensation 252,945 (71,828)
Accrued liabilities (41,453) 26,355
----------- -----------
Net cash provided by (used in) operations 1,435,591 (2,102,115)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (643,890) (363,814)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other long-term debt (238,494) (199,620)
Proceeds from issuance of common stock 81,209 383,529
----------- -----------
Net cash (used in) provided by financing activities (157,285) 183,909
----------- -----------
NET INCREASE (DECREASE) IN CASH 634,416 (2,282,020)
CASH AT BEGINNING OF YEAR 1,273,887 3,625,388
----------- -----------
CASH AT END OF QUARTER $ 1,908,303 $ 1,344,368
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 151,720 $ 129,751
=========== ===========
Income taxes paid $ 800 $ 2,400
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisition of property under capital leases $ 663,282
===========
Conversion of notes payable to related parties to common stock $ 1,200,000
===========
See accompanying notes to condensed financial statements.
5
DENSE-PAC MICROSYSTEMS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Dense-Pac Microsystems, Inc. (Dense-Pac or the Parent Company), a
California corporation, and its wholly-owned subsidiary, TypeHaus, Inc.
(TypeHaus) (together, the Company) designs and manufacturers proprietary
chip-stacking components and subsystems. The Company's revenues are generated
primarily from manufacturers of electronic components, as well as from
subcontracts where the primary contractor is the United States government. The
Company grants credit to customers included in the military, aerospace, and a
variety of commercial industries. TypeHaus provides printer media devices,
printer memory, and electronic laser products to a variety of OEM customers. It
also supplies custom memory subsystems and support software for OEM
manufacturers of laser printers.
NOTE 2 - As contemplated by the Securities and Exchange Commission ("SEC") under
Item 310 (b) of Regulation S-B, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles. This report on Form 10-QSB
for the period ended August 31, 1999 should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1999 filed with the SEC.
In the opinion of the Company management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the Company's financial position as of August 31, 1999 and August 31,
1998, and the results of its operations and its cash flows for the quarters
ended August 31, 1999 and 1998. Results for the interim periods are not
necessarily indicative of those to be expected for the full year.
NOTE 3 - Recent Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The Company
does not invest in derivative investments nor does it engage in hedging activity
and, therefore, does not believe that the adoption of SFAS No. 133 will have an
impact on the Company's financial statements.
In fiscal 1999, the Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosure about
products and services, geographic areas, and major customers. The Company
engages in business activity primarily in two operating segments: the design and
manufacturing of proprietary and patented three-dimensional, high-density
semiconductor products and the design and manufacturing of memory and memory
related products for the laser printer industry (through its wholly-owned
subsidiary, TypeHaus, Inc.). Required operating segment data were as follows:
6
Quarter ended August 31, 1999: Dense-Pac TypeHaus Eliminations Total
- ----------------------------- --------- -------- ------------ -----
(000's)
Net sales $ 6,927 $ 428 $ 7,356
Net income $ 635 $ 45 -- $ 680
Total assets $10,785 $ 627 ($ 10) $11,402
Quarter ended August 31, 1998: Dense-Pac TypeHaus Eliminations Total
- ----------------------------- --------- -------- ------------ -----
(000's)
Net sales $ 2,462 $ 326 ($ 12) $ 2,776
Net income(loss) ($ 2,732) $ 16 -- ($ 2,716)
Total assets $ 8,443 $ 546 ($ 10) $ 8,980
Six months ended August 31, 1999:
- ---------------------------------
(000's) Dense-Pac TypeHaus Eliminations Total
--------- -------- ------------ -------------
Net sales $12,555 $ 848 ($ 7) $13,397
Net income $ 777 $ 106 -- $ 883
Six months ended August 31, 1998:
- ---------------------------------
(000's) Dense-Pac TypeHaus Eliminations Total
--------- -------- ------------ ---------
Net sales $ 4,382 $ 610 ($ 12) $ 4,980
Net income(loss) ($ 3,481) $ 90 -- ($ 3,391)
NOTE 4 - The following table summarizes stock option activity under Dense-Pac's
1985 and 1996 Stock Option Plans for the six months ended August 31, 1999:
Number of Price per Number of
Shares Share Options Exercisable
---------- -------------- -------------------
Balance, February 28, 1999 1,811,550 $ .81 - $ 4.41 617,247
---------- -------------- ===================
Granted 335,000 1.56 - 2.25
Exercised ( 77,550) 1.00
Canceled ( 21,000)
---------- --------------
Balance, August 31,1999 2,048,050 $ .81 - $ 4.41 715,042
========== ============== ===================
NOTE 5 - The weighted average shares outstanding during the three and six month
period ended August 31, 1999 was 18,595,000 and 18,460,000, respectively. The
fully diluted shares outstanding for the three and six month period ended August
31, 1999 was 19,876,000 and 19,689,000, respectively. Options and warrants to
purchase shares of common stock during these periods were included in the above
calculations.
