<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 Transitional Period Ended December 31, 1995
Commission file number: 0-12806
Dynatec International, Inc.
---------------------------
(Name of small business issuer in its charter)
Utah 87-0367267
---- ----------
(State or other jurisdiction (I.R.S. Employer
or incorporation or Identification No.)
organization)
1820 South 3594 West
Salt Lake City, UT 84104
-----
(Address of principal (Zip Code)
executive offices)
Issuer's telephone
number: (801) 973-9500
--------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock (Par Value $0.01 per share)
----------------------------------------
(Title of Class)
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 is not 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. [ ]
Registrant's revenues for the transitional period ended December 31, 1995
were $5,230,971.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the average bid asked price of the Common Stock on
March 25, 1996 as reported on the NASDAQ National Market System, was
approximately $2,041,276.
As of March 25, 1996 Registrant had outstanding 941,219 shares of Common
Stock.
Transitional Small Business Disclosure Format. Yes No X
--- ---
<PAGE>
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 General Description of Business,
Marketing and Market Segment Information
1.2 Subsidiaries
1.3 Raw Materials and Suppliers
1.4 Trademarks and Patents
1.5 Seasonal Nature of Products
1.6 Inventory Load and Backlog Orders
1.7 Major Customers
1.8 Competitive Conditions in the Market
1.9 Environmental Regulation
1.10 Number of Persons Employed
ITEM 2 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 3 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART II
ITEM 5 MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . 6
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA . . . . . . . . . . . . 8
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . . . . . . .10
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE
ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 10 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . 12
ITEM 11 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . 14
ITEM 12 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . 15
PART IV
ITEM 13 EXHIBITS, FINANCIAL STATEMENTS AND
SCHEDULES AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(a) Consolidated financial statements, financial schedules,
and supplemental information
(b) Reports on Form 8-K
(c) Exhibits Index
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
PART I
ITEM 1. BUSINESS
1.1 GENERAL DESCRIPTION OF THE BUSINESS OF THE COMPANY - MARKETING AND
MARKET SEGMENT INFORMATION. Dynatec International, Inc., is engaged in the
manufacture and distribution of consumer products.
TELEPHONE ACCESSORIES.
Historically the telephone accessory products have been the principal
source of revenues for the Company. The telephone shoulder rest products are
currently distributed by the Company under the trade names of "Softalk" (R)
"Mini-Softalk" (TM) "Softalk II" and "Universal Phone Rest". Other telephone
accessory products include "Twisstop," "Twist Cord," "Value Pack" and Telephone
Accessory Packaging.
In the six month transitional period ended December 31, 1995, revenues
from the telephone accessory products accounted for 62.7% of the total revenues
of the Company. In fiscal years 1995 and 1994 the telephone accessories
accounted for 61.2% and 62.7% respectively, of revenues of the Company.
It is anticipated that this segment will account for a similar percentage
of Company revenues in calendar year 1996. Sixteen percent of the telephone
accessory products revenues and ten percent of total Company revenues are
derived through sales to AT&T. United Stationers accounted for thirteen percent
of telephone accessory products revenues and eight percent of total company
revenues. Gemini Industries accounted for twenty four percent of telephone
accessories revenue and fifteen percent of total company revenue. S.P. Richards
accounted for thirteen percent of telephone accessory revenue and eight percent
of total company revenue. These products are additionally sold principally
through Sears stores, various office products stores and office products super
stores. The Company began to package various telephone accessory items for AT&T
Technology in fiscal year 1995. Revenues from packaging in the six month period
amounted to $61,900. AT&T has made the decision to discontinue the packaging.
HARDWARE/HOUSEWARES PRODUCTS.
During the six month transitional period ended December 31, 1995, the
hardware/housewares products of the Company accounted for 27.0% of the revenues
of the Company. In fiscal years 1995 and 1994 this segment accounted for 27.0%
and 23.3% respectively, of the revenues of the Company. The hardware products
currently being sold by the Company include the "Expand-A-Shelf", "Mini Expand-
A-Shelf", "Mega Expand-A-Shelf", "Expandable Book Shelf", "Sofstop", "Cover-Up",
" Hide It", "Sofstop II", "The Wedge", "Super Wedge" and "Fuji Film."
During the six month transitional period ended December 31, 1995, thirty
two percent of the Hardware Products segment sales were made to National
Hardware Manufacturing. The sales to National represented nine percent of total
company revenues.
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The hardware products are being sold directly to retail stores,
distributors and catalogs including National Manufacturing, Lechters, Container
Store, Home Depot, Hannover House, Target, Williams Sonoma and others.
BATTERY PRODUCT LINE.
In fiscal year 1993 the company signed a distribution agreement to
represent Fuji Novel Batteries in various domestic markets. In fiscal years
1994 and 1995 the company renewed the agreement and obtained the rights to
Mexico. The company mainly markets dry cell alkaline batteries. The company
markets the majority of the batteries to office product dealers and wholesalers
as well as several accounts in Mexico. During the six month transitional period
ended December 31, 1995 the battery product line sales were ten percent of total
company revenues. The company has not renewed the license agreement due to low
margins and a price increase from Fuji for 1996.
MISCELLANEOUS PRODUCTS.
Miscellaneous products of the Company include the "Softalk Erasable
Board" a soft wipe erasable planning board for office and personal use.
The miscellaneous products segment accounted for less than one percent of
total Company revenues in the six month transitional period ended December 31,
1995. In 1994 and 1993 it accounted for less than one percent and 1.3% of the
revenues of the Company.
1.2 SUBSIDIARIES OF THE COMPANY. As of the end of its six month
transitional period ended December 31, 1995, the Company conducted most of its
operations through certain of its subsidiaries. Softalk, Inc. is a wholly owned
subsidiary engaged in the manufacture and distribution of the telephone
accessory products, hardware products, battery products, and miscellaneous
products of the Company.
The name of the subsidiary, the date of organization, date of acquisition
by the Company, and percentage owned by the Company are set out in chart form
below.
Date Percentage
Acquired Shares
Name Date By held
Subsidiary Organized Company by Company
- -------------------------------------------------------------------------------
(1) Softalk, Inc. 7/15/82 4/18/83 100%
(2) Arnco Marketing, LTD 7/22/86 9/30/91 100%
- -------------------------------------------------------------------------------
(1) Engaged in the manufacturing and distribution of the products of
the Company.
(2) Arnco Marketing imports and markets Twisstop to Softalk and others
under a license agreement with Recoton Inc.
With regard to the other subsidiaries named above, the Company will
employ consolidated financial statements which include income and expenses for
each of the subsidiaries as part of a single financial statement.
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1.3 RAW MATERIALS AND SUPPLIES. The Company uses a premixed plastisol
to manufacture the Softalk, Mini Softalk, Universal phone rest, Sofstop, and
Softalk II products. "Plastisol" is a generic term for the petroleum based raw
material from which the vinyl substance or product is formed.
The remainder of the Company's products are purchased in finished form
and packaged by the supplier or at the Company headquarters.
The Company, to date, has relied upon approximately fifteen primary
suppliers for plastic and other materials ordered to specification for its
assembly, manufacturing, and marketing processes. The Company has not
experienced any shortage of plastic products or of plastisol in the past year,
and does not anticipate any shortage in calendar year 1996. However, in fiscal
year 1995 the cost of plastics increased substantially due to an increased
demand from the orient as well as the loss of a major plastics plant due to
fire. The cost of packaging also increased substantially in fiscal year 1995.
1.4 TRADEMARKS AND PATENTS. The Company currently owns or has a
contract right in Federal Trademark and Patent Registry filed for the following
products, as well as certain Foreign Trademark and Patent Rights.
TRADEMARKS
Year of
Trademark
Trademark Expiration
Product Country Granted/Filed or Renewal
- --------------------------------------------------------------------------------
(a) Softalk U.S.A. 8/10/90 Each 20 Years
Canada 2/05/81 Each 15 Years
(b) Mini-Softalk U.S.A. 8/10/90 Each 20 Years
- --------------------------------------------------------------------------------
PATENTS
Year of
Patent
Patent Expiration
Product Country Granted/Filed or Renewal
- --------------------------------------------------------------------------------
(a) Universal Softalk U.S.A. 5/07/93 2007
(b) Softalk II U.S.A. 5/02/90 2004
- --------------------------------------------------------------------------------
The principals of the Company think that the trademark protection
afforded by the described trademarks is important to each of the products
identified above.
1.5 SEASONAL NATURE OF PRODUCTS. The three principal segments
generating revenue for the Company are the telephone accessories, battery
products, and the hardware/housewares products. The telephone accessory and
battery products experience a seasonal fluctuation with a significant portion of
sales taking place in the period July 1 to December 31 each year. No significant
seasonal fluctuation has been experienced with the hardware/housewares products
of the Company.
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1.6 INVENTORY LOAD AND BACKLOG ORDERS. The Company has followed a
standard policy of shipping within forty-eight hours of receipt of payment on
orders, or within forty-eight hours of orders on approved credit lines with the
exception of large hardware/housewares and battery orders. Such orders are
filled within two to four weeks. The Company has been able to ship within the
foregoing guidelines on almost all occasions. The Company, in order to meet the
foregoing shipping policy, keeps an inventory of approximately two months of all
products.
1.7 MAJOR CUSTOMERS. In the six month transitional period ended
December 31, 1995, 16% of the telephone accessory products were distributed
through sales to AT&T Phone Center Stores whose headquarters are at 5 Wood
Hollow Parsippany, N.J. 07054.
In the six month transitional period ended December 31, 1995, 13% of the
telephone accessory products were distributed through sales to United Stationers
Supply Company whose headquarters are at 1900 South Des Plaines Ave., Forest
Park, Il 60130.
In the six month transitional period ended December 31, 1995, 13% of the
telephone accessory products were distributed to S.P. Richards whose
headquarters are at P.O. Box 1266, Smyrna GA 30081.
