<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-16250
DYNATEM, INC.
(Name of small business issuer in its charter)
California 95-3627099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23263 MADERO, SUITE C, MISSION VIEJO, CALIFORNIA 92691
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (714) 855-3235
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
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
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
-----
The issuer's revenues for its most recent fiscal year were $2,683,188.
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $158,192 on August 1, 1996.
On August 1, 1996, there were 1,418,400 shares of the issuer's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Definitive Proxy Statement to be filed for its
Annual Meeting of Shareholders to be held on October 3, 1996, are incorporated
herein by reference into Part III hereof, to the extent indicated herein.
Transitional Small Business Disclosure Format Yes No X
----- -----
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS.
------- ------------------------
HISTORY
-------
The Company was incorporated on May 15, 1981, under the laws of the
state of California. It was organized to design, manufacture and market
microcomputers and microcomputer-based systems and software for industrial
applications such as factory automation, sensor monitoring, process
control, robots, data acquisition, networking and displays. The Company
commenced manufacturing and marketing operations in May 1981 and has
conducted such operations continuously from such date. As part of such
operations, the Company was, until October 1984, an authorized dealer of
certain products manufactured by Rockwell International Corporation
("Rockwell") which included the "AIM 65," "AIM 65/40" and "RM 65" families
of single board microcomputers, peripherals and software. In order to
broaden the product line manufactured by the Company and reduce the cost of
sales, in October 1984 the Company entered into an agreement with Rockwell
pursuant to which the Company received an exclusive United States and
Canadian license and a non-exclusive worldwide license elsewhere, with some
exclusions, to manufacture the "AIM 65," "AIM 65/40" and "RM 65" families
of single board microcomputers, peripherals and software.
The Company currently designs, manufactures, distributes and markets
more than 200 products including microcomputers, microcomputer systems,
microcomputer modules, software and peripherals and markets such products
and other licensed products individually or as components of a system.
MARKET
------
The Company markets its products on a worldwide basis and its
customers include many Fortune 100 corporations. Included among the export
markets are the United Kingdom, Germany, and Japan. For the year ended May
31, 1996, export sales accounted for 32% of the Company's net sales.
For the last two fiscal years the export net sales and the percentage
to total net sales were:
<TABLE>
<CAPTION>
Year Amount %
------- -------- ---
<S> <C> <C>
1996 $851,538 32
1995 $362,405 14
</TABLE>
2
<PAGE>
PRODUCTS
--------
The Company's products generally consist of modular single board
microcomputers known as Central Processing Unit (CPU) boards, peripheral
systems and software. The products are intended for use by manufacturing
companies seeking to increase efficiency and productivity through factory
automation, sensor monitoring, process control and other electronic
implementations. The Company provides warranties ranging from 90 days to
one year on all products sold.
VME. The Company's principal product group is based on the VMEbus
---
specification. These products are used as embedded controllers for
telecommunications, industrial controls, robotics, aerospace, and a wide
variety of military applications.
In the Spring of 1990, Dynatem reached an agreement with or
Industrial Computers GmbH in Germany ("or"), whereby Dynatem would
distribute the or products in North America. The products manufactured by
or are extremely compatible with the Dynatem line because, like the Dynatem
VMEbus products, the or products are 100% CMOS and extremely low in power
consumption and well suited to extended temperature range systems.
The addition of the or line to the Dynatem line initially had the
effect of multiplying the Dynatem range of products by a factor of 5 or 6
times. It also dramatically increased the range of hardware to meet
virtually every customer's system requirements in connection with the
products designed and manufactured here. This is extremely important
because customers prefer buying all of the modules in their system from one
vendor who takes responsibility for guaranteeing that all modules function
well together.
One of the growth areas within the VMEbus markets is fully militarized
VMEbus systems. This has been brought about because of directives from the
Department of Defense ("DOD") encouraging government contractors to buy
"Commercial Off The Shelf" ("COTS") systems whenever possible as a way to
save costs in the face of shrinking defense budgets. Although the DOD
endeavors to buy COTS products, the specifications for military systems are
still often extremely high, and require exhaustive environmental testing,
customized system enclosures, a high level of documentation, conduction
cooling, customized systems level shelf testing software and the use of an
extremely high level components (i.e. MIL-STD 883B). Until recently, only
two or three companies could provide this "MIL-SPEC" level in off-the-shelf
VMEbus products, and these companies were based on the larger 6U (233mm x
160mm) VMEbus format. Three years ago, or introduced a line of MIL-SPEC 3U
(100mm x 160mm) boards. This enabled VMEbus to be designed into much
smaller spaces, such as the nose cones of missiles or the pods of military
aircraft. Because of the additional benefits of CMOS design and the greater
vibration immunity of the 3U form factor, the or products became a very
attractive choice for many military and space applications. Relatively
large recent contracts with Orbital
3
<PAGE>
Sciences Corporation ("OSC") and NASA attest to the importance of the
military/space markets to future growth.
