Dynatem (DYTM) 10QSB 2004 Q2 Quarterly report (small business)

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2003.

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-16250

DYNATEM, INC.

(Exact name of small business issuer as specified in its charter)

California	95-3627099
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

23263 Madero, Suite C, Mission Viejo, California 92691

(Address of principal executive offices)

(949) 855-3235

(Issuer’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

On November 30, 2003, there were 1,594,776 shares of the issuer’s Common Stock outstanding.

Transitional Small Business Disclosure Format (check one):    Yes  ¨    No  x

DYNATEM, INC.

INDEX

Part I. Financial Information
	Item 1.	Financial Statements
		Condensed Balance Sheets at November 30, 2003 and May 31, 2003	1
		Condensed Statements of Operations for the Three Months Ended November 30, 2003 and November 30, 2002	2
		Condensed Statements of Operations for the Six Months Ended November 30, 2003 and November 30, 2002	3
		Condensed Statements of Cash Flows for the Six Months Ended November 30, 2003 and November 30, 2002	4
		Notes to Condensed Financial Statements	5
	Item 2.	Management’s Discussion and Analysis or Plan of Operation	7
	Item 3.	Controls and Procedures	8
Part II. Other Information			9
	Item 1.	Legal Proceedings	9
	Item 2.	Changes in Securities	9
	Item 3.	Defaults upon Senior Securities	9
	Item 4.	Submission of Matters to a Vote of Security Holders	9
	Item 5.	Other Information	9
	Item 6.	Exhibits and Reports on Form 8-K	9

DYNATEM, INC.

CONDENSED BALANCE SHEETS

	November 30, 2003			May 31, 2003
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash	$	1,486,830		$	1,531,431
Accounts receivable, net		439,122			238,033
Inventories		700,990			572,628
Prepaid expenses		22,824			52,417
Total current assets		2,649,766			2,394,509
Property and equipment, net		54,140			55,853
Other assets		39,178			9,581
	$	2,743,084		$	2,459,943
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	190,935		$	113,208
Accrued liabilities		272,951			219,684
Deferred revenue		342,720			156,450
Total current liabilities		806,606			489,342
Shareholders’ equity:
Common stock, no par value, 50,000,000 shares authorized; 1,594,776 and 1,519,042 shares issued and outstanding		2,396,506			2,389,085
Accumulated deficit		(460,028	)		(418,484	)
Total shareholders’ equity		1,936,478			1,970,601
	$	2,743,084		$	2,459,943

See accompanying notes to condensed financial statements.

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DYNATEM, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

Three months ended November 30, 2003 and 2002

	2003		2002
Net sales	$	855,083	$	1,054,001
Cost of sales		471,534		513,382
Gross profit		383,549		540,619
Operating expenses:
Selling, general and administrative		253,353		198,744
Research and development		127,612		123,302
Total operating expenses		380,965		322,046
Operating income		2,584		218,573
Other income (expense), net		3,738		3,690
Income before income taxes		6,322	$	222,263
Provision for income taxes		800		800
Net income	$	5,522	$	221,463
Income per share - basic	$	—	$	.15
Income per share - diluted	$	—	$	.13
Weighted average shares outstanding - basic		1,581,411		1,496,264
Weighted average shares outstanding - diluted		1,713,478		1,697,386

See accompanying notes to condensed financial statements

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DYNATEM, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

Six months ended November 30, 2003 and 2002

	2003			2002
Net sales	$	1,485,727		$	2,007,905
Cost of sales		810,235			1,041,076
Gross profit		675,492			966,829
Operating expenses:
Selling, general and administrative		469,244			400,459
Research and development		254,658			236,208
Total operating expenses		723,902			636,667
Operating (loss) income		(48,410	)		330,162
Other income, net		7,666			7,537
Net (loss) income before taxes		(40,744	)		337,699
Provision for income taxes		800			800
Net (loss) income	$	(41,544	)	$	336,899
Income (loss) per share - basic	$	(0.03	)	$	.23
Income (loss) per share - diluted	$	(0.03	)	$	.20
Weighted average shares outstanding - basic	$	1,556,430			1,496,264
Weighted average shares outstanding - diluted	$	1,556,430			1,697,386