In the six month transitional period ended December 31, 1995, 24% of the
telephone accessory products were distributed through sales to Gemini Industries
whose headquarters are at 215 Eatin Road, Clifton NJ 07014.
In the six month transitional period ended December 31, 1995, 32% of the
hardware/housewares products were distributed through sales to National
Manufacturing whose headquarters are at 1 First Avenue, Sterling, Illinois
61081.
The loss of the AT&T Phone Center Stores, United Stationers, S. P.
Richards, Gemini Industries, or National Manufacturing as a customer for the
telephone accessory and hardware/housewares products would have a significant
adverse effect on their various segments. Such a loss may have material negative
impact on the Company as a whole. The Company and its predecessor have sold
telephone accessory products to AT&T Phone Center Stores, United Stationers and
S.P. Richards since 1981 and it is anticipated that this business relationship
will continue. The Company has been marketing the Twisstop product to Gemini
since 1991 and has been marketing to National Manufacturing since 1990.
No other customer of the Company was the source of ten percent or more of
the revenues of the Company during the six month transitional period ended
December 31, 1995.. The loss of a single customer of the other products of the
Company would not have a significant adverse effect on the Company.
1.8 COMPETITIVE CONDITIONS IN THE MARKET. The Company believes that it
is engaged in highly competitive market segments for each of its products
produced. The Company bases this conclusion on the fact that the generic design
or function of the telephone accessory products could probably be functionally
replicated without any great difficulty. Further, many of the other products of
the Company involve relatively easy assembly processes which would allow for
ease of entry into the marketplace by competitors. Not withstanding this fact,
the telephone accessory products of the Company have proven to be very
competitive products.
4
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The doorstop products, as hardware items, experience significant
competition with numerous other doorstop products, but are substantially
different than traditional doorstops. Competition with this product is largely
on the basis of price, although it is believed that the Company's products are
competitively priced. The majority of the other products could be replicated
fairly easy although the mold costs for such products could be substantial. The
Company also has legal protection on various products.
1.9 ENVIRONMENTAL REGULATION. The Company believes that it is in
compliance with all environmental quality regulations pertaining to such matters
as emission, waste disposal, safety equipment, and like procedures. The Company
further believes that it is exempted from specific Environmental Protection
Agency (EPA) requirements or regulations as to its manufacturing and
distribution of products. The Company believes it is in compliance with all
state and local environmental statutes. The Company also believes that it is in
compliance with all Occupational, Safety, and Health Administration standards in
its work place.
1.10 NUMBER OF PERSONS EMPLOYED. The Company employs a full-time sales,
administrative and clerical staff of 13 people. The total average monthly
payroll for this 13 member staff is approximately $62,000. The Company has an
average monthly assembly, warehouse and distribution staff of approximately 48
people with an average monthly payroll of approximately $70,000. The number of
assembly, warehouse and distribution employees is subject to adjustment based
upon demand and has ranged, during the six month transitional period ended
December 31, 1995, from a high of approximately 63 employees to a low of
approximately 54 employees.
ITEM 2. PROPERTIES
During the six month transitional period ended December 31, 1995, the
Company operated one consolidated facility for its main administrative offices
and assembly plant at 1820 South 3594 West Salt Lake City, Utah 84104. These
facilities were leased.
The lease on the main facility provides for monthly rentals of $9,870.00
The lease on the 38,500 square foot plant located in Salt Lake City expires in
February, 1997.
In addition to the base rental payment on the Salt Lake City facility,
the Company pays an annual maintenance fee based upon a percentage formula. The
amount of the maintenance fee varies on a calendar year basis. For the calendar
year 1996, the maintenance fee is estimated at $22,300. The Company pays for its
own electricity and heating.
The Salt Lake City facility consists of approximately 38,500 square feet.
Approximately 5,000 square feet of the facility (12%) is used for office and
administrative purposes, and 33,500 square feet (88%) is used for assembly and
storage area. The Company is presently utilizing all of its administrative and
assembly areas.
5
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ITEM 3. LEGAL PROCEEDINGS
The company known as P.I.E. Nationwide, Inc. filed a chapter 7 bankruptcy
petition prior to June 1992. In June 1992, a complaint was filed against the
registrant and numerous other companies in the United States Bankruptcy Court,
Middle District of Florida, in Jacksonville, Florida by Olympia Holding
Corporation the trustee for P.I.E. trucking company. The trustee for Olympia
claims that the registrant was undercharged for several freight bills dating
back to 1989 through 1991. The action claims that P.I.E. improperly
undercharged the company for freight and claims the company owes P.I.E.
approximately $4,500. Management and legal counsel believe that the suit is
without merit, but regardless of the outcome it is not expected to have a
significant affect on the company financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Other than routine Board of Director elections and auditor appointments
the company had no other matters brought to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The stock of the Company is sold over-the-counter primarily in the states
of California, Illinois, Florida, New York, Texas and Utah. The Company's stock
is listed on the NASD Automated Quotation System (NASDAQ), under the symbol
DYNX. As of the 31st day of December, 1995 there were 1,174 record holders of
the stock of the Company and 941,219 shares of the stock were issued and
outstanding.
The price range of the Company's stock for the two most recent fiscal
years is set forth on a quarterly basis in the Consolidated Financial Statements
which are a part of this report. The referenced quotations reflect inter-dealer
prices without retail markup, markdown, or commissions, and may not necessarily
represent actual transactions.
The Company has paid no dividends on common stock and has no present
intent to pay dividends in calendar year 1996. The Company intends to retain
earnings for business expansion in the foreseeable future.
6
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
The Consolidated Statements of Financial Position of the Company, as
shown in the financial statements attached hereto, reflect the financial
position of the Company.
The Consolidated Statements of Operations of the Company, as shown in the
attached financial statements, reflect the Company's operations.
Results of Operations: For the six month transitional period ended
December 31, 1995, the Company experienced total revenues of $5,230,971 compared
to total revenues of $8,979,939 in the prior fiscal year ended June 30, 1995.
Revenues for the six month period ended December 31, 1994 were $4,876,650.
Comparative period revenues increased $354,321 or 7%.
In the six month transitional period ended December 31, 1995, there was
an increase of $468,429 (17%) in the revenues generated from the telephone
accessory product segment of the Company. This increase was a result of several
factors including a decrease in the sales of Softalk of $171,958 (16%), an
increase in Mini Softalk sales of $60,250 (26%) and an increase in Universal
Softalk sales of $288,727 (212%). The Softalk II experienced a sales increase
of $226,516 (93%) over the prior six month period ended December 31, 1994. The
Value Pack product experienced sales of $13,659. Collectively the shoulder rest
products had increased sales of $417,194. The increase is mainly attributable
to increased superstore sales and additional sales to wholesalers. The Twisstop
product revenues increased by $129,404 (15%). The Twist Cord product
experienced a sales increase of $14,425 (20%). The Twisstop and Twist Cord
products increased due to increased sales to customers and wholesalers. The
Company began packaging product for AT&T in fiscal year 1995. The Company
packaged a line of cellular accessory products. Total packaging revenues
amounted to $61,900 for the six month transitional period ended December 31,
1995. This represents a decrease of $92,594 (60%) over the same period of the
prior fiscal year. AT&T has made the decision to discontinue product packaging.
The Hardware/Housewares products segment produced an increase in revenues
during the six month transitional period ended December 31, 1995 of $154,246 or
12%.
The increase in the hardware products segment is partially a result of an
increase in sales of the shelf products. Expand-A-Shelf and Mini Expand-A-Shelf
increased sales by $35,675 (7%), and $2,012 (4%) respectively. Collectively the
shelf products accounted for revenues of $792,635. The shelf sales increases
are due to an expanded customer base as well as the increased market penetration
of the Expand-A-Shelf and Mini Shelves. The Mega Expand-A-Shelf experienced a
sales decrease of $33,164 (13%) during the six month transitional period ended
December 31, 1995. The Coverup line had decreased sales of $6,141 (3%), while
the Sofstop line showed an increase of $117,545 (88%). During fiscal year 1995
the company introduced the Hide It door bump product. This product experienced
sales of $2,126.
The Wedge product line sales increased by $3,930 (7%) over the same
period for the prior calendar year.
The Expandable Bookshelf product was introduced in the transitional
period and enjoyed sales of $50,604.
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Fuji Film products showed a sales decrease of $5,245 (17%) for the six
month transitional period ended December 31, 1995
Miscellaneous product sales were $13,750 all from the erasable boards.
These declined in sales by $7,616 (36%).
The battery product line experienced sales of $524,103 in the six month
transitional period ended December 31, 1995, compared to sales of $784,841 for
the prior six month period ended December 31, 1994. This represents a decrease
of $260,738 (36%) mainly attributed to the economic crises in Mexico as well as
the decision by the Company late in the year to discontinue the battery line as
a business.
Net income increased from a net income of $20,931 for the six month
period ended December 31, 1994 to a net income of $64,183 over the six month
period ended December 31, 1995. The increase can be substantially attributable
to the increase in sales of the most profitable items of the Company.
Liquidity and capital resources: During the six month transitional
period ended December 31, 1995, the company experienced an increase in its cash
position of $53,361. The cash position increase is a function of a net decrease
in cash provided by investing activities due mainly to capital expenditures, a
net increase in cash from financing activities (line of credit borrowings) and
an increase in cash provided from operations.
Long-term liabilities increased from $443,562 at June 30, 1995 to
$554,488 at December 31, 1995. Short term liabilities increased from $1,702,061
at June 30, 1995 to $2,733,300 at December 31, 1995. The increase is due to
increased debt, particularly the construction of a warehouse and office facility
and the debt incurred with that construction. Stockholders' equity increased
from $2,698,310 for fiscal year ended June 30, 1995 to $2,782,641 for the six
month transitional period ended December 31, 1995.
