<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1996
Commission file number: 0-12806
DYNATEC INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0367267
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
3820 W. GREAT LAKES DR.
SALT LAKE CITY, UT 84120
(Address of principal (Zip Code)
executive offices)
Registrant's telephone
number, including area code: (801) 973-9500
Indicate by check mark whether the issuer (1) has 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
--- ---
The number of shares outstanding of the issuer's common stock as of
September 30, 1996, were 947,529. The aggregate market value of voting stock
held by non affiliates of the Company at November 5, 1996 was $2,061,444.
Transitional small business disclosure format. Yes No X
----- -----
<PAGE>
PART 1. - FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
Reference is made to the attached Unaudited Consolidated Financial
Statements for the third quarter and first nine months of calendar years 1996
and 1995. These Financial Statements are hereby incorporated by reference. (See
Exhibit 1) The information for the Company's third quarter and first nine
months of calendar years 1996 and 1995 ended September 30, 1996 and 1995 is
unaudited, but in the opinion of management reflects all adjustments which are
necessary for a fair presentation of operations for such periods.
2
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues for the third quarter of calendar year 1996 ending on
September 30, 1996 were $2,605,008. Total revenues for the third quarter of
calendar year 1995 ending on September 30, 1995 were $2,437,809. This
represents a 167,199 (7%) increase in revenues for the quarter ended
September 30, 1996 compared to September 30, 1995. Total revenues for the
nine month period ended September 30, 1996, were $7,464,220 compared to
$6,541,099 for the nine month period ended September 30, 1995. This
represents a $923,121 (14%) increase. The telephone accessories products
experienced a overall increase in sales. In total, the telephone accessories
line experienced sales of $4,670,628 for the nine month period ended
September 30, 1996, in comparison to $3,990,424 for the same nine month
period in the prior calendar year. This represents an overall increase of
$680,204 (17%). Specifically, the Softalk product experienced a decrease of
$97,182 (7%) over the same period for the prior year while the Mini-Softalk
had a decrease of $23,473 (8%). The Twisstop product experienced an
increase of $115,393 (10%) as a result of increased sales to volume
wholesalers. TwistCord sales increased by $101,395 (102%). The Universal
Softalk registered a sales decrease of $96,377 (20%) for the nine month
period ending September 30, 1996 over the same period for the prior calendar
year. The Universal Softalk is currently marketed to AT&T on an exclusive
basis. The Softalk II product experienced a sales increase of $247,280
(43%). Overall, the shoulder rest products (Softalk,Mini-Softalk, Universal,
Softalk II) had combined revenues for the nine months ended September 30,
1996, that were an increase in sales of $30,248 (1%) for the same combined
products for the nine months ended September 30, 1995. Management believes
that Softalk and Mini-Softalk sales will continue to decline while Universal
and Softalk II sales will continue to rise. Several large customers are
replacing the Softalk and Mini-Softalk with the Softalk II. The Company
introduced the Value Pack product in late 1995. The Value Pack includes a
Softalk II, TwistCord and Twisstop in a retail package. The Value Pack
experienced sales of $441,793 in the first nine months of 1996 in comparison
to $8,625 in 1995. Hardware products experienced an overall increase in sales
of $350,088 (18%) over the same period for the prior year. This increase can
be principally explained by an increase in Sofstop sales of $34,013 (19%), an
increase in Cover-Up and Hide-It sales of $56,527 (19%), an increase in
Expand-A-Shelf sales of $304,764 (38%), an increase in Mini Expand-A-Shelf
sales of $18,071 (29%) and an decrease in Mega Expand-a-Shelf sales of
$49,997 (14%). The Wedge product increased $29,613 (28%). The Expandable
Bookshelf experienced sales of $51,227. The Company introduced the Medicine
Cabinet Organizer which experienced sales of $21,715. The overall housewares
business is increasing as the company is adding new customers and expanding
it's existing line of products. The miscellaneous hardware products
decreased in sales by $89,821 as several hardware items have been
discontinued since last year. The miscellaneous product lines increased by
$264,252. The Company is winding down the sales of erasable boards and
various other products, as well as decreasing packaging revenues due to
AT&T's decision to discontinue contract packaging with
3
<PAGE>
the Company. The Company was able to facilitate an order for product from
China for a large retailer, resulting in a sale of approximately $316,000.
