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 August 31, 2004.
| ¨ | 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) | (Zip Code) | |
(949) 855-3235
Issuer’s telephone number
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 August 31, 2004, there were 1,499,564 shares of the issuer’s Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes ¨ No x
INDEX
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CONDENSED BALANCE SHEETS
| August 31, 2004 | May 31, 2004 | |||||||
| (Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,553,550 | $ | 1,042,600 | ||||
Accounts receivable, net | 82,609 | 994,539 | ||||||
Inventories, net | 715,220 | 663,439 | ||||||
Prepaid expenses | 27,840 | 38,738 | ||||||
Total current assets | 2,379,219 | 2,739,316 | ||||||
Property and equipment, net | 51,966 | 53,454 | ||||||
Other assets | 27,533 | 23,442 | ||||||
| $ | 2,458,718 | $ | 2,816,212 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 207,857 | $ | 282,899 | ||||
Accrued liabilities | 207,000 | 264,496 | ||||||
Total current liabilities | 414,857 | 547,395 | ||||||
Shareholders’ equity: | ||||||||
Common Stock, no par value, 50,000,000 authorized shares; 1,499,564 and 1,519,564 shares issued and outstanding, respectively | 2,237,008 | 2,283,308 | ||||||
Accumulated deficit | (193,147 | ) | (14,491 | ) | ||||
Total shareholders’ equity | 2,043,861 | 2,268,817 | ||||||
| $ | 2,458,718 | $ | 2,816,212 | |||||
See accompanying notes to condensed financial statements.
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CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended August 31, 2004 and 2003
| 2004 | 2003 | |||||||
Net sales | $ | 564,306 | $ | 630,644 | ||||
Cost of sales | 364,453 | 338,701 | ||||||
Gross profit | 199,853 | 291,943 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 250,079 | 215,891 | ||||||
Research and development | 131,085 | 127,046 | ||||||
Total operating expenses | 381,164 | 342,937 | ||||||
Operating loss | (181,311 | ) | (50,994 | ) | ||||
Other income, net | 2,654 | 3,928 | ||||||
Net loss | $ | (178,657 | ) | $ | (47,066 | ) | ||
Net loss available to common shareholders per common share: | ||||||||
Basic | $ | (0.12 | ) | $ | (0.03 | ) | ||
Diluted | $ | (0.12 | ) | $ | (0.03 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic | 1,499,564 | 1,531,371 | ||||||
Diluted | 1,499,564 | 1,531,371 | ||||||
See accompanying notes to condensed financial statements.
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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended August 31, 2004 and 2003
| 2004 | 2003 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (178,657 | ) | $ | (47,066 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 4,068 | 5,341 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 911,930 | (2,821 | ) | |||||
Inventories | (51,781 | ) | 33,613 | |||||
Prepaid expenses | 10,898 | 11,435 | ||||||
Account payable | (75,042 | ) | 6,237 | |||||
Accrued liabilities | (57,496 | ) | 18,431 | |||||
Deferred revenue | — | (156,450 | ) | |||||
Net cash provided by (used in) operating activities | 563,920 | (131,280 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchases of fixed assets | (2,579 | ) | (7,392 | ) | ||||
Changes in other assets | (4,091 | ) | (31,074 | ) | ||||
Net cash used in investing activities | (6,670 | ) | (38,466 | ) | ||||
Cash flows from financing activities: | ||||||||
Payment of repurchase and retirement of the Company’s Common Stock | (49,800 | ) | — | |||||
Proceeds from the exercise of stock options | 3,500 | 3,696 | ||||||
Net cash used in investing activities | (46,300 | ) | 3,696 | |||||
Net increase (decrease) in cash | 510,950 | (166,050 | ) | |||||
Cash and cash equivalents, beginning balance | 1,042,600 | 1,531,431 | ||||||
Cash and cash equivalents, ending balance | $ | 1,553,550 | $ | 1,365,381 | ||||
See accompanying notes to condensed financial statements.
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Notes to Condensed Financial Statements
August 31, 2004
| (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 August 31, 2004, and the results of operations and cash flows for the three months ended August 31, 2004 and 2003. Although the Company believes that the disclosures in these condensed financial statements are adequate to make the information presented 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,”as amended.
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 has adopted the disclosure provisions of this statement during the year ended May 31, 2004.
At August 31, 2004, 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 quarters ended August 31, 2004 and 2003. 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.
Three Months Ended August 31, | ||||||||
| 2004 | 2003 | |||||||
Net income (loss) available to common stockholders, as reported | $ | (178,657 | ) | $ | (47,066 | ) | ||
Pro forma compensation expense | — | — | ||||||
Pro forma net income (loss) available to common stockholders | $ | (178,657 | ) | $ | (47,066 | ) | ||
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DYNATEM, INC.