Total debt to worth ratio was .79 at fiscal year-end 1995 versus 1.18 at
December 31, 1995.
The ratio of total current assets to total current liabilities was 1.75
at the end of fiscal 1995 compared to 1.17 at December 31, 1995.
Impact of Inflation and Changing Prices: There was some impact on the
Company by reason of inflation during the past fiscal year. Freight carriers
used by the Company increased their rates in calendar year 1995. Also, prices
increased for raw materials used in injection and blow molded products as well
as for packaging.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Reference is made to the consolidated statements of Financial position
and operations of the company which are incorporated as part of this form 10KSB
and which contain the Consolidated Financial Statements for fiscal years 1995,
1994 and the six month transitional period ended December 31, 1995. Reference is
also made to "Impact of Inflation and Changing Prices" set forth above.
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The Consolidated Statements of Financial Position of the Company, as
shown in the Financial Statements, reflect the financial position of the
Company.
The Consolidated Statements of Operations of the Company, as shown in the
Financial Statements, reflect the Company's operations.
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in connection
with, and is limited by, the more complete information in the attached
Consolidated Financial Statements and notes thereto.
<TABLE>
<CAPTION>
Transition
Period Fiscal Year Ended
Ended 12/31/95 1995 1994 1993 1992 1991
-------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Telephone
accessories 3,278,000 5,495,000 5,659,000 5,763,000 4,624,000 4,086,000
Hardware Products 1,415,000 2,423,000 2,100,000 1,673,000 1,408,000 953,000
Batteries 524,000 1,032,000 1,187,000 - - -
Other 14,000 30,000 75,000 98,000 141,000 92,000
--------- --------- --------- --------- --------- ---------
Total Revenues 5,231,000 8,980,000 9,021,000 7,534,000 6,173,000 5,131,000
Income (loss) from
continuing operations
before taxes 110,000 (28,000) 346,000 511,000 430,000 50,000
Income tax expense
(benefit) 46,000 33,000 55,000 3,000 3,000 11,000
Income (loss) from
continuing operations 64,000 5,000 291,000 508,000 427,000 39,000
Discontinued Operations - - - - - (394,000)
Extraordinary Items - - - - - -
Net Income (loss) 64,000 5,000 291,000 508,000 427,000 (355,000)
Total assets 6,070,000 4,844,000 4,279,000 3,598,000 2,963,000 2,522,000
Stockholder's equity 2,783,000 2,698,000 2,678,000 2,008,000 1,502,000 1,053,000
Long term debt 584,488 444,000 419,000 560,000 136,000 198,000
Shares outstanding 941,000 935,000 874,000 767,000 3,841,000 3,665,000
Earnings (loss) per share (1):
Continuing operations .07 .01 .35 .66 .56 .06
Discontinued Operations - - - - - (.54)
Extraordinary items - - - - - -
--------- --------- --------- --------- --------- ---------
Net Earnings (loss) per
share .07 .01 .35 .66 .56 (.48)
----- ----- ----- ----- ----- ------
----- ----- ----- ----- ----- ------
</TABLE>
(1) Earnings per share calculations reflect 10-for-1 reverse stock split
in June, 1990 and 5-for-1 reverse split in November 1992.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company has no disagreement with its accountants on the accounting
and financial disclosures contained in this Form 10-KSB.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During the six month transitional period ended December 31, 1995, or
portions thereof, the following have served in the capacities indicated for the
Company or have been nominated to serve until the next annual meeting of
shareholders. As of the date of this report, the five members serving on the
board are Mr. Wood, Mr. Jack, Mr. Newbold, Mr. Volcansek and Mr. White.
Name and Office Principal Occupation During
Held in the the past Five Years and Other
Corporation Age Directorships
- ----------- --- -------------
Donald M. Wood 51 Chief Executive Officer of the Company since
Chief Executive Officer November 1995; President and CEO from 1982
Director and until November 1995, officer and
Director Nominee director of Softalk, Inc. Since July, 1982;
prior to 1982, employed by Bank of America,
N.T. & S.A. serving as Vice President and head
of the Sao Paulo, Brazil Office. Director of
AC&T Inc., a reporting company, since March
1993.
Fredrick R. Jack 53 President of Dynatec since November 1995.
President Executive Vice-President of Dynatec since
Director and December of 1994.Vice-President of Marketing
Director Nominee of Dynatec since April, 1983 and Secretary
of Dynatec since April, 1985. Mr. Jack also
serves as President and a Director of Softalk,
Inc., a wholly owned subsidiary of Dynatec.
Prior to April, 1983, Mr. Jack served as the
Vice President of Marketing for Softalk, Inc.
Reed Newbold 51 Independent financial planner and consultant,
Director and Mr. Newbold served as an assistant
Director Nominee Vice-President of Tracy Collins Bank & Trustin
1987. He was also employed as a mortgage loan
officer with Salt Lake Mortgage in 1985 &
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1986, and as the Executive V.P. of Heritage
Bank from 1981 to 1985.
Frederick W. Volcansek 51 Mr. Volcansek is an International Market
Director and Development Consultant who provides services
Director Nominee to Fortune 500 companies. Mr. Volcansek was
U.S. Deputy Under Secretary of Commerce in
Washington from 1988 until 1992.
David J. White 39 Secretary of the Company since November
Executive Vice- 1995. Executive Vice-President of Dynatec
President, since December 1994. Vice-President of
Secretary Finance of Dynatec since December 1987,
Director and Controller of Dynatec from February 1985 until
Director Nominee December 1987, Mr. White is a licensed
Certified Public Accountant in the State of
Utah.
Mr. Wood was first elected to the Board of Directors of the corporation
at the Company's Annual Meeting of Shareholders in April, 1983. Mr. Jack was
elected to the Board of Directors by Board action in April 1987. Mr. Newbold,
and Mr. Volcansek were elected to the Board of Directors at the Company's Annual
Meeting of Shareholders in December 1988. Mr. White was elected to the Board of
Directors by Board action in November 1991. The members of the Board currently
serving are director nominees to be elected at the Annual Meeting of
Shareholders and serve until the Annual Meeting in 1996.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During the six month transitional period ended December 31, 1995, all
officers and directors prepared and filed all Forms 3,4 and 5 required by
Section 16 (a) of the Exchange Act. All such forms were filed in a timely
manner.
OTHER INFORMATION REGARDING THE BOARD
The Board of Directors of the Company held five meetings in the six month
transitional period ended December 31, 1995. None of the directors participated
in less than 75% of the meetings held during the period. During the six month
transitional period ended December 31, 1995, each Board member was paid $2,000
for each meeting attended.
None of the directors, officers or five percent owners of the stock of
the Company is involved in any significant legal proceedings adverse to the
Company or has a material interest adverse to the Company. The directors,
officers and five percent owners of the stock of the Company do not believe that
their interests are, in fact, adverse to the Company.
11
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The table set forth below contains information about the remuneration
received and accrued during the last calendar year and prior two calendar years
from the Company and its subsidiaries by each of the most highly compensated
executive officers of the Corporation whose remuneration for that year exceeded
$100,000.
Dynatec International, Inc
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (J)
Other
Year Annual Restricted (3) All other
Ended (2) Compen- Stock Options/ LTIP Compen-
Name and Decem. Salary Bonus sation Award(s) SARs Payouts sation
Principal Position 31 ($) ($) ($)(1) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald M. Wood 1995 194,330 1,421 12,000 - - -
- --Chief Executive 1994 159,421 21,600 5,000 -
Officer 1993 172,633 23,467 7,000 n/a 18,000 n/a (4)
F. Randy Jack 1995 142,215 1,522 12,000 - - -
- --President 1994 122,722 15,840 5,000 -
1993 130,471 18,993 7,000 n/a 13,000 n/a (4)
David J. White 1995 94,312 1,218 10,000 - - -
- --Executive 1994 80,850 10,368 5,000 -
Vice President 1993 91,998 14,289 7,000 n/a 10,000 n/a (4)
</TABLE>
(1) Total cash compensation shown above does not include the value of company
owned vehicles and insurance payments made on behalf of officers. Such
items are included on the individual officers W-2's. The amounts shown
as other annual compensation are directors fees received during the
fiscal year.
(2) Bonus compensation includes time in service bonus and merit bonus at
discretion of the Board of Directors.
(3) Stock options were awarded pursuant to the 1987 and 1989 Incentive Stock
Option Plans.
12
<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Percent of Total
Options/SARs
Options/ Granted to
SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- --------------------------------------------------------------------------------
Donald M. Wood - - - -
F. Randy Jack - - - -
David J. White - - - -
- --------------------------------------------------------------------------------
(4) Mr. Wood, Mr. Jack and Mr. White have respectively five, four and three
years employment contracts with the Company. The contracts call for
annual renewals. The contracts may be terminated with written notice
prior to year-end and severance would be equal to the remaining term of
the contract. Compensation to be paid under the contracts is equal to
current base salary as well as vacation, health insurance, vehicle
privileges and an annual cost of living increase. In the event of a
merger, acquisition or transfer of assets the contract must then be
honored by the surviving entity.
In September 1986, the Company's stockholders approved an Incentive Stock
Option Plan (the "1986 Plan"), for the benefit of the officers and employees of
the Company, and of its subsidiaries. No formal criteria have been established
to determine the amount of benefits to be granted pursuant to the 1986 Plan.
Also, in March, 1990, the Company's stockholders approved an additional
Incentive Stock Option Plan (the "1989 Plan") for the benefit of the officers
and managers of the Company. Formal criteria tied to profitability have been
established to determine the benefits to be granted under the 1989 Plan. The
Plans provide that options are granted at exercise prices equal to the market
value as of the date the option is granted. Further description of the Plan and
the exercise prices are provided in the attached Consolidated Financial
Statements.