See accompanying notes to condensed financial statements

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DYNATEM, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

For Six months ended November 30, 2003 and 2002

	2003			2002
Cash flows from operating activities:
Net income (loss)	$	(41,544	)	$	336,899
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		10,430			4,832
Changes in operating assets and liabilities:
Accounts receivable		(201,089	)		(256,362	)
Inventories		(128,362	)		38,667
Prepaid expenses		29,593			12,903
Accounts payable		77,727			125,545
Accrued liabilities		53,267			9,713
Deferred revenue		186,270			—
Net cash provided by (used in) operating activities		(13,708	)		272,197
Cash flows from investing activities:
Purchases of fixed assets		(8,717	)		—
Changes in other assets		(29,597	)		(4,264	)
Net cash used in investing activities		(38,314	)		(4,264	)
Cash flows from financing activities
Proceeds from issuance of common stock in connection with the exercise of stock options		14,096			—
Repurchase of common stock		(6,675	)		—
Net cash provided by financing activities		7,421			—
Net increase (decrease) in cash		(44,601	)		267,933
Cash, beginning balance		1,531,431			959,042
Cash, ending balance	$	1,486,830		$	1,226,975

See accompanying notes to condensed financial statements.

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DYNATEM, INC.

Notes to Condensed Financial Statements

(1)Interim Accounting Policy

In the opinion of the management of Dynatem, Inc. (the “Company”), the accompanying unaudited condensed financial statements include only normal recurring adjustments necessary for a fair presentation of the Company’s financial position as of November 30, 2003 and the results of operations and cash flows for the three and six months ended November 30, 2003 and November 30, 2002, respectively. Although the Company believes that the disclosures in these condensed financial statements are adequate to ensure that the information presented is not misleading, certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for interim periods are not necessarily indicative of results of operations to be expected for the full year.

(2)Accounting for Stock-Based Compensation

The Company accounts for employee stock options in accordance with the Accounting Principles Board Opinion No. 25 (“APB 25”)“Accounting for Stock Issued to Employees”and related Interpretations and makes the necessary pro forma disclosures mandated by SFAS No. 123 (“SFAS 123”)“Accounting for Stock-based Compensation.”

In March 2000, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 44, (“FIN 44”),“Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB 25”. This Interpretation clarifies (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 became effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur after either December 15, 1998, or January 12, 2000. Management believes that the Company accounts for its employee stock based compensation in accordance with FIN 44.

In December 2002, the FASB issued SFAS No. 148 (“SFAS 148”),“Accounting for Stock-Based Compensation -Transition and Disclosure - an Amendment of FASB Statement No. 123.”SFAS 148 amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure about the effects on reported net income and earnings per share and the entity’s accounting policy decisions with respect to stock-based employee compensation. Certain of the disclosure requirements are required for all companies, regardless of whether the fair value method or intrinsic value method is used to account for stock-based employee compensation arrangements. The Company continues to account for its employee incentive stock option plans using the intrinsic value method in accordance with the recognition and measurement principles of APB 25. SFAS 148 is effective for financial statements for fiscal years ended after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company had adopted the disclosure provisions of this statement during the year ended May 31, 2003.

At November 30, 2003, the Company has two stock-based employee compensation plans (the “Plans”). The Company accounts for the Plans under the recognition and measurement principles of APB 25 and related Interpretations. There was no stock-based employee compensation cost reflected in net income for the periods ended November 30, 2003 and 2002. The following table illustrates the effect on net income and earnings per common share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

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DYNATEM, INC.