Products introduced by or in the past few years include PC compatible
VMEbus products. These are modules that run software which can be
developed on desktop IBM compatible PCs. The advantage is that they can
share the VMEbus with high performance 'real-time' embedded processors
(most often based upon the Motorola family of processors) yet still utilize
the vast amount of high quality, low cost PC software for applications
requiring human interface, sophisticated graphics or data base management.
PC compatible VMEbus products are a fast growing yet very competitive part
of the overall VMEbus market. One aspect of the or products that has
helped to differentiate the or PC compatible VMEbus products is the
"rugged" versions. By providing PC compatible VMEbus products that can
withstand high vibration and temperature extremes, the Company has been
able to win at least one major long-term military contract.
Among the most exciting new product offerings is Dynatem's own PC
compatible VMEbus module based upon the Pentium processor and using the
most current PC compatible components. With this design, the Company is
able to produce a very high performance, highly reliable processor module
at a very low cost, by leveraging off the economies of scale inherent to
components used in desktop PCs. Through part screening, testing and careful
design, the same components found in state of the art desktop computers can
be used in high-end multiprocessor systems or in rugged environments. With
recent software and hardware improvements, these architectures, previously
not suitable for use in time-critical multitasking applications, can now
support true real-time environments where "deterministic" tasks need to be
scheduled to the micro-second.
SOFTWARE. The Company offers to its customers software that it has
--------
developed, and software which the Company purchases from other suppliers.
The Company believes that there are alternative sources of supply for such
software. Since all of the modules offered are part of highly integrated
real-time systems, it is essential that all boards work well together. For
this reason, the Company is required to provide drivers for all the boards
which enable them to implement any of the standard real-time operating
systems. The Company therefore distributes, sells and supports real-time
operating systems that have been modified to work with the Dynatem and or
products. This is a value-added service which ties the Company more
closely to the customer base.
OPERATIONS
----------
The Company's products are manufactured at the Company's facility in
Mission Viejo, California. They are produced from the Company's designs
with standard and semi-custom components.
Most of the devices and components used in the Company's products are
available from several sources. Although no assurance can be given as to
the future, the Company believes
4
<PAGE>
that the loss of one or more of its current suppliers would not have a
material adverse effect upon its business.
MARKETING
---------
The Company's marketing and sales department consists of marketing,
sales, customer service, engineering and engineering application support.
The Company has in recent years expanded its use of advertising in major
trade publications, coupling it with wide distribution of marketing
brochures. In addition, the Company participates in over 20 regional trade
shows during the year throughout the U.S. and Canada.
The distribution of the or products has previously been limited to all
of North America. Recently, or set up a sales office for the eastern half
of the United States. The presence of this office may jeopardize some
future business but does not affect existing accounts. This shift will
steer us into concentrating our marketing efforts in the lucrative western
region and all of Canada, while at the same time developing business with
all of our existing clients in the eastern United States. The Company is
openly seeking alliances with other key product vendors as well as
developing new products of its own.
There are over 200 VMEbus vendors worldwide. Depending on the
application, at least one or more of these companies are in direct
competition with us. Details of unique characteristics of the Company's
offerings are more fully described in "Products" above.
Marketing of the Company and the Company's products is accomplished
through direct marketing and telemarketing efforts. Direct marketing
efforts are consummated by responding to inquiries generated through press
releases, trade publications, advertising, current customer lists and other
similar leads. Telemarketing is utilized to inform current and potential
customers of new products and technical product changes, as well as allows
the Company to evaluate the market and customer needs. Implementation of a
World Wide Web site is anticipated over the next several months. It is
hoped that this will provide a new means of quickly reaching new customers.
Research and Development
------------------------
The Company believes that its future growth greatly depends on its
ability to be an innovator in the development and application of new and
existing hardware and software technology. Expenditures for Company-
sponsored research and development for the fiscal years ended May 31, 1996
and 1995, were $169,121 and $140,836, respectively. In the last fiscal
year the Company went into two exciting new directions. The Pentium Single
Board Computer described earlier is the first new direction; traffic
control systems is the second. CalTrans has specified the use of the 3U
VMEbus into its new generation of traffic controllers named the Model 2070.
The Company has taken advantage of its 3U VMEbus experience to develop a
Motorola 68360 based Single Board Computer ("SBC") in compliance with the
CalTrans Specification.
5
<PAGE>
Experts expect thousands of 2070 controllers to ultimately be implemented
and, since there are only two other manufacturer's developing similar
SBC's, the Company believes it will receive a portion of this business.