In fiscal year 1995, and during the six month transitional period ended
December 31, 1995, the Company provided a medical and health insurance program
for all salaried and office employees. All full-time salaried and office
employees of the Company were entitled to the payment by the Company of health
insurance premiums after certain mandatory waiting periods.
13
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The only persons known by the Board of Directors to be the beneficial
owners of more than five percent of the outstanding shares of the Common Stock
of the Company, as of March 25, 1996 are indicated in the following table:
<TABLE>
<CAPTION>
Amount and Percent
Nature of of Class
Name and Address of Beneficial as of
Beneficial Owner Ownership 3/25/95
- ---------------- --------- -------
<S> <C> <C>
Ditta Limited Partnership 45,887 (1) 4.9%
1819 E. Southern
Mesa, AZ 85204
WAC Research, Inc. 228,700 (2) 24.3%
1553 East Hackamore
Mesa, AZ 85203
Donald M. Wood 159,262 (3) 16.9%
3594 West 1820 South
Salt Lake City, Utah 84104
- --------------------------------
</TABLE>
The above table reflects the actual Beneficial Ownership as of September
22, 1994. It does not take into account shares available under the incentive
stock option plans.
(1) Ditta Limited Partnership is an Arizona limited partnership.
(2) WAC Research is owned by Mr. Donald M. Wood, and Annalee Wood,
wife of Mr. Donald Wood.
(3) This reflects the 112,471 shares owned by Annalee G. Wood, wife of
Donald M. Wood, the 8,000 shares held by dependent children of Mr.
Wood, and the 38,791 shares held by Mr. Wood. Mr. Wood is also
deemed the beneficial owner of the 228,700 shares owned by WAC
Research, Inc.
14
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
Amount of Nature of
Beneficial Ownership
of Common Stock by
Management as of
March 25, 1996
<TABLE>
<CAPTION>
Percent
of class
--------
<S> <C> <C>
Donald M. Wood 387,962 (1) (3) 41.2%
Fredrick R. Jack 16,006 1.7%
David J. White 14,000 1.5%
Reed D. Newbold 2,200 (2)
All directors and
officers as a
group (5 persons) 420,168 44.6%
</TABLE>
(1) This reflects the 112,471 shares owned by Annalee G. Wood, wife of
Donald M. Wood, the 8,000 shares held by dependent children of Mr.
Wood, the 38,791 shares held by Mr. Wood and the 228,700 shares
held by WAC Research Inc. of which Donald M. Wood is deemed the
beneficial owner.
(2) Ownership is less than 1% of the outstanding shares of the
Company.
(3) Includes the WAC shares deemed to be beneficially owned by Mr.
Wood.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's subsidiary Softalk, Inc., maintains a royalty agreement for
patent and trade-mark rights on telephone accessories from WAC Research Inc., a
Utah corporation. The original royalty to be paid by Softalk was 10% of sales
of the products. In January of 1990 the company completed negotiations with WAC
Research for the reduction of future royalties from 10% to 5%.
It is anticipated that approximately $200,000 of royalties will be
accrued or paid to WAC Research in calendar year 1996. During the six month
transitional period ended December 31, 1995 Softalk Inc. paid $70,000 to WAC
Research in payment of royalties.
15
<PAGE>
Mr. Wood, the CEO and a Director of the Company, has guaranteed certain
bank lines of credit and an equipment loan of the Company. The balances owing on
the bank lines and loans at December 31, 1995 were $2,242,727. During the six
month transitional period ended December 31, 1995, the highest amount of the
bank lines and equipment notes was $2,242,727
Mr. Wood, the CEO and a Director of the Company and Mr. White, Vice
President and Director are beneficial owners of rental property in Park City,
Utah which the Company leases on an annual basis. The Company uses the property
for travel, promotional work, lodging and entertainment for customers, suppliers
and employees. The total amount paid by the Company for operating, maintenance
and general care of the property for the six month transitional period ended
December 31, 1995 was $66,000.
During fiscal years 1995 and 1994 the Company paid the personal credit
card bills for a member of the Board of Directors on a month to month basis.
The amount is paid back to the Company by the Board Member. At December 31,
1995 the amount owed to the Company was $24,888.
During the fiscal year 1995, the Company sold all rights and interest in
various products to WAC Research for $150,000 in the form of a demand note
bearing 8% interest. The entire balance of the note remains outstanding at
December 31, 1995.
As part of the transaction, inventory was sold at cost for $38,441.
Molds were also sold for $43,500 in the form of a note bearing 8% interest due
June 30, 1996. The balance owing on these items at December 31, 1995 is $45,195.
During fiscal year 1995 and the six month transitional period ended
December 31, 1995, the Company paid various travel expenses for WAC Research.
At December 31, 1995, amounts owed to the Company were $39,229.
16
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM
8K
(a) FINANCIAL STATEMENTS
See the Consolidated Financial Statements which are attached
to this report and are incorporated by this reference.
(b) REPORTS ON FORM 8-K
Not Applicable.
(c) EXHIBITS
None
17
<PAGE>
S I G N A T U R E S
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.
REGISTRANT
DYNATEC INTERNATIONAL, INC.,
Date: March 27, 1996 By:/s/Donald M. Wood
----------------------------------
DONALD M. WOOD, Chairman and
Chief Executive Officer
Date: March 27, 1996 By:/s/David J. White
----------------------------------
DAVID J. WHITE, Vice-President
Chief Financial & Accounting Officer
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 date indicated.
Date: March 27, 1996 By:/s/Donald M. Wood
----------------------------------
DONALD M. WOOD, Director
Date: March 27, 1996 By:/s/Frederick R. Jack
----------------------------------
FREDRICK R. JACK, Director
Date: March 27, 1996 By:/s/Reed D. Newbold
----------------------------------
REED D. NEWBOLD, Director
Date: March 27, 1996 By:/s/David J. White
----------------------------------
DAVID J. WHITE, Director
Date: March 27, 1996 By:/s/Frederick W. Volcansek
----------------------------------
FREDERICK W. VOLCANSEK, Director
18
<PAGE>
EXHIBIT 1
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1995 AND 1994
<PAGE>
C O N T E N T S
Page
----
Accountants' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Financial Position. . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . 7
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 12
Consolidated Costs of Sales (Schedule 1) . . . . . . . . . . . . . . . . . . 28
Consolidated Expenses (Schedule 2) . . . . . . . . . . . . . . . . . . . . . 29
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Dynatec International, Inc.
Salt Lake City, Utah 84104
We have audited the accompanying consolidated statements of financial position
of Dynatec International, Inc. and subsidiaries as of December 31, 1995 and June
30, 1995 and 1994 and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for the six months ended December 31,
1995 and the years ended June 30, 1995 and 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dynatec
International, Inc. and subsidiaries as of December 31, 1995 and June 30, 1995
and 1994 and the results of their operations, changes in stockholders' equity,
and their cash flows for the six months ended December 31, 1995 and the years
ended June 30, 1995 and 1994 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The additional information
contained in schedules 1 and 2 is presented for the purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
KARTCHNER & PURSER, P.C.