The Company has made the decision to discontinue its marketing efforts with
the Fuji Novel line of dry cell batteries. Sales of the batteries have
decreased by $371,423 (89%) over the same nine month period of the previous
year.
The Company experienced a net profit of $5,418 in the third quarter of
calendar year 1996, compared to a net profit of $54,761 for the same period
of the prior calendar year. For the comparative nine month periods ended
September 30, 1996 and 1995 the Company experienced a net profit of $94,669,
compared to $38,491. The increase in profitability for the nine months can
be mainly attributed to a revenue increase of $923,000 and a significant
increase in the gross margin of the Company.
The Company has not paid taxes for several years due to a net loss carry
forward. For the nine month period ended September 30, 1996, the Company
recognized income tax expense of approximately $300, while in 1995 the
Company had an income tax benefit of $33,000.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities is 1.21 at September
30, 1996 as compared to 1.38 as of the December 31, 1995, the calendar
year-end 1995 audit date. The current assets at September 30, 1996 were
$3,840,145 compared to $3,204,336 at December 31, 1995. The current
liabilities of the company at September 30, 1996 were $3,181,229 compared to
$2,318,859 at December 31, 1995.
For the nine month period ending September 30, 1996 the company
experienced an increase in their cash position of $151,262. For the nine
month period ending September 30, 1995 the company experienced a $3,438
decrease in cash. The cash increase for the nine month period ending
September 30, 1996 was a result of cash being provided by operating
activities in excess of cash outflow from operations of $465,267, cash being
provided by net borrowings $2,012,449 and cash being used by investing
activities in the amount of $2,326,454. A significant portion of the
borrowing and use of the borrowings was for the construction of a new
manufacturing, warehouse, and office facility. At September 30, 1996, the
stockholders' equity was $2,897,299. At December 31, 1995 the stockholders'
equity was $2,782,641.
PART II-OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit List.
Exhibit 1 - Unaudited Consolidated Financial Statements of the Company as
of September 30, 1996, and 1995.
(b) Reports on Form 8-K.
None
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on the 11th day of November, 1996.
DYNATEC INTERNATIONAL, INC.
/s/ DONALD M. WOOD
--------------------------------------------------
Donald M. Wood
President-Chief Executive Officer
/s/ DAVID J. WHITE
--------------------------------------------------
David J. White,
Executive Vice-President - Chief Financial Officer
(Principal Financial and Accounting Officer)
5
<PAGE>
EXHIBIT 1
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995
1
<PAGE>
C O N T E N T S
Page
----
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION. . . . . . . . . . 3
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . . . . . . . . 5
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . . 7
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 9
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 12
UNAUDITED CONSOLIDATED COSTS OF SALES (SCHEDULE 1) . . . . . . . . . . . . 22
UNAUDITED CONSOLIDATED COST OF GOODS MANUFACTURED (SCHEDULE 2) . . . . . . 23
UNAUDITED CONSOLIDATED EXPENSES (SCHEDULE 3) . . . . . . . . . . . . . . . 24
2
<PAGE>
The information for the Company's nine month period ended September 30, 1996
is unaudited, but in the opinion of management reflects all adjustments which
are necessary for a fair presentation of the results of operations for such
period. Results for interim periods should not be considered as indicative of
results for a full year.