Income (loss) per share, as reported | ||||||||
Basic | $ | (0.12 | ) | $ | (0.03 | ) | ||
Diluted | $ | (0.12 | ) | $ | (0.03 | ) | ||
Income (loss) per share, pro forma | ||||||||
Basic | $ | (0.12 | ) | $ | (0.03 | ) | ||
Diluted | $ | (0.12 | ) | $ | (0.03 | ) | ||
| (3) | Inventories |
A summary of inventories follows:
| August 31, 2004 | May 31, 2004 | |||||
| (Unaudited) | (Audited) | |||||
Raw materials | $ | 393,389 | $ | 362,473 | ||
Work-in-process | 264,631 | 245,820 | ||||
Finished goods | 57,200 | 55,146 | ||||
| $ | 715,220 | $ | 663,439 | |||
| (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, 200,000 and 220,000 shares were potential additional common shares as of August 31, 2004 and 2003, 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 three months ended August 31, 2004, 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 August 31, 2004, the Company issued 10,000 shares of common stock for $3,500 of cash in connection with the exercise of stock options by an employee. Additionally, the Company repurchased 30,000 shares of its common stock from a stockholder for $49,800 in cash.
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DYNATEM, INC.
Item 2.Management’s Discussion and Analysis or Plan of Operation
Revenues for the first quarter ended August 31, 2004 decreased by 10.5% to $564,306 as compared to $630,644 in the first quarter of the prior year. The decrease in revenue can be accounted for by a traditional drop in orders during the summer season coupled with delays in funding of some U.S. government contracts as a result of recent reallocation of defense spending.
Cost of sales for the three months ended August 31, 2004, was $364,453 or 64.5% of net sales and compares to $338,701 or 53.7% of net sales in the same period a year ago. The increase of $25,752 or 10.8% of net sales was the consequence of the Company’s higher sales volume of its distributed products for which it realizes a lower margin than from sales of its own manufactured products.
Selling, general and administrative expenses for the three months ended August 31, 2004 were $250,079 compared to $215,891 in the same period a year ago. The increase of 15.8% was principally the effect of trade shows, other marketing expenses for the new products, as well as various administrative expense increases such as medical insurance.
Research and development expenses were $131,085 and $127,046 for the three months ended August 31, 2004 and 2003, respectively. The growth can be attributed to the ongoing development of new single-board computer products utilizing advanced microprocessor technology. These units include the DMC and DHC product lines.
The results of operations for the first quarter ended August 31, 2004 and 2003 reflect net losses of $178,657 and $47,066 respectively. The greater loss occurred due to the decreased sales for the period, additional expenses incurred in the areas of marketing, research and development and administration and also, a result of sales of product mix for which a lower margin was realized as described above.
As of August 31, 2004, the Company had a current ratio of 5.74 :1 and total shareholders’ equity of $2,043,861. On May 31, 2004, there was a current ratio of 5:00.1 and total shareholders’ equity of $2,268,817. 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 2005. 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.
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 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.
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DYNATEM, INC.
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. SAB 101 was superseded and replaced by SAB 104. Management believes the Company’s revenue recognition policy conforms to SAB 104
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.
The Company does not have off-balance sheet arrangements, financings, or relationships with unconsolidated entities or other persons, also know as “special purpose entities.”
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DYNATEM, INC.
Item 3.Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a – 15(e) and 15d – 15(e) of the Exchange Act as of a date (the “Evaluation Date”) within 90 days prior to filing the Company’s Form 10-QSB. Based upon that evaluation, the CEO and CFO concluded that, as of August 31, 2004, our disclosure controls and procedures were effective in timely alerting management to the material information relating to us required to be included in our periodic filings with the SEC. Based on their most recent evaluation as of the Evaluation Date, the CEO and the CFO have also concluded that there are no significant deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information, and such officers have identified no material weaknesses in the Company’s internal controls over financial reporting.
There were no significant changes made in our internal controls over financial reporting during the quarter ended August 31, 2004 that have materially affected or are reasonably likely to materially affect these controls. Thus, no corrective actions with regard to significant deficiencies or material weaknesses were necessary.
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PART II.OTHER INFORMATION
Items 1 through 5 have been omitted because there is nothing material to report.
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 listed 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 Company1 | |
| 3(b) | Bylaws of the Company2 | |
| 31.1* | Rule 13a-14(a)/15d-14(a) Certifications – Principal Executive Officer | |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certifications – Principal Financial Officer | |
| 32* | Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer and Chief Financial Officer | |
| 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. |
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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. | ||||
October 13, 2004 | By: | /s/ Michael Horan | ||
Michael Horan, President and Chief Executive Officer | ||||
October 13, 2004 | By: | /s/ Belen Ramos | ||
Belen Ramos, Chief Financial Officer | ||||
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