EMPLOYEES
---------
At present the Company employs 15 people, 10 of whom are working full-
time schedules in the sales, engineering, financial and manufacturing
departments. Neither the Company nor its employees are parties to a
collective bargaining agreement. The Company believes that its employee
relations are very good.
COMPETITION
-----------
Competition within the industry is based primarily upon product line
breadth, product performance, price and customer service. The Company
competes with over 250 manufacturers of VMEbus products in North America
and Europe. One advantage the Company believes it has is its ability to
offer a "one-stop-shop" approach which provides full support normally not
provided by the Company's competitors. As part of this approach, the
Company provides high quality products, pricing that is competitive, and
technical support which includes, when needed, customization, special
products and/or writing of special software programs. In addition, the
Company provides customers with most products required for specific
applications including, but not limited to, special power supplies, special
enclosures, cables and other requisite hardware. This approach is not
customary with larger competitors who would normally limit themselves to
sales of standard products. However, most of these manufacturers have
certain other competitive advantages over the Company, including greater
financial and technological resources, earlier access to customers,
established client service programs and client loyalty.
ITEM 2. DESCRIPTION OF PROPERTY.
------- -----------------------
The Company's executive offices and manufacturing plant are located in
an approximately 6,357 square foot facility in Mission Viejo, California.
The facility is leased from an unaffiliated party for a term expiring in
January, 2001, and is currently adequate to meet the Company's needs.
ITEM 3. LEGAL PROCEEDINGS.
------- -----------------
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------- ---------------------------------------------------
Not Applicable.
6
<PAGE>
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
- ------- ------------------------------------------------
MATTERS.
-------
There is no public trading market for the Company's Common Stock. Set
forth below are the high and low bid quotations of the Company's Common
Stock for the periods indicated, as reported by a licensed marketmaker who
continues to make a market in the Common Stock. Such quotations represent
inter-dealer quotations without adjustment for retail mark-up, mark-down or
commissions, and may not represent actual transactions. Trading in the
Company's Common Stock is limited in volume and may not be a reliable
indicator of its market value.
<TABLE>
<CAPTION>
Fiscal year ended May 31,
1996 1995
------------ -------------
High Low High Low
----- ---- ----- -----
<S> <C> <C> <C> <C>
First Quarter 13/32 1/4 1/2 1/4
Second Quarter 13/32 1/4 13/16 3/8
Third Quarter 1/4 1/8 7/8 5/8
Fourth Quarter 1/4 1/4 3/4 13/32
</TABLE>
As of August 1, 1996, there were approximately 154 shareholders
of record of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock and the
Board of Directors intends to continue this policy for the foreseeable
future. Future dividend policy will depend upon the Company's earnings,
capital requirements, financial condition and other factors considered
relevant by the Company's Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
- ------- -----------------------------------------------
OPERATION.
---------
RESULTS OF OPERATIONS
- ---------------------
Net sales for the Company's fiscal year ending May 31, 1996, increased 5%
to $2,683,188 over net sales of $2,553,646 in fiscal 1995. For fiscal year May
31, 1996, net sales of or products increased 15% to $1,790,758 over net sales of
$1,563,836 for fiscal year 1995. Dynatem manufactured products sales were
reduced to $892,430 this fiscal year from $989,810 in fiscal year 1995. Export
sales amounted to $851,538 representing 32% of total net sales for the year
ended May 31, 1996.
Gross profit as a percentage of sales declined from 33% to 31% for this
fiscal year due primarily to a relative increase in revenues derived from the or
products in which the Company realizes a lower gross margin. Customarily, the
Company realizes higher margins on domestic sales of its own products versus
those products distributed for or.
The Company's cost of sales totalled $1,858,944, an 8% rise over fiscal
year 1995. Taken as a percentage of net sales, cost
7
<PAGE>
of sales was 69% and 67% for fiscal years 1996, and 1995, respectively. The
increase is due in great part to the decline in the market value of the U.S.
Dollar against the DeutschMark as well as the factors in relation to the
Company's product sales mix.
Selling, general and administrative expenses were $635,338 for fiscal 1996
compared to $591,765 for fiscal 1995, a 7% increase. This change is attributable
to expenditures incurred in the Company's more aggressive marketing campaign,
including advertising, trade shows and travel. The Company's management
maintains that these outlays will continue along with the commitment to add more
in-house sales and engineering staff to fuel future growth of sales.
Research and development costs were $169,121 in fiscal 1996 in comparison
to $140,836 in fiscal 1995. The Company continues to expand its employment of
internal design engineers in order to optimize the scheduling and completion of
its new products on a more timely basis, as well as to obtain more competitive
costs.