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, 1996 and December 31, 1995
Audited
Unaudited Year-End
ASSETS September 30 December 31
1996 1995
------------ -----------
CURRENT ASSETS
Cash $ 470,185 $ 318,923
Receivables
Trade accounts (net of allowance of
$14,962 at September 30, 1996 and
$12,629 at December 31, 1995) 1,567,369 1,318,792
Employee advances -- 3,838
Accounts Receivable-related parties
(Note 12) 46,120 83,781
Accounts Receivable-unconsolidated affiliate
(Note 11) 341,788 --
Accounts Receivable-other 81,833 --
Inventory (Note 2) 1,065,049 1,257,180
Prepaid expenses 266,239 213,228
Unamortized debt issue costs 1,562 8,594
---------- ----------
TOTAL CURRENT ASSETS 3,840,145 3,204,336
PROPERTY AND EQUIPMENT (Note 3) 3,850,734 2,123,671
OTHER ASSETS
Deposits 66,220 29,825
Deferred tax asset 62,713 57,181
Note receivable-related party (Note 12) 150,000 150,000
Prepaid Royalties-related party (Note 12) 55,883 71,555
License, patents and agreements (Note 4) 357,535 433,861
---------- ----------
TOTAL OTHER ASSETS 692,351 742,422
---------- ----------
TOTAL ASSETS $8,383,230 $6,070,429
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Audited
Unaudited Year-End
LIABILITIES AND EQUITY September 30 December 31
1996 1995
------------ -----------
CURRENT LIABILITIES
Short-term notes payable (Note 5) $1,422,723 $ 688,899
Current portion of long-term debt (Note 6) 738,705 810,628
Current portion of capital lease
obligations (Note 7) 46,289 31,514
Accounts payable 687,082 457,286
Accrued expenses 152,927 138,726
Accrued advertising 120,000 150,000
Accrued royalties payable 13,203 12,077
Accrued royalties - related parties (Note 12) -- --
Income taxes - current 300 29,729
---------- ----------
TOTAL CURRENT LIABILITIES 3,181,229 2,318,859
LONG-TERM LIABILITIES
Construction in progress obligations (Note 3) -- 861,744
Long-term debt (Note 6) 2,151,924 6,737
Capital lease obligations (Note 7) 141,533 89,203
Deferred income taxes 11,245 11,245
Minority interest in affiliate (Note 11) -- --
---------- ----------
TOTAL LIABILITIES 5,485,931 3,287,788
STOCKHOLDERS' EQUITY
Common stock, $.01 par value (Note 10)
Authorized 100,000,000 shares
Issued 947,529 shares at September 30,
1996
941,219 shares at December 31,
1995 9,474 9,412
Additional paid-in capital 2,719,165 2,699,238
Retained earnings 168,660 73,991
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,897,299 2,782,641
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $8,383,230 $6,070,429
---------- ----------
---------- ----------
4
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Month Periods Ended
September 30, 1996 and 1995
<TABLE>
Three Months Three Months Nine Months Nine Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE
$2,605,008 $2,437,809 $7,464,220 $6,541,099
COST OF SALES
Products (Schedule 1) $1,465,483 1,448,197 4,256,097 3,808,275
Royalties (Note 13) 65,199 74,489 190,507 198,699
---------- ---------- ---------- ----------
TOTAL COST OF SALES 1,530,682 1,522,686 4,446,604 4,006,974
GROSS PROFIT 1,074,326 915,123 3,017,616 2,534,125
EXPENSES
Selling expenses (Sch 3) 589,376 438,675 1,536,732 1,469,416
General & adm exp (Sch 3) 419,329 368,917 1,182,841 1,112,002
Bad debts -- 1,500 23,000 15,000
---------- ---------- ---------- ----------
TOTAL EXPENSES 1,008,705 809,092 2,742,573 2,596,418
---------- ---------- ---------- ----------
OPERATING INCOME/(LOSS) 65,621 106,031 275,043 (62,293)
---------- ---------- ---------- ----------
OTHER INCOME/(EXPENSE)
Interest Income 8,281 -- 21,496 9,878
Research and Development (16,950) (6,161) (25,704) (8,447)
Consulting Income (Note 11) (66,667) -- -- --
Loss from affiliate (Note 11) 77,097 -- -- --
Interest expense (63,581) (45,966) (166,191) (105,659)
Gain (loss) on Sale of Asset (11,074) -- (9,675) 21,428
Miscellaneous Income (21,363) -- -- --
Gain on Sale of Product Rights -- -- -- 150,000
---------- ---------- ---------- ----------
TOTAL OTHER INCOME
/(EXPENSE) (94,257) (52,127) (180,074) 67,200
---------- ---------- ---------- ----------
Income/(loss) from
Continuing Operations (28,636) 53,904 94,969 4,907
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Month Periods Ended
September 30, 1996 and 1995
<TABLE>