	Three Months Ended November 30,
	2003		2002
Net income available to common stockholders, as reported	$	5,522	$	221,463
Pro forma compensation expense		—		—
Pro forma net income available to common stockholders	$	5,522	$	221,463
Income per share, as reported
Basic	$	—	$	0.15
Diluted	$	—	$	0.13
Income per share, pro forma
Basic	$	—	$	0.15
Diluted	$	—	$	0.13

(3)Inventories

A summary of inventories follows:

	November 30, 2003		May 31, 2003
Raw materials	$	352,598	$	284,621
Work-in-process		313,342		256,237
Finished goods		35,050		31,770
	$	700,990	$	572,628

(4)Loss Per Share

Under SFAS No. 128 “Earnings Per Share”, basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares assumed to be outstanding during the period of computation. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive (using the treasury stock method, approximately 132,000 and 201,000 shares were potential additional common shares as of November 30, 2003 and 2002, respectively). Pro forma per share data has been computed using the weighted average number of common shares outstanding during the periods. Because the Company had incurred net losses during the six months ended November 30, 2003, basic and diluted loss per share are the same as additional potential common shares would be anti-dilutive.

(5)Common Stock

During the quarter ended November 30, 2003, the Company issued 50,000 shares of common stock in connection with the exercise of certain options resulting in cash proceeds of approximately $10,400.

On October 1, 2003, the Company initiated a program to repurchase (the “Repurchase

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Plan”) shares of the Company’s common stock (the “Shares”) with an aggregate repurchase price not to exceed $300,000 (the “Maximum Amount”). As of November 30, 2003, the Company repurchased 4,450 shares of common stock resulting in cash outlay of $6,675.

Item 2.Management’s Discussion and Analysis or Plan of Operation

Net sales for the three months ended November 30, 2003, decreased 18.9% to $855,083 compared to net sales of $1,054,001 in the same period a year ago. For the six months ended November 30, 2003, net sales were $1,485,727, $522,178 lower than the corresponding period in the previous fiscal year, for a decrease of 26%. The decrease in total net sales was due to the result of temporary delays in production which resulted in slower product shipment.

Cost of sales for the three months ended November 30, 2003, was $471,534 or 55.1% of net sales and compares to $513,382 or 48.7% of net sales in the same period a year ago. For the six months ended November 30, 2003, cost of sales of $810,235 represented 54.5% of net sales and compares to $1,041,076 representing 51.8% of net sales for the same period a year ago.

Selling, general and administrative expenses for the three-month and six-month periods ended November 30, 2003, were $253,353 and $469,244, respectively, as compared to $198,744 and $400,459 the same periods a year ago. The additions in selling, general and administrative expense is primarily the result of aggressive spending for marketing as well as the increased cost of insurance and some other expenses related to the implementation of the new rules and regulations required by the Securities and Exchange Commission.

Research and development expenses for three-month and six-month periods ended November 30, 2003, were $127,612 and $254,658, respectively, as compared to $123,302 and $236,208 the same respective periods a year ago. The increase in expenses is attributed to the ongoing development of new single-board computer products utilizing advanced microprocessor technology, as well as added engineering staff. The Company expanded its engineering capabilities in the new office in Escondido, California, to better support its many customer’s designs, which incorporate Dynatem products.

For the three-month and six-month periods ended November 30, 2003, net income was $5,522 and net loss of $41,544, respectively, compared to net income of $221,463 and $336,899, for the same respective periods ended November 30, 2002. The loss occurred due to the decrease in sales for the period and the overall additional expenses incurred by the Company.

The Company does not expect to pay significant income taxes due to its utilization of net operating loss carryforwards which will expire in various years through 2019.

At November 30, 2003, the Company’s working capital was $1,843,160 and its current ratio was 3.28:1 compared to $1,905,167 and a ratio of 4.89:1 as of May 31, 2003. Management believes that the Company’s existing working capital and cash flows from operations will be sufficient to meet its working capital needs during fiscal year 2004. The Company has arranged for a line of credit of $500,000 with its bank and may consider other sources of capital should the need arise.

Stock Repurchase Plan

On October 1, 2003, the Company initiated a program to repurchase (the “Repurchase Plan”) shares of the Company’s common stock (the “Shares”) with an aggregate repurchase price not to exceed $300,000 (the “Maximum Amount”). As of November 30, 2003, the Company repurchased 4,450 shares of common stock resulting in cash outlay of $6,675.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s consolidated financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheet and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, accounts

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DYNATEM, INC.

receivable, doubtful accounts and inventories. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by management are, among others, provisions for losses on accounts receivable, realizability of long-lived assets and estimates for deferred income tax asset valuations.