At May 31, 1996, the Company had net operating loss carryforwards of
approximately $1,610,000 and $152,800 for federal and state income tax reporting
purposes, respectively, which, if not used, will expire through 2006.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of May 31, 1996, the Company's working capital was $872,224 and its
current ratio was 4.9 to 1. 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 1997. Management's intentions are to
generate increased sales through the expansion of its sales force to increase
sales of its newly developed products and or distributed products. The Company
may consider additional sources of capital should the need arise.
FUTURE TRENDS
- -------------
The Company has continued to expand its distribution of or products and
this expansion is expected to continue into fiscal 1997. The Company's ability
to provide value-added engineering support for or products, as well as its own,
has positioned Dynatem for improvement in its role as a well-rounded technical
service and design company.
Recently, or set up a sales office for the eastern half of the United
States. The presence of this office may jeopardize some future business but is
not likely to affect existing accounts. On a more positive vain, the Company
will now concentrate more of its resources in the lucrative western region of
the United States. At the same time, the development and expansion of contracts
with existing clients in the eastern United States and Canada will continue.
Additionally, the Company is openly seeking new alliances with other key product
vendors as well as developing new products of its own.
8
<PAGE>
The Company is offering a new PC compatible VMEbus module based upon the
Pentium processor. This product is expected to be the focus of the Company's
future marketing.
The Company is now in the process of evaluating alternative methods of
manufacturing, by using outside vendor facilities on several contractual bases.
Should the economics and material aspects of this evaluation prove feasible, a
decision will be made which could alter the dynamics and classification of
certain assets such as inventory and manufacturing equipment.
The rise in the value of the DeutschMark versus the U.S. Dollar has had a
significant impact on the costs of the Company's inventory purchases from or.
To forestall the negative effects of this currency devaluation, management will
maintain a policy of negotiating purchases on more favorable prices and/or terms
to reduce any potentially unfavorable impacts on its operations.
9
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
- ------- --------------------
INDEX
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report.......................... F-1
Balance Sheet as of May 31, 1996...................... F-2
Statements of Income For The Years Ended
May 31, 1996 and 1995................................ F-3
Statements of Shareholders' Equity For The
Years Ended May 31, 1996 and 1995.................... F-4
Statements of Cash Flows For The Years
Ended May 31, 1996 and 1995.......................... F-5
Notes to Financial Statements For The
Years Ended May 31, 1996 and 1995........... F-6 to F-16
</TABLE>
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Dynatem, Inc.
We have audited the accompanying balance sheet of Dynatem, Inc. (a California
corporation) as of May 31, 1996, and the related statements of income,
shareholders' equity and cash flows for each of the years in the two-year period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dynatem, Inc. as of May 31,
1996, and the results of its operations and its cash flows for each of the years
in the two-year period then ended in conformity with generally accepted
accounting principles.
CORBIN & WERTZ
Irvine, California
July 26, 1996
F-1
<PAGE>
DYNATEM, INC.
BALANCE SHEET
May 31, 1996
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents (Note 1) $ 532,918
Accounts receivable, less allowance
for doubtful accounts of $12,643 275,288
Inventories (Notes 1 and 2) 266,299
Prepaid expenses and other 19,980
----------
Total current assets 1,094,485
Note receivable (Note 9) 10,735
Property and equipment, net (Notes 1 and 3) 24,919
Other assets (Notes 1 and 4) 57,617
----------
$1,187,756
==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C>
Accounts payable $ 160,692
Accrued expenses (Note 6) 61,569
-----------
Total current liabilities 222,261
-----------
Commitments and contingencies (Note 6)
Shareholders' equity (Note 8):
Common stock, no par value, authorized
50,000,000 shares; issued and outstanding
1,418,400 shares 2,383,385
Accumulated deficit (1,417,890)
-----------
Total shareholders' equity 965,495
-----------
$ 1,187,756
===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-2
<PAGE>
DYNATEM, INC.