7
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
Net sales for the quarter ended August 31, 1999 increased $4,580,000 or
165% compared to the quarter ended August 31, 1998. For the six months ended
August 31, 1999, sales increased $8,416,000 or 169%, as compared to the six
months ended August 31, 1998. The increase in net sales for the quarter ended
August 31, 1999, when compared to the same quarter in the prior year was due
primarily to a focused sales effort associated with the Company's high density
commercial products. Management believes that this has been met with success as
the commercial product becomes accepted into the market, increasing revenue.
Additionally, the industrial, defense and aerospace division continues to
rebuild with a number of new design wins and contracts. In the six month period
ended August 31, 1998, the Company had marketed a significant number of
off-the-shelf type commercial products and concentrated a majority of its
efforts on selling these lower margin commercial products. At the end of August,
1998, the Company changed its marketing strategy to offer only the Company's
patented technology in a format to support a larger customer base. Additionally
in August 1998, the sales department was re-structured to differentiate sales
personnel in the area of commercial sales from industrial, defense and aerospace
sales. Management believes this has increased the effectiveness of the sales
personnel as individuals could be utilized based on their experience, increasing
the revenue associated with the Company's focused product line. See "Forward
Looking Statements."
Gross profit as a percentage of sales was 35% for the three month period
ended August 31, 1999, as compared to a negative margin of 41% for the three
month period ended August 31, 1998. For the six month period ended August 31,
1999 the margin was 30% as compared to a negative margin of 14% in the same
period in the prior year. The increase in the gross margin for the quarterly
period and the six month period ending August 31, can be attributed to the
complete change in the type of products that the Company was selling during such
periods for this year as compared to the comparable periods of the prior fiscal
year. Additionally, the Company increased its production by acquiring new
equipment during the second quarter ended August 31, 1999 creating economics of
scale which resulted in an increase in gross margin. During the first quarter
the Company shipped orders for approximately $1,600,000, where the margin was
low due to fact that the Company procured the memory for the order at the
Company's expense. The practice of buying memory for stacking orders was
completely stopped in the second quarter when the Company decided that it would
no longer purchase commercial memory for the customer's order, but rather
require the customer to consign the memory to the Company. See "Forward Looking
Statements."
During the quarter ended August 31, 1998, slower moving ceramic products
that were being replaced by newer technology were written-down in inventory
value by approximately $450,000. Additionally, the inventory reserve for
obsolete products was increased by $100,000 and the scrap associated with the
production of commercial and other products was written-off, representing a
charge of approximately $270,000. These charges were recognized in the cost of
goods sold for the quarter. In addition, at the end of the quarter, the Company
discontinued several commercial product lines and commercial ceramic memory
module lines were discontinued, resulting in a charge of $774,000.
Selling, general and administrative expenses increased in the second
quarter of fiscal 1999 by $664,000 or 80% from the second quarter of the prior
fiscal quarter. For the six months ended August 31, 1999 these expense increased
$911,000 or 56% over the same period in the prior year. The increase in selling,
general and administrative expenses during the related periods
8
is directly related to the increase in revenues. With an increase of over 160%
in revenues for the first six months of the fiscal year, expenses in this area
increased to support the new level of operations. There were also increases in
legal expense for the six months ended August 31, 1999 of $165,000 associated
with a patent infringement lawsuit and other legal expenses associated with the
filing of new patents.
For the quarter ended August 31, 1998, the Company wrote-off $372,000 of
equipment used in the production of commercial products no longer being offered
for sale by the Company.
