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 February 28, 2005.
| ¨ | 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 April 1, 2005, there were 1,469,564 shares of the issuer’s Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes ¨ No x
INDEX
CONDENSED BALANCE SHEETS
| February 28, 2005 | May 31, 2004 | |||||||
| (Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 912,919 | $ | 1,042,600 | ||||
Accounts receivable, net | 171,820 | 994,539 | ||||||
Inventories, net | 728,788 | 663,439 | ||||||
Prepaid expenses | 51,734 | 38,738 | ||||||
Total current assets | 1,865,261 | 2,739,316 | ||||||
Property and equipment, net | 52,258 | 53,454 | ||||||
Other assets | 20,633 | 23,442 | ||||||
| $ | 1,938,152 | $ | 2,816,212 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 210,013 | $ | 282,899 | ||||
Accrued liabilities | 207,034 | 264,496 | ||||||
Total current liabilities | 417,047 | 547,395 | ||||||
Stockholders’ equity | ||||||||
Common stock, no par value, 50,000,000 shares authorized; 1,469,564 and 1,519,564 shares issued and outstanding at February 28, 2005 and May 31, 2004 respectively | 2,185,408 | 2,283,308 | ||||||
Accumulated deficit | (664,303 | ) | (14,491 | ) | ||||
Total stockholders’ equity | 1,521,105 | 2,268,817 | ||||||
| $ | 1,938,152 | $ | 2,816,212 | |||||
See accompanying notes to condensed financial statements.
1
CONDENSED STATEMENTS OF OPERATION (UNAUDITED)
Three months ended February 28, 2005 and February 29, 2004
| 2005 | 2004 | ||||||
Net sales | $ | 424,880 | $ | 1,370,017 | |||
Cost of sales | 331,549 | 830,779 | |||||
Gross profit | 93,331 | 539,238 | |||||
Operating expenses: | |||||||
Selling, general and administrative | 275,292 | 226,243 | |||||
Research and development | 150,936 | 136,151 | |||||
Total operating expenses | 426,228 | 362,394 | |||||
Operating income (loss) | (332,897 | ) | 176,844 | ||||
Other income, net | 3,835 | 2,744 | |||||
Net income (loss) | $ | (329,062 | ) | $ | 179,588 | ||
Basic income (loss) per share | $ | (.22 | ) | $ | .11 | ||
Diluted income (loss) per share | $ | (.22 | ) | $ | .11 | ||
Weighted average shares outstanding – basic | 1,469,564 | 1,587,660 | |||||
Weighted average shares outstanding – diluted | 1,469,564 | 1,713,364 | |||||
See accompanying notes to condensed financial statements
2
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine months ended February 28, 2005 and February 29, 2004
| 2005 | 2004 | ||||||
Net sales | $ | 1,760,417 | $ | 2,855,744 | |||
Cost of sales | 1,199,911 | 1,641,014 | |||||
Gross profit | 560,506 | 1,214,730 | |||||
Operating expenses: | |||||||
Selling, general and administrative | 796,825 | 695,487 | |||||
Research and development | 422,910 | 390,809 | |||||
Total operating expenses | 1,219,735 | 1,086,296 | |||||
Operating income (loss) | (659,229 | ) | 128,434 | ||||
Other income, net | 10,217 | 10,410 | |||||
Net income (loss) before taxes | (649,012 | ) | 138,844 | ||||
Provision for income taxes | 800 | 800 | |||||
Net income (loss) | $ | (649,812 | ) | $ | 138,044 | ||
Basic income (loss) per share | $ | (.44 | ) | $ | .09 | ||
Diluted income (loss) per share | $ | (.44 | ) | $ | .08 | ||
Weighted average shares outstanding – basic | 1,483,337 | 1,566,776 | |||||
Weighted average shares outstanding – diluted | 1,483,337 | 1,692,480 | |||||
See accompanying notes to condensed financial statements
3
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For nine months ended February 28, 2005 and February 29, 2004
| 2005 | 2004 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (649,812 | ) | $ | 138,044 | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation and amortization | 9,465 | 15,497 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 822,719 | (379,336 | ) | |||||
Inventories | (65,349 | ) | (156,126 | ) | ||||
Prepaid expenses and other | (12,996 | ) | (4,188 | ) | ||||
Accounts payable | (72,886 | ) | 104,800 | |||||
Accrued liabilities | (57,462 | ) | (79,729 | ) | ||||
Deferred revenue | 0 | (90,497 | ) | |||||
Net cash used in operating activities | (26,321 | ) | (451,535 | ) | ||||
Cash flows from investing activities: | ||||||||
Other assets | 2,809 | (8,930 | ) | |||||
Purchases of property and equipment | (8,269 | ) | (22,567 | ) | ||||
Net cash used in investing activities | (5,460 | ) | (31,497 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock in connection with the exercise of stock options | 3,500 | 15,197 | ||||||
Repurchase of common stock | (101,400 | ) | (21,326 | ) | ||||
Net cash used in financing activities | (97,900 | ) | (6,129 | ) | ||||
Net decrease in cash | (129,681 | ) | (489,161 | ) | ||||
Cash and cash equivalents, beginning balance | 1,042,600 | 1,531,431 | ||||||
Cash and cash equivalents, ending balance | $ | 912,919 | $ | 1,042,270 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for taxes: | $ | 800 | $ | 800 | ||||
See accompanying notes to condensed financial statements.