Three Months Three Months Nine Months Nine Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
DISCONTINUED OPERATIONS
Gain (Loss) from discontinued
operations -- -- -- --
---------- ---------- ---------- ----------
Income/(loss) before
income taxes (28,636) 53,904 94,969 4,907
---------- ---------- ---------- ----------
INCOME TAX EXPENSE
Income tax expense (benefit)
(Note 8) (34,054) (857) 300 (33,584)
---------- ---------- ---------- ----------
NET INCOME/(LOSS) $ 5,418 $ 54,761 $ 94,669 $ 38,491
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings/(loss) per share:
Continuing Operations .01 .06 .10 .04
Discontinued Operations -- -- -- --
---------- ---------- ---------- ----------
NET EARNINGS/
(LOSS) PER SHARE $ .01 $ .06 $ .10 $ .04
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
6
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Month Periods Ended September 30, 1996 and 1995
Nine month period ending September 30, 1996
-------------------------------------------
Free Total
Restricted Trading Shares
Shares Shares Issued
---------- ------- -------
BALANCE DECEMBER 31, 1995 385,630 555,593 941,223
Shares issued for rights
& non-compete 6,306 -- 6,306
Restricted shares free
trading (72) 72 --
Net Income (September 30, 1996) -- -- --
------- ------- -------
------- ------- -------
BALANCE SEPTEMBER 30, 1996 391,864 555,665 947,529
------- ------- -------
------- ------- -------
Nine month period ending September 30, 1995
-------------------------------------------
Free Total
Restricted Trading Shares
Shares Shares Issued
---------- ------- -------
BALANCE DECEMBER 31, 1994 331,481 548,797 880,278
Stock relinquished to
purchase options (15,971) (3,500) (19,471)
Restricted shares free
trading (10,291) 10,291 --
Shares issued pursuant to
stock option agreements 72,000 -- 72,000
Shares issued for rights
and non-compete 6,309 -- 6,309
Net Income (September 30, 1995) -- -- --
------- ------- -------
BALANCE SEPTEMBER 30, 1995 383,528 555,588 939,116
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of these financial statements
7
<PAGE>
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
------ ---------- -------- ----------
$9,412 $2,699,238 $ 73,991 $2,782,641
62 19,927 -- 19,989
-- -- -- --
-- -- 94,669 94,669
------ ---------- -------- ----------
------ ---------- -------- ----------
$9,474 $2,719,165 $168,660 $2,897,299
------ ---------- -------- ----------
------ ---------- -------- ----------
8,803 2,667,668 26,078 2,702,549
(195) 195 -- --
-- -- -- --
720 (4,251) -- (3,531)
64 46,805 -- 46,869
-- -- 38,491 38,491
------ ---------- -------- ----------
$9,392 $2,710,417 $ 64,569 $2,784,378
------ ---------- -------- ----------
------ ---------- -------- ----------
8
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three and Nine Month Periods Ended September 30, 1996 and 1995
<TABLE>
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash received from
customers $ 2,584,773 $ 2,388,005 $ 8,073,246 $ 6,974,931
Cash paid to suppliers
& employees (2,311,413) (2,143,214) (7,421,861) (6,406,990)
Interest paid (65,187) (39,081) (164,129) (94,788)
Income taxes paid ( -- ) (50) (21,989) (26,347)
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 208,173 205,660 465,267 446,806
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of Land -- (626,153) -- (626,153)
Proceeds from Sales of Assets 17,778 -- 17,778 10,320
License, Patents,
Rights expenditures -- -- -- (250,000)
Received from related parties 41,538 -- 37,661 (97,568)
Stock issuance for rights
and non-compete 6,663 31,246 19,989 46,869
Purchase of stock options -- -- -- (3,531)
Capital expenditures (2,400,783) (51,039) (2,571,071) (330,162)
Minority Interest in affiliate (77,097) -- -- --
Construction in Progress 1,460,538 -- 592,810 --
Advances to affiliate 68,087 -- (341,788) --
Advances to third parties (81,833) -- (81,833) --
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (965,109) (645,946) (2,326,454) (1,250,225)
</TABLE>
9
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three and Nine Month Periods Ended September 30, 1996 and 1995
<TABLE>
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (payments)
under line of credit
agreements 333,823 238,815 733,824 263,387
Net (payments) borrowings