/s/ Kartchner & Purser
Salt Lake City, Utah
February 9, 1996
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, 1995 and June 30, 1995 and 1994
ASSETS
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 318,923 $ 265,562 341,209
Trade accounts receivable
(net of allowances of $12,629
at December 31, 1995, $13,188
at June 30, 1995 and $14,899
at June 30, 1994) 1,318,792 1,030,874 1,232,142
Employee advances 3,838 - 1,963
Accounts receivable -
related parties (Note 11) 83,781 70,411 79,903
Note receivable - related
parties (Note 11) - 43,500 -
Inventory (Note 2) 1,257,180 1,422,477 1,087,062
Prepaid expenses 213,228 138,768 156,583
Prepaid income taxes - 18,595 -
Unamortized debt issue
costs (Note 1) 8,594 2,500 9,313
---------- ---------- ----------
TOTAL CURRENT ASSETS 3,204,336 2,992,687 2,908,175
PROPERTY AND EQUIPMENT (NOTE 4) 2,123,671 964,348 785,369
OTHER ASSETS
Deposits 29,825 14,033 15,285
Deferred tax asset (Note 9) 57,181 60,512 -
Note receivable -
related party (Note 11) 150,000 150,000 -
Prepaid royalties -
related party (Note 6) 71,555 71,555 126,487
Licenses and agreements (Note 3) 433,861 590,859 443,584
---------- ---------- ----------
TOTAL OTHER ASSETS 742,422 886,959 585,356
---------- ---------- ----------
TOTAL ASSETS $6,070,429 $4,843,994 $4,278,900
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 457,286 $ 463,128 $ 233,916
Accrued expenses 138,726 111,470 86,316
Accrued advertising 150,000 103,714 74,037
Accrued royalties (Note 6) 12,077 13,938 51,930
Accrued royalties payable -
related parties (Note 6 - 4,679 44,856
Short-term notes payable
(Note 5) 688,899 714,525 467,596
Current portion of long-term
debt (Note 7) 810,628 270,993 149,435
Current portion of capital
lease obligations (Note 8) 31,514 19,614 49,009
Income taxes - payable 29,729 - 25,026
------------ ----------- -----------
TOTAL CURRENT LIABILITIES 2,318,859 1,702,061 1,182,121
LONG-TERM LIABILITIES
Construction-in-progress
obligations (Note 4) 861,744 - -
Capital lease obligations
(Note 8) 89,203 110,696 43,296
Long-term debt (Note 7) 6,737 316,089 375,461
Deferred income taxes (Note 9) 11,245 16,777 -
------------ ----------- -----------
TOTAL LIABILITIES 3,287,788 2,145,623 1,600,878
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
(Note 10) Authorized
100,000,000 shares; issued
941,219 shares at December 31,
1995, 934,912 shares at
June 30, 1995, and 874,278
shares at June 30, 1994 9,412 9,349 8,743
Additional paid-in capital 2,699,238 2,679,214 2,664,103
Retained earnings 73,991 9,808 5,176
------------ ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,782,641 2,698,371 2,678,022
------------ ----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 6,070,429 $ 4,843,994 $ 4,278,900
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
5
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended December 31, 1995
and the Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
REVENUE $ 5,230,971 $8,979,939 $9,020,810
COST OF SALES
Products (Schedule 1) 3,130,185 5,466,295 5,055,536
Royalties (Note 6) 157,268 269,745 316,951
----------- ---------- ----------
TOTAL COST OF SALES 3,287,453 5,736,040 5,372,487
----------- ---------- ----------
GROSS PROFIT 1,943,518 3,243,899 3,648,323
EXPENSES
Selling expenses (Schedule 2) 961,302 1,881,630 1,896,090
General & administrative
expenses (Schedule 2) 772,395 1,424,872 1,295,845
Loss on impairment of assets 33,760 - -
Bad debts 7,000 18,500 1,000
----------- ---------- ----------
TOTAL EXPENSES 1,774,457 3,325,002 3,192,935
----------- ---------- ----------
OPERATING INCOME (LOSS) 169,061 (81,103) 455,388
OTHER INCOME (EXPENSES)
Interest income 16,449 5,306 -
Interest expense (net of
capitalized interest of
$22,714 at December 31, 1995) (75,204) (123,426) (94,955)
Gain (loss) on disposal
of assets - 21,428 (14,126)
Gain on sale of product rights - 150,000 -
----------- ---------- ----------
NET OTHER INCOME (EXPENSE) (58,755) 53,308 (109,081)
----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 110,306 (27,795) 346,307
INCOME TAX (EXPENSE) BENEFIT
(NOTE 9) (46,123) 32,427 (54,912)
----------- ---------- ----------
NET INCOME $ 64,183 $ 4,632 $ 291,395
----------- ---------- ----------
----------- ---------- ----------
EARNINGS PER SHARE: $ .07 $ .01 $ .35
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended December 31, 1995
and the Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Free Total
Restricted Trading Shares
Shares Shares Issued
------------- ------------ -----------
<S> <C> <C> <C>
BALANCE JUNE 30, 1993 325,525 441,618 767,143
Issuance of new shares 7,125 100,010 107,135
Restricted shares now free trading (866) 866 -
Net income (June 30, 1994) - - -
------------ ---------- ---------
BALANCE JUNE 30, 1994 331,784 542,494 874,278
Stock options exercised 78,000 - 78,000
Shares relinquished (15,971) (3,500) (19,471)
Shares issued for non-compete
agreement 2,105 - 2,105
Restricted shares now free trading (9,419) 9,419 -
Net income (June 30, 1995) - - -
------------ ---------- ---------
BALANCE JUNE 30, 1995 386,499 548,413 934,912
Shares issued for non-compete
agreement 6,307 - 6,307
Restricted shares now free trading (7,176) 7,176 -
Net income (December 31, 1995) - - -
------------ ---------- ---------
BALANCE DECEMBER 31, 1995 385,630 555,589 941,219
------------ ---------- ---------
------------ ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-In Earnings Stockholders'
Stock Capital (Deficit) Equity
- ------------ ------------ ------------ -------------
<S> <C> <C> <C>
$ 7,671 $ 2,286,675 $ (286,219) $ 2,008,127
1,072 377,428 - 378,500
- - - -
- - 291,395 291,395
- ------------ ------------ ------------ ------------
8,743 2,664,103 5,176 2,678,022
780 (686) - 94
(195) 195 - -
21 15,602 - 15,623
- - - -
- - 4,632 4,632
- ------------ ------------ ------------ ------------
9,349 2,679,214 9,808 2,698,371
63 20,024 - 20,087
- - - -
- - 64,183 64,183
- ------------ ------------ ------------ ------------
$ 9,412 $ 2,699,238 $ 73,991 $ 2,782,641
- ------------ ------------ ------------ ------------
- ------------ ------------ ------------ ------------
</TABLE>
8
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended December 31, 1995
and the Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash received from customers $ 4,936,053 $ 9,164,670 $ 8,797,508
Cash paid to suppliers and
employees (4,642,482) (8,783,796) (8,793,565)
Interest paid (73,234) (114,143) (98,727)
Income taxes paid - (54,929) (36,186)
Interest received 10,315 5,306 -
------------ ------------ ------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 230,652 217,108 (130,970)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of assets - 15,560 13,466
Capital expenditures (270,145) (379,782) (124,275)
Payment on note receivable
from related party 43,500 - -
Payment for non-competition
agreement - (12,500) (1,000)
Advances to related parties (42,738) - (20,903)
Received from related party - 47,933 -
------------ ------------ ------------
NET CASH (USED) BY
INVESTING ACTIVITIES (269,383) (328,789) (132,712)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings under line-of-
credit agreement 172,815 3,536,526 9,390,359
Payments under line-of-
credit agreement - (3,289,208) (9,161,267)
Proceeds from issuance of
common stock - 94 350,000
Principal payments under
capital lease obligations (9,593) (35,838) (44,123)
Proceeds from long-term debt - 100,000 -
Payments on long-term debt (71,130) (275,540) (178,309)
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 92,092 36,034 356,660
------------ ------------ ------------
NET INCREASE IN CASH 53,361 (75,647) 92,978
CASH AT BEGINNING OF PERIOD 265,562 341,209 248,231
------------ ------------ ------------
CASH AT END OF PERIOD $ 318,923 $ 265,562 $ 341,209
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ----------- -----------
NET INCOME (LOSS) $ 64,183 $ 4,632 $ 291,395
------------ ----------- -----------
<S> <C> <C> <C>
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation 140,900 229,460 187,326
Amortization 60,738 102,725 90,109
Amortization prepaid royalties - 54,932 75,208
Provision for losses
on accounts receivable 7,000 18,500 1,000
Amortization of debt issue costs 3,281 14,313 6,187
(Gain) Loss on disposition of
fixed assets - (21,428) 14,126
Loss on impairment of assets 33,760
Non-cash expenses - - 6,019
Gain on sale of product rights - (150,000) -
(Increase) Decrease in assets:
Accounts receivable (294,918) 182,768 (162,339)
Receivable related parties - - (59,000)
Employee advances - 1,963 (1,963)
Inventory 165,297 (358,396) (371,406)
Debt issue costs (9,375) (7,500) (10,500)
Accrued interest (6,134) - -
Prepaid expenses (78,460) 42,814 (89,917)
Prepaid income taxes 18,595 (18,595) -
Deposits (15,792) 1,252 (635)
Deferred tax asset 3,331 (60,512) -
Increase (Decrease) in liabilities:
Interest payable 8,064 2,470 541
Royalties payable (1,861) (37,992) (6,061)
Royalties payable-related
parties 26,985 (40,177) 31,860
Accounts payable 15,383 211,767 (117,351)
Accrued expenses 65,478 52,361 (34,295)
Income taxes payable 29,729 (25,026) 19,526
Deferred taxes payable (5,532) 16,777 (800)
------------ ----------- -----------
TOTAL ADJUSTMENTS 166,469 212,476 (422,365)
------------ ----------- -----------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES $ 230,652 $ 217,108 $ (130,970)
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Six Months Ended December 31, 1995
and the Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
non-cash investing and
financing activities:
Capital acquisitions
financed by:
Accounts payable $ - $ 17,445 $ 3,780
Issuance of long-term debt 447,303 - 28,878
Capital lease obligations - 90,394 33,995
Issuance of long-term debt
as payment of expenses - - 6,019
Cancellation of 15,513
shares of common stock
held by treasury - - (155)
Issuance of 58,529 shares through
exercise of stock options:
Common stock - 585 -
Additional paid-in capital - (585) -
Reduction of long-term debt
from issuance of common stock:
Common stock 63 21 -
Additional paid-in capital 20,024 15,602 -
Purchase of non-compete
agreement financed by:
Long-term debt - 237,500 37,786
Issuance of shares of stock - - 28,500
Issuance of long-term debt as
payment for capital lease
obligation - - 18,188
Obsolete fixed assets abandoned:
Cost 110,569 3,480 255,117
Accumulated depreciation (110,569) (3,480) (240,899)
Net book value - - 14,218
Intangible assets written-off:
Cost 67,286 - -
Accumulated amortization (33,526) - -
Net book value 33,760 - -
Proceeds from line-of-credit
agreement to fund costs of
land 600,000 - -
Purchase of inventory by
issuance of long-term debt - 15,460 -
Sale of inventory through
accounts receivable - 38,441 -
Note receivable issued for
sale of fixed asset - 43,500 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies reflect practices of the manufacturing
industry and conform to generally accepted accounting principles. Certain
prior amounts have been reclassified to be consistent with the December
31, 1995 presentation. The following policies are considered to be
significant:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Softalk, Inc. and Arnco Marketing, Inc.
All significant intercompany accounts and transactions have been
eliminated. The Company, through its subsidiaries is currently engaged in
two primary industries; telephone accessories and hardware products.
INVENTORY
All inventory is recorded in the Company's subsidiary (Softalk, Inc.) at
the lower of cost, (last-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost with depreciation and
amortization computed on the straight line method. Property and equipment
are depreciated over the following estimated useful lives:
YEARS
-----
Capital Leases 3-5
Equipment 3-10
Leasehold Improvements 2-7
Office Equipment 3-7
Signs 3-5
Vehicles 5
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due
plus deferred taxes. Deferred taxes are recognized for differences
between the basis of assets and liabilities for financial statement and
income tax purposes. The differences relate primarily to depreciable
assets and intangible assets, which use different methods and lives for
depreciation and amortization for financial statement and income tax
purposes, and inventory differences between financial statement and income
tax reporting. The deferred tax assets and liabilities represent the
future tax consequences of those differences, which will either be taxable
or deductible when the assets and liabilities are recovered or settled.