4
Notes to Condensed Financial Statements
February 28, 2005
(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 February 28, 2005 and the results of operations and cash flows for the three and nine months ended February 28, 2005 and February 29, 2004, respectively. Although the Company believes that the disclosures in these 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. These financial statements and the notes hereto should be read in conjunction with the financial statement accounting policies, and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended May 31, 2004, which was filed with the Securities and Exchange Commission on August 27, 2004. Results of operations for interim periods are not necessarily indicative of results of operations to be expected for the full year.
(2)Significant Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. In Chapter 4 of ARB 43, paragraph 5 previously stated that “…under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges” SFAS No. 151 requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of so abnormal (an undefined term). This pronouncement also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred in years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 123-R, “Share-Based Payment,” which requires that the compensation cost relating to share-based payment transactions (including the cost of all employee stock options) be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. SFAS No. 123-R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” As originally issued, SFAS No. 123 established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that pronouncement permitted entities to continue applying the intrinsic-value model of APB Opinion 25, provided that the financial statements disclosed the pro forma net income or loss based on the preferable fair-value method.
Small Business Issuers are required to apply SFAS No. 123-R in the first interim or annual reporting period that begins after December 15, 2005.
5
DYNATEM, INC.
Notes to Condensed Financial Statements
February 28, 2005
The FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured using the estimated fair value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets, and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has “commercial substance” if the future cash flows of the entity are expected to change significantly as a result of the transaction. This pronouncement is effective for nonmonetary exchanges in fiscal periods beginning after June 15, 2005.
Management is presently evaluating the potential effect, if any, the above pronouncements might have on its future financial statements. Additionally, recent accounting pronouncements discussed in the notes to the May 31, 2004 and 2003 audited financial statements, filed previously with the Securities and Exchange Commission on Form 10-KSB, that were required to be adopted during the year ending May 31, 2005 did not have a significant impact on the Company’s financial statements for the three-month and nine-month periods ended February 28, 2005.
(3)Accounting for Stock-Based Compensation
The Company presently 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.”
At February 28, 2005, the Company has two stock-based employee compensation plans (the “Plans”). There was no stock-based employee compensation cost reflected in net income for the periods ended February 28, 2005 and 2004. Had the Company applied the fair value recognition provision of SFAS 123, as amended, to stock based employee compensation, there would be no significant change to net income value (loss) for all the periods presented. As such, pro-forma disclosure required by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No 123,” have not been presented.
(4)Inventories
A summary of inventories follows:
| February 28, 2005 | May 31, 2004 | |||||
Raw materials | $ | 397,918 | $ | 362,473 | ||
Work-in-process | 269,651 | 245,820 | ||||
Finished goods | 61,219 | 55,146 | ||||
| $ | 728,788 | $ | 663,439 | |||
6
DYNATEM, INC.
Notes to Condensed Financial Statements
February 28, 2005
(5)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. Under the treasury stock method, approximately 200,000 and 200,000 shares were potential additional common shares as of February 28, 2005 and February 29, 2004, respectively. Pro forma per share data has been computed using the weighted average number of common shares outstanding during the periods. Because the Company has incurred net losses during the three and nine months ended February 28, 2005, basic and diluted loss per share are equal (additional potential common shares would be anti-dilutive and not included in the calculation).