STATEMENTS OF INCOME
For The Years Ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net sales (Notes 1 and 7) $2,683,188 $2,553,646
Cost of sales 1,858,944 1,722,102
---------- ----------
Gross profit 824,244 831,544
---------- ----------
Operating expenses:
Selling, general and administrative
(Notes 6 and 9) 635,338 591,765
Research and development (Note 1) 169,121 140,836
---------- ----------
Total operating expenses 804,459 732,601
---------- ----------
Operating income 19,785 98,943
Other income, net 16,963 9,904
---------- ----------
Income before income taxes 36,748 108,847
Income taxes (Notes 1 and 5) 800 800
---------- ----------
Net income $ 35,948 $ 108,047
========== ==========
Net income per common share (Note 1) $ .03 $ .08
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-3
<PAGE>
DYNATEM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock Total
--------------------------- Accumulated Shareholders'
Shares Amount Deficit Equity
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Balances at
June 1, 1994 1,418,400 $2,383,385 $(1,561,885) $ 821,500
Net income --- --- 108,047 108,047
------------ ------------ ------------ ---------------
Balances at
May 31, 1995 1,418,400 2,383,385 (1,453,838) 929,547
Net income --- --- 35,948 35,948
------------ ------------ ------------ ---------------
Balances at
May 31, 1996 1,418,400 $2,383,385 $(1,417,890) $ 965,495
============ ============ ============ ===============
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-4
<PAGE>
DYNATEM, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 35,948 $108,047
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 44,462 43,540
Provision for doubtful accounts (4,000) 1,151
Changes in current assets and
liabilities:
Accounts receivable, net (26,005) 142,527
Inventories (7,648) 9,725
Prepaid expenses and other (10,181) (1,777)
Accounts payable 32,883 (60,604)
Accrued expenses 14,188 (16,869)
-------- --------
Net cash provided by operating
activities 79,647 225,740
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,387) (12,714)
Collections on note receivable from
officer 3,250 3,120
Other assets (45,203) (16,945)
-------- --------
Net cash used in investing activities (44,340) (26,539)
-------- --------
Net increase in cash 35,307 199,201
Cash and cash equivalents, beginning
of year 497,611 298,410
-------- --------
Cash and cash equivalents, end of
year $532,918 $497,611
======== ========
Supplemental disclosures of cash flow
information -
Cash paid for:
Interest $ --- $ ---
======== ========
Income taxes $ 800 $ 800
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-5
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended May 31, 1996 and 1995
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
General
- -------
Dynatem, Inc. (the "Company"), was incorporated on May 15, 1981, under the laws
of the state of California. The Company designs, manufactures, distributes and
markets modular single board microcomputers and microcomputer-based systems and
software. These systems are used for industrial applications including factory
automation, process control, robotics, data acquisition and networking. The
Company sells products to customers throughout the United States and in many
foreign countries.
Concentrations of Credit Risk
- -----------------------------
At May 31, 1996, the Company holds cash with financial institutions in excess of
amounts insured by federal agencies.
Two customers accounted for 25% and 12% of net sales for the year ended May 31,
1996. One other customer accounted for 11% of accounts receivable at May 31,
1996. One customer (see Note 7) accounted for 31% of net sales, which are
included in the net sales of distributed products noted below, for the year
ended May 31, 1995.
Export sales represented 32% and 14% of net sales for the years ended May 31,
1996 and 1995, respectively.
The Company distributes products for an international vendor that is also a
competitor. Approximately 67% and 61% of net sales for the years ended May 31,
1996 and 1995, respectively, represented distribution of this vendor's products.
The vendor accounted for 80% and 79% of cost of sales for the years ended May
31, 1996 and 1995, respectively. The same vendor accounted for 78% of accounts
payable at May 31, 1996.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements. Such
estimates effect the reported amounts of revenues and expenses during the
reported period. The Company's significant estimates include allowances for
accounts receivable and inventory, as well as warranties on its products.
Actual results could materially differ from these estimates.
Continued
F-6
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------------------
Fair Value of Financial Instruments
- -----------------------------------
Enterprises have financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis. The Company's financial instruments consist of its cash and cash
equivalents, accounts receivable, a note receivable and accounts payable. The
carrying amounts of the Company's financial instruments generally approximate
their fair values at May 31, 1996. The fair value of the note receivable (see
Note 9) was not readily determinable as market comparables were not available
for such instrument.
Cash Equivalents
- ----------------
For the purposes of the statements of cash flows, the Company considers highly
liquid instruments with original maturities of three months or less to be cash
equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost or market (estimated net realizable
value). Cost is determined using the first-in, first-out (FIFO) method. Such
net realizable value is based on forecasts for sales of its products in the
ensuing years. The industry in which the Company operates is characterized by
rapid technological advancement and change. Should demand for the Company's
products prove to be significantly less than anticipated, the ultimate
realizable value of such products could be substantially less than the amount
shown on the accompanying balance sheet.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets or the remaining term of the leases, if lesser. Useful lives range from
three to five years.
Continued
F-7
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------------------
Income Taxes
- ------------
The Company accounts for income taxes using the asset and liability approach
under Statement of Financial Accounting Standards Statement No. 109 ("Statement
109"). Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Warranties
- ----------
The Company provides warranties ranging from ninety days to one year on all
products sold. Estimated future costs of warranties are provided at the time of
sale.
Research and Development Costs
- ------------------------------
Research and development costs are expensed as incurred.