under capital lease
obligations 45,433 (4,744) 67,105 40,514
Net (payments) borrowings
on long-term debt 2,119,466 315,336 2,073,264 496,080
Net borrowings (payments)
on construction obligations (1,531,079) -- (861,744) --
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 967,643 549,407 2,012,449 799,981
NET INCREASE (DECREASE)
IN CASH 210,707 109,121 151,262 (3,438)
CASH AT BEGINNING OF
PERIOD 259,478 265,562 318,923 378,121
CASH AT END OF PERIOD $ 470,185 $ 374,683 $ 470,185 $ 374,683
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital acquisitions financed by:
Accounts payable 136,137 51,039 306,425 330,162
Issuance of debt 2,200,000 -- 2,200,000 --
Capital lease obligations 64,646 -- 64,646 --
----------- ----------- ----------- -----------
</TABLE>
10
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three and Nine Month Periods Ended September 30, 1996 and 1995
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (loss) $ 5,418 $ 54,761 94,669 38,491
Adjustments to reconcile
net (loss) to net cash
provided by operating
activities:
Depreciation 83,137 69,055 233,420 189,859
Amortization 25,442 35,056 76,326 92,728
Provisions for losses
on accounts receivable -- 751 2,333 (2,464)
Change in assets & liabilities:
Decrease (increase) in
accounts receivable (103,925) (322,885) (250,910) 79,648
Decrease (increase) in
Employee advances 1,848 -- 3,838 523
Decrease (increase) in
inventory 91,940 165,052 192,131 23,656
Decrease (increase) in
prepaids (68,416) 68,369 (53,011) 120,248
Decrease (increase) in
prepaid royalties -- -- -- 158
Decrease (increase) in
deposits 7,112 -- (36,395) --
Decrease (increase) in
debt issue costs 2,344 1,875 7,032 (625)
Decrease (increase) in
prepaids-related 22,221 -- 15,672 (78,235)
Decrease (increase) in
other assests -- -- (5,532) (79,107)
Increase (decrease) in
royalties payable (1,834) 677 1,126 (36,120)
Increase (decrease) in
royalties payable-
related -- 31,811 -- 36,159
Increase (decrease) in
accounts payable 94,293 57,954 229,796 48,905
Increase (decrease) in
accrued expenses 45,387 2,766 14,201 (37,927)
Increase (decrease) in
income tax payable (41,794) 10,898 (29,429) 27,675
Increase (decrease) in
accrued advertising 45,000 29,520 (30,000) 23,234
TOTAL ADJUSTMENTS $ 202,755 $ 150,899 $ 370,598 $ 408,315
----------- ----------- ----------- -----------
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES $ 208,173 $ 205,660 $ 465,267 $ 446,806
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods
ended September 30, 1996 and 1995 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1996.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-KSB
for the period ended December 31, 1995.
NOTE 2 - INVENTORY
Inventory as of September 30, 1996 and December 31, 1995 is summarized
as follows:
September 30 December 31
1996 1995
------------ -----------
Raw $ 433,783 $ 390,490
Finished 631,266 866,690
---------- ----------
$1,065,049 $1,257,180
---------- ----------
---------- ----------
Valued at lower of cost or market:
September 30 December 31
1996 1995
------------ -----------
LIFO basis $1,065,049 $1,257,180
12
<PAGE>
NOTE 2 - INVENTORY (CONTINUED)
Dynatec inventories are stated at the lower of cost or market,
cost being determined using the last-in, first-out (LIFO) method.
The current cost of inventories exceeded the carrying amount by
approximately $12,000 at
September 30, 1996.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1996 and December 31,
1995 are detailed in the following summary:
<TABLE>
<CAPTION>
Net Book Value
-------------------------
Accumulated Sept. 30 December 31
Cost Depreciation 1996 1995
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Equipment $2,107,232 $1,418,458 $ 688,774 $ 653,992
Leasehold impr. 6,410 76 6,334 12,795
Office equip. 224,096 90,281 133,815 107,984
Signs 10,646 8,216 2,430 -
Vehicles 50,377 18,377 32,000 37,152
Capital leases 216,872 58,661 158,211 93,989
Land 626,153 - 626,153 624,949
Construction in progress 2,207,734 4,717 2,203,017 592,810
---------- ---------- ---------- ----------
$5,449,520 $1,598,786 $3,850,734 $2,123,671
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 nine
months ended September 30, 1996 amounted to $233,420 ($189,859 for
September 30, 1995).