Revenue Recognition

Revenues from product sales are recognized at the time the product is shipped.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 (SAB 101”),“Revenue Recognition,”which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the Securities and Exchange Commission. Management believes the Company’s revenue recognition policy conforms to SAB 101.

Long-Lived Assets

Statement of Financial Accounting Standards (“SFAS”) No. 144,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset (excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. SFAS 144 also requires companies to separately report discontinued operations and extends that reporting requirement to a component of an entity that either has been disposed of (by sale, abandonment or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or the estimated fair value less costs to sell. The Company adopted SFAS 144 during the year ended May 31, 2003. The provisions of this pronouncement relating to assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated commitments to plan to sell or dispose of such asset, as defined, by management. As a result, management cannot determine the potential effects that adoption of SFAS 144 will have on the Company’s financial statements with respect to future decisions, if any.

Management believes that no impairment loss is necessary on long-lived assets. There can be no assurance, however, that market conditions or demand for the Company’s products or services will not change which could result in long-lived assets impairment charges in the future.

Item 3.Controls and Procedures.

The Company’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the Company. The Certifying Officers have concluded that, based upon their evaluation as of a date within 90 days of the filing of this Quarterly Report (the “Evaluation Date”), the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this Quarterly Report is accumulated and communicated to the Company’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure.

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The Certifying Officers also have indicated that as of the Evaluation Date, there were no significant changes in the Company’s internal controls or other factors that could significantly affect such controls, subsequent to the Evaluation Date and there were no corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Items 1 through 3 have been omitted because there is nothing material to report.

Item 4.SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

On October 22, 2003, the Company held its annual meeting of shareholders and took the following actions:

ELECTION OF DIRECTORS

The following persons were duly elected to the Company’s Board of Directors. The tabulation of the votes cast for and against each director is set forth opposite their names below.

Directors	Yes	No
Robert Anslow	1,397,606	200
Harry Cavanaugh	1,397,606	200
Eileen DeSwert	1,397,606	200
Richard Jackson	1,397,606	200
Costis Toregas	1,397,606	200
Charles Spear	1,397,606	200
H. Richard Anderson	1,397,606	200
Michael Horan	1,397,606	200

APPOINTMENT OF AUDITORS

The shareholders approved the appointment of the accounting firm of Squar, Milner, Reehl & Williamson, LLP as its independent auditors for the fiscal year ending May 31, 2004. Such appointment was approved by 1,307,356 votes and 650 votes either abstained or voted against approval of the appointment.

Item 5.OTHER INFORMATION

The Board of Directors approved the election of the following officers at a meeting held October 22, 2003.

President & Chief Executive Officer - Michael Horan

Executive Vice President & Corporate Secretary - Eileen D. Schmalbach

Chief Financial Officer - Belen Ramos

Item 6.Exhibits and Reports on Form 8-K

(a) See Exhibit Index attached hereto.

(b) On October 21, 2003, the Company filed a report on Form 8-K announcing the commencement of the Company’s plan to repurchase shares of the Company’s common stock in an aggregate amount not to exceed $300,000.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DYNATEM, INC.
January 13, 2004	By:	/s/ Michael Horan
		Michael Horan
		President & CEO
January 13, 2004	By:	/s/ Belen Ramos
		Belen Ramos
		Chief Financial Officer

DYNATEM, INC.

EXHIBIT INDEX

The following is a list of Exhibits required by Item 601 of Regulation S-B. Except for those exhibits indicated by an asterisk which are filed herewith, the remaining exhibits below are incorporated by reference to the exhibit previously filed by us as indicated.

Exhibit Number	Exhibit
3(a)	Restated Articles of Incorporation of the Company (1)
3(b)	Bylaws of the Company (2)
31*	Certifications Pursuant to 18 U.S.C. Section 1350-Section 302
32*	Certification Pursuant to 18 U.S.C. Section 1350-Section 906

(1) Incorporated herein by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-KSB for fiscal year ended May 31, 1997.

(2) Incorporated herein by reference to Exhibit 3(b) to the Company’s Annual Report on Form 10-KSB for fiscal year ended May 31, 1997.