Other Assets
- ------------
Certain costs incurred subsequent to establishing technological feasibility to
produce a finished product, including purchased software and other outside costs
(see Note 4), are capitalized. The annual amortization of these costs is
computed at the lesser of the straight-line basis over the estimated product
life, not to exceed five years, or based on units sold divided by the total
estimated units to be sold. Amounts capitalized in 1996 and 1995 approximated
$11,100 and $17,000, respectively. Amortization expense for each of the years
ended May 31, 1996 and 1995 approximated $26,700.
Continued
F-8
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------------------
Revenue Recognition
- -------------------
Revenues on contracts performed by the Company are recognized on the percentage-
of-completion method measured by the cost-to-cost method. Contract costs
include all direct material and labor costs, costs paid to subcontractors and
those indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred. Revisions in cost and
profit estimates during the course of the work are reflected in the accounting
period in which the facts that require the revision become known. At the time a
loss on a contract becomes known, the estimate of the estimated loss on the
contract will be recognized. The Company's contracts, except for as noted at
Note 7, generally have durations less than one year.
Earnings Per Share
- ------------------
Earnings per common share is computed based on the weighted average number of
common shares outstanding during the years presented (1,418,400 shares for 1996
and 1995). The potential exercise of stock options are not included in the
computation of earnings per share in 1996 and 1995 because their effect would be
antidilutive.
NOTE 2 - INVENTORIES
- --------------------
A summary of inventories at May 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Finished goods $ 33,117
Work-in-process 66,644
Raw materials and component parts 166,538
--------
$266,299
========
</TABLE>
Continued
F-9
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 3 - PROPERTY AND EQUIPMENT, continued
- ------------------------------------------
A summary of property and equipment at May 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment $ 396,613
Product tooling 226,835
Leasehold Improvements 5,000
Furniture and fixtures 39,592
---------
668,040
Less: accumulated depreciation and amortization (643,121)
---------
$ 24,919
=========
NOTE 4 - OTHER ASSETS
- ---------------------
A summary of other assets at May 31, 1996 is as follows:
Capitalized software costs $ 16,507
Prepaid inventory (Note 6) 33,500
Deposits 4,658
Other 2,952
---------
$ 57,617
=========
</TABLE>
NOTE 5 - INCOME TAXES
- ---------------------
Income tax expense for the years ended May 31, 1996 and 1995
consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<C> <C> <C>
Current:
U.S. federal $ --- $ ---
State 800 800
------------ ------------
$ 800 $ 800
============ ============
</TABLE>
No deferred income tax expense was charged to the accompanying statements of
income for the years presented.
Continued
F-10
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 5 - INCOME TAXES, continued
- --------------------------------
Income tax expense differs from the amounts computed by applying a U.S. federal
income tax rate of 34% to pretax income as a result of the following for the
years ended May 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Computed "expected" tax expense
at a U.S. federal rate of 34% $ 12,494 $ 37,008
Increase (reduction) in income taxes
resulting from:
State income taxes, net of federal
tax benefit 2,256 6,681
Change in the valuation allowance
for deferred tax assets, net of
effects of expired net operating
loss carryforwards (14,795) (43,008)
Meals and entertainment 790 350
Other 55 (231)
-------- --------
$ 800 $ 800
======== ========
</TABLE>
Continued
F-11
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 5 - INCOME TAXES, continued
- --------------------------------
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets at May 31, 1996 are presented below. Deferred tax
liabilities at May 31, 1996 are not significant:
Deferred tax assets:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable, principally
due to allowance for doubtful
accounts $ 5,075
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 and allowance
for inventory obsolescence 36,922
Compensated absences, principally
due to accrual for financial
reporting purposes 9,483
State net operating loss
carryforwards 9,377
Federal net operating loss
carryforwards 547,515
Research and development credit
carryforwards 73,863
Other 3,776
---------
Total gross deferred tax assets 686,011
Less valuation allowance (686,011)
---------
Net deferred tax assets $ ---
=========
</TABLE>
At May 31, 1996, the Company had net operating loss carryforwards of
approximately $1,610,000 and $152,800 for Federal and state tax reporting
purposes, respectively, which, if not utilized to offset future taxable income,
will expire through 2006.
Continued
F-12
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 5 - INCOME TAXES, continued
- --------------------------------
At May 31, 1996, the Company had available unused research and development
credits for income tax purposes of approximately $73,900, which, if not used,
will expire through 2010.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Leases
- ------
In December 1995 the Company entered into a noncancellable operating lease for
its corporate and manufacturing facility. In addition to monthly lease payments
for the facility, the Company is required to pay utilities and certain insurance
and maintenance costs. Such lease provides for annual rental increases and a
five-year renewal option based on certain terms and conditions. The lease
expires in fiscal 2001. Future annual minimum lease payments under this
noncancellable operating lease are as follows:
<TABLE>
<CAPTION>
Years Ending
May 31,
------------
<C> <S>
1997 $ 54,290
1998 56,461
1999 58,721
2000 61,072
2001 36,442
------------
$266,986
============
</TABLE>
Total rental expense for operating leases amounted to approximately $49,900 and
$49,100 for the years ended May 31, 1996 and 1995, respectively.