EARNINGS PER SHARE
Earnings per share is calculated using a weighted average for common
stock. Stock options issued are not considered to be common stock
equivalents for purposes of calculating earnings per share.
12
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and cash on deposit with banks.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis when goods are shipped to a
customer.
UNAMORTIZED DEBT ISSUE COSTS
Unamortized debt issue costs represent costs associated with short-term
borrowings incurred during the year and are amortized using the straight-
line method over the life of the respective debt issue.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to be consistent with the current year presentation.
CHANGE OF REPORTING PERIOD
The Company has elected to change its year-end from June 30 to December
31.
NOTE 2 - INVENTORY
Inventory is summarized as follows at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Raw $ 390,490 $ 329,795 $ 228,371
Finished 866,690 1,092,682 858,691
------------ ------------ ------------
Total inventory $ 1,257,180 $ 1,422,477 $ 1,087,062
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company's inventories are stated at the lower of cost or market, using
the last-in, first-out (LIFO) method. All inventory is recorded in the
Company's subsidiary (Softalk, Inc.) at December 31, 1995. The current
replacement cost of LIFO inventories exceeds the carrying amount by
approximately $30,000 at December 31, 1995 and $197,000 and $42,000 at
June 30, 1995 and 1994, respectively.
NOTE 3 - LICENSES AND AGREEMENTS
These agreements represent amounts paid for the rights to manufacture and
market various products. The majority of such costs are associated with
agreements for the telephone accessory product lines.
In March 1995, the Company purchased the rights and customer list for the
doorstop product line from All R Prodx, Inc. for $100,000. In addition, a
five year non-competition agreement was entered into with All R Prodx,
Inc. and its shareholder for $150,000. Such costs are amortized on the
straight-line method in amounts sufficient to write off the costs over
their estimated useful lives.
13
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1995 and 1994
NOTE 3 - LICENSES AND AGREEMENTS (Continued)
At December 31, 1995, management has discontinued sales and distribution
of Fuji products. Two non-compete agreements associated with sales of
Fuji products with a net unamortized book value of $33,760 were written-
off as of December 31, 1995.
Amortization for the six months ended December 31, 1995 and the years
ended June 30, 1995 and 1994 amounted to $94,497, $102,725 and $90,190,
respectively.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follow at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Land $ 624,949 $ - $ -
Capital leases 148,405 213,776 216,673
Equipment 1,997,817 1,987,867 1,760,636
Leasehold improvements 132,919 132,919 128,200
Office equipment 240,475 223,836 160,394
Signs 8,187 8,187 8,187
Vehicles 68,355 57,678 33,678
Construction in progress 592,810 - -
---------- ---------- ----------
3,813,917 2,624,263 2,307,768
Less: Accumulated
depreciation 1,690,246 1,659,915 1,522,399
---------- ---------- ----------
Net property and equipment $2,123,671 $ 964,348 $ 785,369
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Depreciation expense is computed principally on the straight line method
in amounts sufficient to write off the cost of depreciable assets over
their estimated useful lives. Depreciation for the years six months ended
December 31, 1995 and the years ended June 30, 1995 and 1994 amounted to
$133,374, $229,460, and $187,326, respectively.
Construction-in-progress is related to the construction of an office,
warehouse, and distribution facility for the Company. Total cost of the
land and building is estimated to be $2,512,320 with completion in June
1996. At December 31, 1995, $592,810 had been expended including
capitalized interest of $22,714. Construction costs through December 31,
1995, were financed through company profits and an operating line of
credit.
Subsequent to December 31, 1995, the Company entered into a construction
mortgage loan for $1,815,592 with a variable rate of interest of 1.75%
over the lender's index (10.0% at February 15, 1996). The loan terms
require the Company to pay five consecutive monthly interest payments
beginning April 1, 1996, and a principal payment of $615,592 on August 1,
1996 at which time the loan becomes an installment mortgage loan. The
mortgage loan requires the Company to make monthly payments of principal
and interest of $11,581 beginning September 1, 1996 through August 1,
2016.
14
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT (Continued)
Concurrent with the August 1, 1996 payment of $615,592, the Company
expects to receive a Small Business Administration mortgage loan in the
amount of $1,000,000. The consummation of the SBA loan is subject to the
completion of the building and other normal SBA requirements. Management
believes these requirements will be met. Ultimate terms of the loan are
not currently determinable but are expected to be approximately 7.5%
interest with monthly payments of approximately $8,000 - 9,000 over 20
years.
Accordingly, final financing of the land and building is expected to be as
follows:
<TABLE>
<CAPTION>
Monthly
Amount Rate Years Payment
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Bank $ 1,200,000 10.5 20 $ 11,891
SBA 1,000,000 7.5 20 8,056
Company equity 342,320 - - -
------------
$ 2,452,350
------------
------------
</TABLE>
The loan is secured by real estate in Salt Lake City and Park City, UT and
the personal guaranty of the CEO and director, Don Wood.
Construction-in-progress obligations of $861,744 consist of amounts
payable on the construction contract of $447,303 and funds advanced from
an operating line of credit of $414,441. The entire amount is to be
refinanced as part of the Bank and SBA loans described above.
NOTE 5 - SHORT-TERM NOTES PAYABLE
Short-term notes payable is summarized as follows at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revolving line-of-credit up
to $500,000 with a bank;
interest payable monthly
at 1.5% over prime:
secured by inventory,
receivables and equipment;
due December 5, 1994. $ - $ - $ 467,596
</TABLE>
15
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1995 and 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NOTE 5 - SHORT-TERM NOTES PAYABLE (Continued)
Revolving line-of-credit up
to $1,500,000 with a bank;
interest payable monthly
at 1.0% over prime;
secured by accounts
receivable, inventory and
the personal guarantee of
Don Wood, CEO and director;
due November 30, 1996. 1,103,340 714,525 -
------------ ------------ ------------
1,103,340 714,525 467,596
Less: Construction-in-
progress obligations 414,441 - -
------------ ------------ ------------
$ 688,899 $ 714,525 $ 467,596
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Under the terms of the aforementioned bank lines-of-credit the Company is
required to maintain certain financial covenants and ratios. The bank may
withdraw the lines-of-credit upon default by the Company of various
provisions in the line-of-credit agreement. At December 31, 1995 the
Company had a ratio of current assets to current liabilities of 1.39 to 1
which is not in compliance with the provisions requiring a ratio of no
less than 1.5 to 1.
Pertinent data regarding aggregate short-term borrowings is as follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Maximum outstanding $ 1,103,340 $ 724,677 $ 493,268
Average outstanding 897,022 591,061 376,108
Weighted average
interest rate 10.15% 9.53% 8.17%
</TABLE>
NOTE 6 - ROYALTIES
The following is a summary of royalties for the six months ended December
31, 1995 and the years ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
WAC Research
Telephone accessory $ 102,274 $ 163,988 $ 206,028
Hardware products 9,711 9,646 11,440
Other Entities
Telephone accessory - 14,078 25,433
Hardware products 45,283 82,033 74,050
------------ ------------ ------------
$ 157,268 $ 269,745 $ 316,951
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
16
<PAGE>
NOTE 6 - ROYALTIES (Continued)
In June of 1993 the Company renegotiated with WAC Research to apply four-
fifths of the 5% royalty towards the prepayment until the prepayment is
absorbed. In November of 1993 the Company renegotiated with WAC Research to
apply the 5% royalty towards the prepayment or pay WAC Research at the
discretion of WAC Research until the prepayment is absorbed. Amounts paid to
WAC Research during fiscal year 1995, 1994 and 1993 amounted to $161,000,
$111,000, and $245,500 respectively. The payment of $245,500 to WAC Research
during fiscal 1993 exceeded the 5% royalty. The balance of the prepaid royalty
to WAC Research for December 31, 1995, June 30, 1995 and June 30, 1994 was
$71,555, $71,555, and $126,487, respectively.
Royalties owing are summarized as follows at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
WAC Research $ - $ 4,679 $ 44,856
Other 12,077 13,938 51,930
----------- ------------ ------------
Total Royalties Payable $ 12,077 $ 18,617 $ 96,786
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
NOTE 7 - LONG-TERM DEBT
Long-term notes payable is summarized as follows at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Note payable to a bank;
due in monthly principal
installments of $8,333
plus interest at 1.5%
over prime; due December
1995; secured by accounts
receivable, inventory
and equipment. $ - $ - $ 350,000
Note payable to a bank;
due in monthly install-
ments of $3,525 with
interest at 2% over prime
through March 1998;
secured by equipment. - - 133,051
Note payable to a bank due
in monthly installments of
$879 with an interest at
8.7% through April 1996;
Secured by vehicle. - - 17,823
</TABLE>
17
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1995 and 1994
<TABLE>
<S> <C> <C> <C>
NOTE 7 - LONG-TERM DEBT (Continued)
Note payable to financing
company due in monthly
installments of $588 with
interest at 8.5% through
December 1997; secured by
vehicle. 12,915 15,810 21,236
Non-interest bearing note
payable to a company; due
in various installments;
final payment due July, 1994. - - 2,786
Revolving line of credit
payable to bank financing;
advances to be amortized
over a period of 60 months
due in monthly installments
of principal plus interest
at 1% over prime until the
maturity date (November 30,
1996); secured by equipment. 692,085 347,785 -
Note payable to company; due
in quarterly installments
of $15,908 with interest at
8% through December 22,
1996; unsecured. 60,575 89,110 -
Note payable to a company;
due upon gross sales
derived from the payee's
key customer list or
March 22, 1997, whichever
is earlier with interest
at 8%; unsecured. 25,000 25,000 -
Note payable to an
individual; due in
quarterly payments of
2,102 shares of stock of
the Company through
December 22, 1996; no
interest; unsecured. 26,790 109,377 -
------------ ------------- ------------
Total long-term debt 817,365 587,082 524,896
Less: Current portion (810,628) (270,993) (149,435)
------------ ------------ ------------
Long-term debt $ 6,737 $ 316,089 $ 375,461
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
18
<PAGE>
NOTE 7 - LONG-TERM DEBT (Continued)
Aggregate annual maturities of long-term debt are as follows:
Year ending December 31, 1996 $ 810,628
1997 6,737
------------
Total long-term debt $ 817,365
------------
------------
NOTE 8 - LEASES
All non-cancelable leases with an initial term greater than one year have
been categorized as capital or operating leases in conformity with the
definitions in Financial Accounting Standards Board Statement No. 13,
"Accounting for Leases".