For the quarter ended August 31, 1999, research and development costs
decreased $63,000 or 19% from the same quarter in the previous fiscal year and
for the six months ended August 31, 1999, such expenses decreased by $213,000 or
33% as compared to the prior year six month period. The decrease is primarily
due to the completion in the first quarter of fiscal 1999 of the research
necessary to develop and produce the commercial plastic product that the Company
is currently selling. The Company is continuing to invest in research and
development for new products in the aerospace and commercial marketplace. See
"Forward Looking Statements".
For the three months ended August 31, 1999, other expenses increased
$52,000 from the same period last year and for the six months ended August 31,
1999, other expenses increased $59,000 as compared to the same period in the
prior fiscal year. This increase is due to additional interest expense
associated with the utilization of debt to finance equipment purchases and a
decrease in interest income as compared to the interest income earned in the
prior fiscal year's period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity for the first six months of
fiscal 2000 was cash generated from operations and $4.3 million from the private
placement of stock completed in February 1996. The Company is attempting to
continue to improve its operating performance in order to generate cash for
operations. Assuming that the Company is successful in its efforts to continue
to improve its financial performance, the Company believes that the remaining
proceeds from the private placement and cash from operations will be sufficient
to meet the Company's operating cash needs for the next twelve months.
Additionally, the Company has received a written commitment from an accounts
receivable factoring company for a one million dollar credit facility if the
need should arise for additional working capital to support operations. See
"Forward Looking Statements."
Net cash provided by operations was approximately $1,436,000 during the
first six months of fiscal year 2000 which was generated from the profitable
results of operations. This increase was primarily the result of net income of
$883,000, depreciation and amortization of $680,000, an increase in accounts
receivable of $1,424,000, a decrease in inventories of $1,513,000 primarily
attributed to requiring customers to consign inventory to the Company.
Management considers that the conversion to this manner of business represents
for the most part, a one time benefit to cash flows.
The Company purchased approximately $1,307,000 in new equipment during the
first quarter of fiscal year 2000, of which approximately $663,000 was financed
through capital leases. The Company is expecting that it will incur additional
lease debt with the purchase of additional equipment during the next quarter.
See "Forward-Looking Statements".
9
On April 8, 1999, the Company amended the terms of its $1.8 million loan
payable to a major shareholder, and a $100,000 loan payable to a director. Under
the terms of the amendment, $1,200,000 of the outstanding principal was
converted into 662,069 shares of common stock at $1.8125 per share, the fair
market value of the Company's common stock at the date of the amendment. The
remaining outstanding principal will accrue interest at 8.75% per annum, with
interest only payments due quarterly and the principal due on December 31, 2000.
At the election of the lenders, the remaining outstanding principal may be
converted into common stock at the price of $1.8125, based on the terms defined
in the agreement.
The Company also has a loan from a Belgium bank due November 2000, which
provides for semi-annual principal payments of $70,533. The interest rate is two
points over the LIBOR rate in effect at the time of each principal payment, and
interest is payable semi-annually. At August 31, 1999, the outstanding amount
was $211,659.
CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS
Year 2000 Disclosure Statement
Many currently installed computer systems and software products are coded
to accept only two digits in the date code field. These date code fields will
need to accept four digit entries to distinguish 21st century dates from the
20th century dates. As a result, in less than one hundred days, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements.
The Company has completed its program to assess and address year 2000
compliance of its software and systems in its internal business processes, and
obtained assurances of compliance from the manufacturers of these products and
their promises to modify or replace all non-compliant products. In addition, the
Company converted its software and systems to commercial products that are
believed to be Year 2000 compliant. Based on the information available to date,
the Company believes it has completed its Year 2000 compliance review and made
the necessary modifications. Nevertheless, particularly because the Company is
relying on the representations of vendors that their products or operations are
Year 2000 compliant, there can be no assurances that the these representations
are accurate. If key systems, or a significant number of systems were to fail as
a result of Year 2000 problems or the Company were to experience problems in the
represented Year 2000 compliant products or disruptions in supply, service, or
utilities, the Company could incur substantial costs and disruption of its
business, which would potentially have a material effect on the Company's
business and results of operations.