Royalty Agreements
- ------------------
The Company is a party to a royalty agreement that requires it to pay royalties
of 25% of sales of a select hardware product and 50% of sales of a select
software product, as defined.
The Company is also a party to another royalty agreement that requires it to pay
royalties of 50% of the gross profit earned by the Company on sales of certain
hardware products, as defined.
Continued
F-13
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 6 - COMMITMENTS AND CONTINGENCIES, continued
- -------------------------------------------------
Total royalty expense for the above noted royalty agreements amounted to
approximately $14,500 and $18,100 for the years ended May 31, 1996 and 1995,
respectively.
Purchase Agreement
- ------------------
In March 1996, the Company entered into an agreement with an unrelated product
engineering and manufacturing firm (the "Firm") to design a series of products,
utilizing the Company's specifications, for sale to its customers. In
connection therewith, the Company is obligated to purchase a specified minimum
quantity of the Firm's products, as defined, for $67,000. In addition, the
Company obtained an exclusive right to sell such products under the Company's
name worldwide and it is not obligated to pay any license or royalty fees under
the terms of this agreement. The agreement is for an initial term of one year,
is cancelable thereafter by either party with 120 days advance notice, and will
renew automatically each year unless otherwise terminated.
As of May 31, 1996, the Company has made advance payments to the Firm of $33,500
pursuant to this agreement (see Note 4) and is obligated for the additional
$33,500 in fiscal 1997 upon the Company's inspection and acceptance of products
designed by the Firm. As of May 31, 1996, the Firm had not delivered the
products specified under this agreement and, accordingly, the remaining contract
price of $33,500 has not been accrued in the accompanying balance sheet.
NOTE 7 - CONTRACT
- -----------------
In January 1993, the Company entered into a fixed price contract for $1,053,070
with Orbital Sciences Corporation for the construction of certain VMEbus
hardware. In March 1994, the Company entered into an amendment to this contract
to provide additional VMEbus hardware through an anticipated completion date of
November 1994. In September 1995, the Company entered into an additional
amendment which increased the contract price by an additional $21,065 and
extended the estimated completion date to February 1997. These modifications,
in the aggregate, have increased the contract price by a total of $1,023,388 to
$2,076,458. Costs incurred related to this contract, through May 31, 1996, were
approximately $1,597,000. At May 31, 1996, the amended contract is
approximately 94% complete.
Continued
F-14
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 8 - SHAREHOLDERS' EQUITY
- -----------------------------
In August 1993, the Company's 1987 nonqualified stock option plan expired, and
as a result, options to purchase 110,000 shares of the Company's common stock
expired as well.
On August 31, 1993, the Company's Board of Directors adopted, and the
shareholders approved, the Dynatem, Inc. 1993 Stock Option Plan (the "Plan"),
which provides for the grant of options intended to qualify as incentive stock
options under Section 422 of the Internal Revenue Code and for the grant of
nonqualified stock options. In connection with the Plan, 200,000 shares of the
Company's common stock have been reserved for issuance upon the exercise of
options to be granted.
Options to purchase an aggregate of 110,000 shares of the Company's common stock
were granted pursuant to the Plan to the Company's four non-employee directors
and to certain officers of the Company on October 15, 1993. Such options were
fully exercisable at the date of grant and expire on various dates through
October 15, 2003. The exercise price of such options ranges from $0.20 to
$0.22, which exceeded the fair market value per share of the Company's common
stock on the grant date.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Shares Option Price
------------ ------------
<S> <C> <C>
Outstanding at June 1, 1994 110,000 $.20-.22
Canceled --- ---
Expired --- ---
Granted --- ---
------------ ------------
Outstanding at May 31, 1995 110,000 $.20-.22
Canceled --- ---
Expired --- ---
Granted --- ---
------------ ------------
Outstanding at May 31, 1996 110,000 $.20-.22
============ ============
</TABLE>
As of May 31, 1996, all 110,000 options are exercisable.
Continued
F-15
<PAGE>
DYNATEM, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended May 31, 1996 and 1995
NOTE 8 - SHAREHOLDERS' EQUITY, continued
- ----------------------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because it will continue to account for employee stock options under
Accounting Principal Board Opinion No. 25. The disclosure requirements for the
Company required by Statement No. 123 are effective for financial statements
issued after fiscal year 1996.
NOTE 9 - RELATED PARTY TRANSACTIONS
- -----------------------------------
During the years ended May 31, 1996 and 1995, the Company paid fees of $3,000
and $5,000, respectively, to a consulting firm principally owned by the Chairman
of the Board of Directors of the Company.