Rental expense charged to operations for the nine month periods ending
September 30, 1996 and 1995 is summarized below:
09-30-96 09-30-95
-------- --------
Gross rental expense $116,800 $109,485
13
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996 and 1995
NOTE 4 - LICENSE, PATENTS AND AGREEMENTS
These agreements represent amounts paid for the rights to manufacture,
produce, sell and market various products. 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 $62,500. The remainder of said costs are associated
with agreements for the telephone accessory lines. Such costs are
amortized on the straight-line method in amounts sufficient to write
off the costs over their estimated economic lives. Most of these
rights are non-exclusive. Amortization for the nine months ended
September 30, 1996 amounted to $76,326 ($92,728 for 1995).
NOTE 5 - SHORT-TERM NOTES PAYABLE
Short-term notes payable as of September 30, 1996 and December 31,
1995, are detailed in the following summary:
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ -----------
<S> <C> <C>
Revolving line of credit up to $1,500,000
with a bank; interest payable monthly at
1.0% over prime; secured by receivables,
inventory and the personal guarantee of
Donald M. Wood, CEO and director; due
November 30, 1996. $1,422,723 $1,103,340
Less construction in progress obligations: - (414,441)
---------- ----------
$1,422,723 $ 688,899
</TABLE>
Under the terms of the 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 September 30, 1996 the Company had a ratio of
current assets to current liabilities of 1.21 to 1 which is not in
compliance with the provisions requiring a minimum ratio of 1.5 to 1.
Pertinent data regarding aggregate short-term borrowings is as follows:
September 30 December 31
1996 1995
------------ -----------
Maximum outstanding $1,553,340 $1,103,340
Average outstanding 1,281,667 897,022
Weighted average interest rate
for the nine month periods 9.25% 10.15%
NOTE 6 - LONG-TERM DEBT
14
<PAGE>
Long-term notes payable as of September 30, 1996 and December 31,
1995, are detailed in the following summary:
September 30 December 31
1996 1995
------------ -----------
Note payable to financing company
due in monthly installments of
$588 with interest at 8.5%; due
December 1997. -- 12,915
Revolving line of credit payable to
a bank, interest at prime plus 1.0%
amortized over 60 months. 648,411 692,085
Note payable to a company due in
quarterly installments of $15,598
with interest at 8.0% due
December 1996. 15,598 60,575
Note payable to a company due in
a lump sum of $25,000; due March
1997 or sooner based on product
sales; interest at 8% unsecured. 25,000 25,000
Note payable to an individual in
quarterly installments of stock of
the Company through December 22,
1996; no interest; unsecured. 6,663 26,790
Note payable to a bank, with monthly
installments of $10,480, interest at
prime plus 2.0%, amortized over
20 years. 1,199,642 --
Note payable to the SBA in monthly
installments of $8,541 with interest
at 7.32%, amortized over 20 years. 995,315 --
Total long-term debt 2,890,629 817,365
Less: current portion (738,705) (810,628)
---------- ---------
Total long-term debt excluding
current portion $2,151,924 $ 6,737
---------- ---------
---------- ---------
15
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996 and 1995
NOTE 6 - LONG-TERM DEBT (CONTINUED)
Aggregate maturities are as follows:
Twelve months ending September 30, 1997 923,924
1998 228,252
1999 228,252
2000 228,252
2001 228,252
Later 1,053,697
----------
Total long-term debt $2,890,629
----------
----------
16
<PAGE>
NOTE 7 - 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".
The following analysis represents property under capital lease at
September 30, 1996 and December 31, 1995.