Property and equipment under capital leases is summarized as follows at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Property and equipment $ 148,405 $ 148,405 $ 216,673
Less: Accumulated
depreciation (54,416) (35,864) (121,587)
------------ ------------ ------------
Net property and equipment
under capital lease $ 93,989 $ 112,541 $ 95,086
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
At December 31, 1995, the Company is liable under the terms of non-
cancelable leases for the following minimum lease commitments:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------ ------------
<S> <C> <C>
Year Ended December 31:
1996 $ 40,868 $ 118,864
1997 39,165 18,268
1998 57,656 -
------------ ------------
Total minimum lease payments 137,689 $ 137,132
------------
------------
Less: Interest 16,972
------------
Present value of net minimum
lease payments 120,717
Less: Current portion 31,514
------------
Capital lease obligations
payable long-term $ 89,203
------------
------------
</TABLE>
The Company leases its office and manufacturing facilities. Rental
expense was $70,273, $141,107 and $133,211 for the six months ended
December 31, 1995 and the years ended June 30, 1995 and 1994,
respectively.
19
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1995 and 1994
NOTE 9 - INCOME TAX EXPENSE
Income tax expense (benefit) consisted of the following for the six months
ended December 31, 1995 and the years ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal $ 19,047 $ 9,155 $ 49,670
State 29,277 2,153 5,242
------------ ------------ ------------
48,324 11,308 54,912
Deferred
Federal (1,919) (38,128) -
State (282) (5,607) -
------------ ------------ ------------
(2,201) (43,735) -
------------ ------------ ------------
Income tax expense (benefit) $ 46,123 $ (32,427) $ 54,912
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred tax assets and liabilities have been presented in the Company's
financial statements as follows at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax asset $ 57,181 $ 60,512 $ -
Deferred tax liability (11,245) (16,777) -
------------ ------------ ------------
Net deferred taxes $ 45,936 $ 43,735 $ -
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
A reconciliation between the actual income tax expense (benefit) and income
taxes computed by applying the statutory federal income tax rates to income
(loss) before income taxes is as follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Federal income taxes $ 28,149 $ (4,169) $ 137,709
State income taxes 7,455 (1,405) 23,904
Other, net - - 1,154
NOL carryforwards - - (107,855)
Income tax audit adjustment 24,475 - -
Continuing operations (11,755) 16,882 -
Deferred taxes (2,201) (43,735) -
------------ ------------ ------------
Net income tax expense $ 46,123 $ (32,427) $ 54,912
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
20
<PAGE>
NOTE 10 - COMMON STOCK
In July of 1993, as part of the purchase of some of the assets and a non-
competition agreement with Fujima Corporation, the Company issued 7,125
shares of common stock for $28,500.
On March 22, 1995, the Company entered into a noncompete agreement for
16,818 shares of stock to be issued quarterly for two years beginning
March 22, 1995. At December 31, 1995, a total of 8,408 shares had been
issued with 8,408 and 4,206 shares due for December 31, 1996 and 1997,
respectively. A liability has been recorded at the market value of the
stock at the time of the transaction.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company's subsidiary, Softalk, Inc., maintains a royalty agreement for
patent and trade-mark rights on telephone accessories from WAC Research, a
Utah corporation. Don Wood, CEO and director of the Company, is the
beneficial owner of one-half of WAC Research (See Note 7).
The CEO and the financial vice-president of the Company are owners of the
rental property in Park City, Utah which the Company leases on an annual
basis. The Company uses the rental property for travel, promotional work,
lodging and entertainment for customers, suppliers and employees. The
Company decided that the promotional value of the property and its use as
a sales incentive with independent reps was less than alternative
promotional and travel costs expended by the Company. The total amount
paid by the Company for the six months ended December 31, 1995 and the
years ended June 30, 1995 and 1994 was $66,000, $132,000 and $101,500,
respectively. This cost covered operating, maintenance and general care
of the property.
The Company paid the personal credit card bills for members of the Board
of Directors on a month to month basis. The amount is generally paid back
to the Company the next month. At December 31, 1995, June 30, 1995 and
1994 the amounts owed to the Company were $24,888, $7,741 and $20,903,
respectively.
During the fiscal year 1994, the Company sold a past-due accounts
receivable trade balance of $109,000 to WAC Research, a related entity of
the President of the Company, for a non-interest bearing note receivable.
The agreement requires WAC Research to payoff the note on or before
October 31, 1994. As of June 30, 1994 the balance of the receivable was
$59,000. As of June 30, 1995 the balance was paid in full.
During the fiscal year ended June 30, 1995, the Company sold all rights
and interest in various products to WAC Research for $150,000 in the form
of a demand note bearing 8% interest. The entire balance of the note
along with accrued interest of $6,134 remains outstanding at December 31,
1995.
21
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1995 and 1994
NOTE 11 - RELATED PARTY TRANSACTIONS (Continued)
As part of the transaction, inventory was sold at cost for $38,441 and
receivable at June 30, 1995. Sales of these products and purchases of
additional inventory by WAC Research are performed through the Company and
the outstanding receivable is adjusted as required. The outstanding
receivable due from WAC Research at December 31, 1995 is $45,195.
Molds were also sold for $43,500 in the form of a note bearing 8% interest
due June 30, 1996. A gain on the sale of the molds of $13,928 was
recognized. During the six months ended December 31, 1995, the note was
paid in full.
During the year ended June 30, 1995, a vehicle was sold to Don Wood, CEO
and director of the Company for $7,500 and a gain on the sale of the
vehicle of $7,500 was recognized. The CEO/director of the Company also
sold a vehicle to the Company for $24,000.
During the year ended June 30, 1995 and the six months ended December 31,
1995 the Company paid various travel expenses for WAC Research. At
December 31, 1995, and June 30, 1995 amounts owed to the Company were
$39,229 and $24,229, respectively.
NOTE 12 - SUMMARY OF SELECTED FINANCIAL INFORMATION
The following is a summary of selected financial information at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Other Financial Data:
Working capital $ 885,477 $ 1,290,626 $ 1,726,054
Property & equip. 2,123,671 964,348 785,369
Total assets 6,070,429 4,843,944 4,278,900
Long-term debt 968,929 426,785 418,757
Stockholders' equity 2,782,641 2,698,371 2,678,022
Book value per share 2.96 2.86 3.06
Other Information:
Shares outstanding at
period end 941,219 943,912 874,278
Stockholders of record
(reported by stock
transfer agent) 1,174 1,177 1,196
Number of employees
at period end 63 57 53
</TABLE>
22
<PAGE>
NOTE 13 - PERIODIC FINANCIAL INFORMATION (UNAUDITED)
The following presents a summary of the unaudited consolidated results of
operations for the six months ended December 31, 1995 and the years ended
June 30, 1995 and 1994:
<TABLE>
<CAPTION>
Total
1st Quarter 2nd Quarter Six Months
Ended Ended Ended
9-30-95 12-31-95 12-31-95
----------- ----------- -----------
<S> <C> <C> <C>
Total revenues $ 2,437,809 $ 2,793,162 $ 5,230,971
Gross profit 833,372 1,110,146 1,943,518
Net income (loss) 54,761 9,422 64,183
Earnings per share .06 .01 .07
Market price
- high 7.75 6.50 7.75
- low 6.50 6.25 6.25
</TABLE>
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
Ended Ended Ended Ended Ended
9-30-94 12-31-94 3-31-95 6-30-95 6-30-95
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,188,614 $ 2,688,036 $ 2,127,018 $ 1,976,271 $ 8,979,939
Gross profit 872,445 1,029,174 781,528 560,752 3,243,899
Net income (loss) 16,664 4,237 (89,525) 73,256 4,632
Earnings per share .02 - (.10) .09 .01
Market price
- high 7.00 7.38 7.50 7.38 7.50
- low 6.25 6.75 7.00 7.00 6.25
</TABLE>
<TABLE>
<CAPTION>
9-30-93 12-31-93 3-31-94 6-30-94 6-30-94
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,022,256 $ 2,447,970 $ 2,224,362 $ 2,326,222 $ 9,020,810
Gross profit 937,287 1,021,249 865,461 824,326 3,648,323
Net income (loss) 155,127 115,116 35,974 (14,822) 291,395
Earnings per share .20 .13 .04 (.02) .35
Market price
-high 7.00 6.13 6.00 6.38 7.00
-low 3.25 5.13 5.25 5.38 3.25
</TABLE>
The gross profit for each quarter for the years ended June 30, 1995 and
1994 have been adjusted to reflect the reclassification of freight
expenses for sales as a selling expense rather than cost of goods sold.