The Company, in its ordinary course of business, tests and evaluates its
own products. The Company believes that its products are generally Year 2000
ready, meaning that the use or occurrence of dates on or after January 1, 2000
will not affect the performance of the Company's products with respect to four
digits dependent data or the ability of such products to correctly create,
store, process and output information related to such date data. The Company has
warranted that the use or occurrence of dates on dates on or after January 1,
2000 will not adversely affect the performance of the Company's products with
respect to four digits date dependent data or the ability to create, store,
process and output information related to such data.
To date, the Company has not created a separate budget for investigating
and remedying issues related to Year 2000 compliance involving the Company's own
software or systems used in its internal operations. The Year 2000 program has
directly cost the Company approximately $100,000. There can be no assurances
that future Company resources spent on investigating and
10
remedying Year 2000 compliance issues will not have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition, the purchasing patterns of customers and potential customers
may be affected by Year 2000 issues. Many companies are expending significant
resources to correct their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase the
electronic products that incorporate the Company's products, which could have an
adverse effect on the Company's business, results of operations and financial
condition.
FORWARD-LOOKING STATEMENTS
Included in the Notes to Consolidated Financial Statements, this Item 2.
Management's Discussion and Analysis or Plan of Operation and elsewhere in this
Report are certain statements that do not present historical information. These
are forward-looking statements and reflect the Company's current expectations.
Although the Company believes that its expectations are based on reasonable
assumptions, there can no assurance that the Company's financial goals or
expectations will be realized. Numerous factors may affect the Company's actual
results and may cause results to differ materially from those expressed in
forward-looking statements made by or on behalf of the Company.
Some of these factors include demand for and acceptance of new and existing
products, technological advances and product obsolescence, availability of
semiconductor devices at reasonable prices, competitive factors, costs and risks
concerning litigation, the ability to protect proprietary intellectual property,
and the availability of capital to finance operations and if applicable, growth,
the willingness of customers to procure and consign inventory to the Company,
competitive conditions, pricing pressures, and Year 2000 risks. These and other
factors which could cause actual results to differ materially from those in the
forward looking statements are discussed in greater detail in the Company's
Annual Report on Form 10-KSB for the year ended February 29, 1999 under the
heading "Cautionary Statements". These Cautionary Statements are incorporated by
reference herein. Investors are cautioned against ascribing undue weight to any
forward looking statements herein.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On September 23, 1998, Dense-Pac Microsystems, Inc. was served with a
complaint from Simple Technology, Inc., filed in U.S. District Court for the
Central District of California, Santa Ana Division for an undetermined amount,
alleging that Dense-Pac's stacking technology infringes on a Simple Technology
patent. Dense-Pac intends to vigorously defend itself against such charges. On
October 23, 1998, Dense-Pac filed a cross-compliant in the U.S. District Court
for the Central District of California, Santa Ana for patent infringement
against Simple Technology. The suit alleges that the Simple Technology
infringement has benefited Simple Technology and unlawfully interfered with
Dense-Pac's sales efforts. In April 1999, Dense-Pac filed two motions for
summary judgement, one relating to non-infringement of the Simple patent and the
second relating to previous public art, which may invalidate the claims in the
Simple Technology patent. Simple
11
Technology also filed a summary motion. The ruling on the summary motions is
still open. The ultimate outcome or any resulting potential loss cannot be
determined at this time.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed below are hereby filed with the
Securities and Exchange Commission (the "SEC") as part of
the Quarterly Report.
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - The text under the heading "Cautionary
Statements" on pages 18 to 20 of the Company's Form 10-KSB
filed on May 26, 1999 with the SEC
(b) Reports on Form 8-K -
No reports on Form 8-K were filed during the second quarter
of fiscal 2000 covered by this Form 10-QSB.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENSE-PAC MICROSYSTEMS, INC.
(Small Business Issuer)
October 8, 1999 /s/ Ted Bruce
- ----------------------- -------------------------------------------
Date Ted Bruce, Chief Executive Officer
October 8, 1999 /s/ William M. Stowell
- ----------------------- -------------------------------------------
Date William M. Stowell, Chief Financial Officer