The note receivable is due from an officer and consists of a seven year note
bearing interest at the rate of 5% per annum and requires installments of $282
per month for principal and interest. The note is due in May 2000.
F-16
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
-----------------------------------
Not Applicable.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------- -------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
-------------------------------------------------
Information concerning the Company's directors and executive officers and
compliance with Section 16(a) of the Exchange Act is incorporated herein by
reference to the portion of the Company's Definitive Proxy Statement, to be
filed for its 1996 Annual Meeting of Shareholders to be held on October 3, 1996,
set forth under the heading "ELECTION OF DIRECTORS".
ITEM 10. EXECUTIVE COMPENSATION.
- -------- ----------------------
Information concerning executive compensation is incorporated herein by
reference to the portion of the Company's Definitive Proxy Statement, to be
filed for its 1996 Annual Meeting of Shareholders to be held on October 3, 1996,
set forth under the heading "ELECTION OF DIRECTORS - Compensation of Executive
Officers".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- --------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference to the portion of the Company's
Definitive Proxy Statement, to be filed for its 1996 Annual Meeting of
Shareholders to be held on October 3, 1996, set forth under the heading
"PRINCIPAL HOLDERS OF VOTING SECURITIES".
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- ----------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference to the portion of the Company's Definitive
Proxy Statement, to be filed for its 1996 Annual Meeting of Shareholders to be
held on October 3, 1996, set forth under the heading "ELECTION OF DIRECTORS -
Relationships with Outside Firms".
11
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- -------- --------------------------------
(a) EXHIBITS.
--------
Reference is made to the Exhibit Index preceding the exhibits attached
hereto for a list of all exhibits filed as part of this Report.
(b) REPORTS ON FORM 8-K.
-------------------
The Company did not file any reports on Form 8-K during the last quarter of
the Company's fiscal year ended May 31, 1996.
12
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATEM, INC.
August 21, 1996 By: /s/ EILEEN DESWERT
--------------------------
Eileen DeSwert,
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ EILEEN DESWERT August 21, 1996
-----------------------------
Eileen DeSwert,
President/Principal Executive
Officer/Director
By: /s/ HARRY CAVANAUGH August 21, 1996
-----------------------------
Harry Cavanaugh,
Chairman of the Board/Director
By: /s/ BELEN RAMOS August 21, 1996
-----------------------------
Belen Ramos,
Chief Financial Officer
By: /s/ ROBERT ANSLOW August 21, 1996
----------------------------
Robert Anslow,
Director
By: /s/ RICHARD JACKSON August 21, 1996
-----------------------------
Richard Jackson,
Director
By:
-----------------------------
Costis Toregas,
Director
</TABLE>
13
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number
- -------
<C> <S>
3(a) Articles of Incorporation of the Company, as amended to date (1)
3(b) Bylaws of the Company (1)
10(i) Standard Industrial/Commercial Multi-Tenant Lease-Modified Net dated
August 22, 1995, between Pacific Highpark Partners, as lessor and the
Company as lessee (2)
10(j) Contract Term and Conditions (Contract No. ELV9212001), dated April
30, 1993, between the Company and Orbital Sciences Corporation,
together with Amendment No. 001 thereto (3)
</TABLE>
______________________________
(1) Incorporated herein by reference to the Exhibit of the same number to the
Company's Registration Statement on Form S-18, Registration No 3306363LA.
(2) Incorporated herein by reference to Exhibit 10 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended August 31, 1995.
(3) Incorporated herein by reference to the Exhibit of the same number to the
Company's Annual Report on Form 10-KSB for the fiscal year ended May 31,
1993.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAY-31-1996 MAY-31-1995
<PERIOD-START> JUN-01-1996 JUN-01-1994
<PERIOD-END> MAY-31-1996 MAY-31-1995
<CASH> 532,918 0
<SECURITIES> 0 0
<RECEIVABLES> 275,288 0
<ALLOWANCES> 12,643 0
<INVENTORY> 266,299 0
<CURRENT-ASSETS> 1,094,485 0
<PP&E> 24,919 0
<DEPRECIATION> 643,121 0
<TOTAL-ASSETS> 1,187,756 0
<CURRENT-LIABILITIES> 222,261 0
<BONDS> 0 0
0 0
0 0
<COMMON> 2,383,385 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,187,756 0
<SALES> 2,683,188 2,553,646
<TOTAL-REVENUES> 2,683,188 2,553,646
<CGS> 1,858,944 1,722,102
<TOTAL-COSTS> 2,663,403 2,454,703
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 800 800
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 35,948 108,047
<EPS-PRIMARY> $0.03 $0.08
<EPS-DILUTED> 0 0
</TABLE>