23
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1995 and 1994
NOTE 14 - SEGMENT REPORTING
Information about the Company's operations by segment is as follows at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Telephone accessories $ 3,277,953 $ 5,299,337 $ 5,658,903
Hardware products 1,415,166 2,619,000 2,100,331
Batteries 524,103 1,031,900 1,187,123
Other segments 13,749 29,702 74,453
------------ ------------ ------------
Total $ 5,230,971 8,979,939 $ 9,020,810
------------ ------------ ------------
------------ ------------ ------------
Operating income (loss):
Telephone accessories $ 420,535 $ 319,825 $ 648,086
Hardware products (34,601) (216,381) (59,664)
Batteries (217,862) (172,838) (130,749)
Other segments 989 (11,709) (2,285)
------------ ------------ ------------
Total $ 169,060 $ (81,103) $ 455,388
------------ ------------ ------------
------------ ------------ ------------
Identifiable assets:
Telephone accessories $ 3,593,875 $ 2,592,537 $ 2,616,368
Hardware products 1,932,047 1,344,494 923,170
Batteries 514,545 877,586 695,146
Other segments 29,962 29,377 44,216
------------ ------------ ------------
Total $ 6,070,429 $ 4,843,994 $ 4,278,900
------------ ------------ ------------
------------ ------------ ------------
Depreciation and
amortization:
Telephone accessories $ 100,616 $ 185,995 $ 170,200
Hardware products 83,061 118,043 89,306
Batteries 17,662 27,890 17,658
Other segments 299 317 270
------------ ------------ ------------
Total $ 201,638 $ 332,245 $ 277,434
------------ ------------ ------------
------------ ------------ ------------
Capital expenditures:
Telephone accessories $ 47,731 $ 297,718 $ 137,120
Hardware products 28,115 117,340 40,202
Batteries 6,449 46,232 12,802
Other segments 169 1,331 803
------------ ------------ ------------
Total $ 82,464 $ 462,621 $ 190,927
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
24
<PAGE>
NOTE 15 - STOCK OPTION PLAN
The Company had previously adopted incentive stock option plans under which
18,800 and 60,000 unissued shares (as adjusted for 1 for 5 reverse stock
split), respectively, are to be reserved for distribution to officers and
key personnel.
Both plans provide that options be granted at exercise prices equal to
market value as of the date the option is granted, unless the option is
granted to a 10% or more shareholder, then the exercise prices are to equal
110% of market value on the date the option is granted. Options granted
are for five years and are exercisable upon issuance. No options may be
granted pursuant to the plans after April 30, 1996 and August 21, 1999,
respectively.
Transactions in stock options under these plans are summarized as follows:
<TABLE>
<CAPTION>
Option Price
Shares Range
---------- ------------
<S> <C> <C>
Options exercisable at
June 30, 1993
Free trading 48,000 1.88-2.07
Restricted 30,000 1.50-1.65
Options available for
grant at June 30, 1993 800 -
Options exercisable at
June 30, 1994
Free trading 48,000 1.88-2.07
Restricted 30,000 1.50-1.65
Options available for
grant at June 30, 1994 800 -
Options exercised during
year ended June 30, 1995
Free trading (48,000) 1.88-2.07
Restricted (30,000) 1.50-1.65
Options available for grant
at June 30, 1995 800 -
Options available for grant
at December 31, 1995 800 -
</TABLE>
NOTE 16 - CONTINGENCIES AND LITIGATION
The Company known as P.I.E. Nationwide, Inc. filed a Chapter 7 bankruptcy
petition prior to June 1992. On June 19, 1992 the trustee of the estate
of Olympia Holding Corporation formerly known as P.I.E. Nationwide, Inc.
filed suit in the United States Bankruptcy Court Middle District of
Florida, Jacksonville Division against the Company. The plaintiff claims
that P.I.E. improperly undercharged the Company for freight and therefore,
claims the Company owes P.I.E. approximately $4,500. The trustee has
filed several thousand similar claims against various companies. At
present the Company is defending itself and expects to prevail.
25
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1995 and 1994
NOTE 17 - FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
Letters of credit are issued by the Company during the ordinary course of
business through their bank as required by certain vendor contracts. As of
June 30, 1994 the Company had approximately $350,000 in outstanding letters
of credit for the future purchase on inventory. There were no outstanding
letters of credit at December 31, 1995 and June 30, 1995.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
The Company provides credit to its customers in the normal course of
business. However, the Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses.
Concentrations of credit risk with respect to trade receivables is limited
due to the Company's large number of customers and their dispersion across
many geographies. The Company places its temporary cash investments with
high quality financial institutions. At times such investments may be in
excess of the FDIC insurance limit. At December 31, 1995 and June 30, 1995
and 1994, the Company had bank deposits in excess of federally insured
limits by approximately $225,000, $153,000 and $156,000, respectively.
NOTE 18 - MAJOR CUSTOMERS
Sales to major customers for the six months ended December 31, 1995
recognized by the Company's wholly-owned subsidiary, Softalk, Inc., are
summarized as follows:
Sales Percent of
Customer Recognized Revenues
---------------------- ------------ ------------
Gemini Industries $ 799,700 15%
AT&T Technologies 537,082 10%
National Manufacturing 458,934 9%
United Stationers 428,124 8%
SP Richards 426,198 8%
NOTE 19 - SUBSEQUENT EVENTS
On January 12, 1996, WiTec Industries, L.L.C., (WiTec) a Utah limited
liability company was formed for the purpose of manufacturing and marketing
consumer products including headsets, amplifiers and other phone
accessories. Initial members of WiTec include Dynatec International, Inc.
and Muito Bem Ltd. (the Dynatec Group) and Weiser Communications, Inc. and
Margaret Weiser (the Weiser Group). The president of the Company is the
beneficial owner of one-half of Muito Bem Ltd. The percentage interest by
each member in WiTec is as follows:
Dynatec International, Inc. 48%
Weiser Communications, Inc. 2%
Margaret Weiser 2%
Muito Bem Ltd. 48%
26
<PAGE>
NOTE 19 - SUBSEQUENT EVENTS (Continued)
WiTec may be merged into Dynatec, at Dynatec's option, after the conclusion
of calendar year 1997 in order to take advantage of Dynatec's banking
relationships and credit lines, and to facilitate raising capital in the
public markets. Under the merger, the Dynatec Group and the Weiser Group
will receive fifty percent and four percent, respectively, of the aggregate
number of shares computed as determined in the operating agreement.
Under the operating agreement, Dynatec International, Inc. will receive
each year a management fee of $200,000 payable in equal quarterly
installments.
27
<PAGE>
Schedule 1
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED COSTS OF SALES
For the Six Months Ended December 31, 1995
and the Years Ended June 30, 1995 and 1994
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
COST OF SALES - PRODUCTS
Beginning inventory-raw $ 329,795 $ 228,371 $ 184,652
Materials - raw 1,865,598 4,093,452 4,281,743
Freight 123,509 212,630 232,441
Depreciation 92,921 154,262 132,342
Labor 497,542 753,919 533,757
Repairs & maintenance 11,811 13,233 13,807
Miscellaneous direct 49,433 78,038 83,810
Supplies - 4,809 992
Less: ending inventory - raw (390,490) (329,795) (228,371)
------------ ------------ ------------
TOTAL COST OF GOODS
MANUFACTURED 2,580,119 5,208,919 5,235,173
Beginning inventory-finished 1,092,682 858,691 531,004
Purchases 263,586 389,142 58,440
Amortization 60,488 102,225 89,610
Less: ending inventory-finished (866,690) (1,092,682) (858,691)
------------ ------------ ------------
TOTAL COST OF SALES -
PRODUCTS $ 3,130,185 $ 5,466,295 $ 5,055,536
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Schedule 2
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED EXPENSES
For the Six Months Ended December 31, 1995
and the Years Ended June 30, 1995 and 1994
December 31, June 30, June 30,
1995 1995 1994
------------ ------------ ------------
SELLING EXPENSES
Advertising $ 101,677 $ 133,161 $ 183,564
Commissions 235,572 478,912 489,899
Depreciation - selling 29,235 46,236 22,176
Freight 208,033 399,523 367,824
Miscellaneous 1,988 26,944 21,112
Promotions 45,185 155,189 109,152
Salaries - sales 245,489 408,425 439,152
Travel & entertainment 94,123 233,240 263,211
------------ ------------ ------------
TOTAL SELLING EXPENSES $ 961,302 $ 1,881,630 $ 1,896,090
------------ ------------ ------------
------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Amortization $ 250 $ 500 $ 500
Automobile 1,084 757 626
Bank charges 5,707 4,674 2,463
Corporate expense 122,605 156,538 191,577
Depreciation - office 18,745 29,022 32,808
Dues & subscriptions 114 770 822
Insurance 91,486 209,070 201,031
Janitorial 2,642 5,274 3,084
Legal & accounting 55,018 88,453 82,968
Miscellaneous 2,308 (1,645) 3,986
Office expense 46,465 96,455 59,486
Payroll taxes 72,201 145,813 114,403
Rent 69,517 141,107 133,211
Repairs & maintenance 122 1,850 85
Salaries - office 224,853 423,273 350,842
Taxes 12,460 22,597 21,107
Telephone 27,165 54,983 51,374
Utilities 19,653 45,381 45,472
------------ ------------ ------------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES $ 772,395 $ 1,424,872 $ 1,295,845
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Consolidated Financial Statements December 31, 1995 and June 30, 1995 and
1994 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 318,923
<SECURITIES> 0
<RECEIVABLES> 1,331,421
<ALLOWANCES> 12,629
<INVENTORY> 1,257,180
<CURRENT-ASSETS> 3,204,336
<PP&E> 3,813,917
<DEPRECIATION> 1,690,246
<TOTAL-ASSETS> 6,070,429
<CURRENT-LIABILITIES> 2,318,859
<BONDS> 0
0
0
<COMMON> 9,412
<OTHER-SE> 2,773,229
<TOTAL-LIABILITY-AND-EQUITY> 6,070,429
<SALES> 5,230,971
<TOTAL-REVENUES> 5,230,971
<CGS> 3,287,453
<TOTAL-COSTS> 5,166,788
<OTHER-EXPENSES> 16,449
<LOSS-PROVISION> 7,000
<INTEREST-EXPENSE> 75,204
<INCOME-PRETAX> 110,306
<INCOME-TAX> 46,123
<INCOME-CONTINUING> 64,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,183
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