(6)Common Stock
During the nine months ended February 28, 2005, the Company repurchased 60,000 shares common stock resulting in a cash outlay of $101,400.
(7)Options
During the nine months ended February 28, 2005, the Company granted 45,000 options to employees at an exercise price of $1.65. Such exercise price was equal to or above the market price of the Company’s common stock at the time of issuance.
7
DYNATEM, INC.
Item 2.Management’s Discussion and Analysis or Plan of Operation
Net sales for the three months ended February 28, 2005, decreased 68.9% to $424,880 compared to net sales of $1,370,017 in the same period a year ago. For the nine months ended February 28, 2005, net sales were $1,760,417, $1,095,327 lower than the corresponding period in the previous fiscal year, for a decrease of 38.3%. The decrease in total net sales is the result of three of our largest ongoing programs, representing a significant portion of our business, not receiving expected funding this year due to government budget reallocations. We believe, but we cannot guarantee, that these budget issues will not affect the three programs in the long term.
Cost of sales for the three months ended February 28, 2005, was $331,549 or 78% of net sales compared to $830,779 or 60.6% of net sales in the same period a year ago. For the nine months ended February 28, 2005, cost of sales of $1,199,911 represented 68.2% of net sales compared to $1,641,014, representing 57.5% of net sales for the same period a year ago. The nine-month increase of cost of sales as a percentage of net sales is the result of product mix factors, such as increased cost of prototyping four new products including the DPM (VMEbus Pentium M SBC), RPM (ruggedized version of DPM), CPM1 (CompactPCI Pentium M SBC) and CPM-S1 (custom design for OEM customer). Also, such increase is 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-month and nine-month periods ended February 28, 2005, were $275,292 and $796,825, respectively, as compared to $226,243 and $695,487, respectively, for the same periods a year ago. The increase in selling, general and administrative expenses is primarily the result of a new employee in the sales department, aggressive spending for marketing as well as the increased expenses due to general monetary inflation most notably in the escalation of rents, insurance rates, legal and audit fees and other expenses that relate to the implementation of the new rules and regulations required by the Securities and Exchange Commission under the Sarbanes-Oxley Act of 2002.
Research and development expenses for the three-month and nine-month periods ended February 28, 2005, were $150,936 and $422,910, respectively, as compared to $136,151 and $390,809, respectively, for the same periods a year ago. The increase in research and development expenses is attributed to the ongoing development of new products utilizing advanced microprocessor technology including the DPM (VMEbus Pentium M SBC), RPM (ruggedized version of DPM), CPM1 (CompactPCI Pentium M SBC) and CPM-S1 (custom design for OEM customer).
Liquidity and Capital Resources
At February 28, 2005, the Company’s working capital, which is current assets less current liabilities, was $1,448,214 and the Company’s current ratio, which is current assets divided by current liabilities, was 4.5:1 compared to $2,191,921 and a ratio of 5.00:1 as of May 31, 2004.
Stock Repurchase Plan
On October 28, 2004, the Board of Directors formally adopted a resolution to continue the Company’s Stock Repurchase Plan, originally initiated on October 1, 2003, (the “Repurchase Plan”). Pursuant to the resolution, the Company is authorized to acquire shares of the Company’s common stock with an aggregate repurchase price not to exceed $300,000, expiring November 1, 2005. During the nine months ended February 28, 2005, the Company repurchased 60,000 shares of common stock resulting in a cash outlay of $101,400.
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 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, allowance for doubtful accounts and inventories. Actual results could differ from these estimates. Such critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements.
8
DYNATEM, INC.
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 valuation allowances.
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.
Item 3.Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of February 28, 2005, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of February 28, 2005.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended February 28, 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
9
DYNATEM, INC.
Items 1 through 5have been omitted because there is nothing material to report.
Item 6.Exhibits
See Exhibit Index attached hereto.
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. | ||||
| April 11, 2005 | By | /s/ Michael Horan | ||
| Michael Horan | ||||
| President & Chief Executive Officer | ||||
| April 11, 2005 | By: | /s/ Belen Ramos | ||
| Belen Ramos | ||||
| Chief Financial Officer | ||||
10
DYNATEM, INC.
EXHIBIT INDEX
The following is a list of Exhibits required by Item 601 of Regulation S-B. Except for these 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) | |
| 31.1* | 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-Section 906 of the Sarbanes-Oxley Act 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. |
11