September 30 December 31
1996 1995
-------- ---------
Equipment $216,872 $ 148,405
Less: Accumulated depreciation (58,661) (54,416)
-------- ---------
Net property under capital lease $158,211 $ 93,989
-------- ---------
-------- ---------
At September 30, 1996, the Company is liable under the terms of non-
cancelable leases for the following minimum lease commitments:
Capital Operating
Leases Leases
-------- ---------
Year Ended September 30:
1997 $ 61,617 $56,465
1998 78,303 --
1999 40,254 --
2000 14,918 --
2001 20,094 --
Later years -- --
-------- -------
Total minimum lease payments $215,186 $56,465
Less: Interest (27,364) -------
-------- -------
Present value of net minimum
lease payments $187,822
Less: Current portion (46,289)
--------
Capital lease obligations
payable long-term $141,533
--------
--------
NOTE 8 - INCOME TAX EXPENSE
The provisions for taxes on earnings from continuing operations
consisted of the following:
09-30-96 09-30-95
-------- --------
Current
Federal $ -- $(33,584)
State 300 --
---- --------
300 (33,584)
---- --------
---- --------
17
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996 and 1995
NOTE 9 - MAJOR CUSTOMERS
Sales to major customers for the nine months ended September 30, 1996
are summarized as follows:
Percent of:
------------------------
Sales Segment Company Wide
Customer Dollars Revenues Revenues
-------- ------- -------- --------
AT&T $ 380,237 8% 5%
United Stationers 473,561 10% 6%
S.P. Richards 553,816 12% 7%
National Hardware 421,575 19% 6%
Gemini Industries 526,600 11% 7%
WalMart 319,888 14% 4%
Sams Club 453,901 10% 6%
Boise Cascade 461,105 10% 6%
NOTE 10 - COMMON STOCK
During the first nine months of calendar year 1995 the company issued
72,000 shares of stock pursuant to the Dynatec International, Inc.
incentive stock option plans of 1987 and 1989. As part of the
issuance, 19,471 shares of stock were relinquished in order to
purchase the stocks. On February 22, 1995, the company completed the
acquisition of all of the doorstop business, and some of the doorstop
inventory of All R Prodx, Inc. a Utah corporation. As part of this
transaction the company signed an agreement to issue 16,818 shares in
eight equal quarterly installments. Pursuant to this agreement, the
Company issued 6,309 shares of stock in the first nine months of 1996
and 6,306 shares in the first nine months of 1995.
18
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996 and 1995
NOTE 11 - UNCONSOLIDATED AFFILIATE AND MINORITY INTEREST
The account receivable from unconsolidated affiliate at September 30,
1996 is calculated as follows:
September 30
1996
---------
Cash Advances $ 341,788
---------
---------
On January 12, 1996, WiTec International, 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 included Dynatec
International, Inc. and Muito Bem Ltd. (The Dynatec Group) and Weiser
Telecommunications, Inc. and Margaret Weiser (the Weiser Group). The
president of the Company is the beneficial owner of Muito Bem Ltd.
The company and Witec signed a dissolution agreement in early October
1996. As part of the agreement Dynatec will begin receiving payments
on the account receivable in early 1997. Dynatec is also absolved of
the recognition of any gains or losses of Witec. The receivable owed
to the company was $341,788 at September 30, 1996.
NOTE 12 - 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. Donald M. Wood, CEO and director of the
Company is the beneficial owner of one-half of WAC Research. In
August 1986, WAC Research, Inc. purchased a 10% royalty right from the
inventor of Softalk and related products in a private transaction.
This involved both cash and stock in a transaction valued between one
and two million dollars being paid to Practical Innovations, Inc. At
that time, WAC determined in conjunction with the Board of Directors
of Dynatec that the 10% royalty was onerous and not sustainable;
therefore, WAC agreed to lower the royalty to 5%.
During 1995, the Company sold all rights and interest in various
discontinued products to WAC Research for $150,000 in the form of a
demand note bearing 8% interest. As part of the transaction,
inventory and molds were also sold at cost to WAC. During calendar
years 1996 and 1995, WAC assumed responsibility for various travel and
other expenses related to Dynatec.
The royalty reduction, purchase of molds, rights, and products, as
well as the assumption of expenses as explained above were done in an
effort to increase the profitability and/or cash flows of the Company.
Management is currently negotiating with WAC Research in regards to
the disposition of these items. Management is confident that a
solution beneficial to the Company
19
<PAGE>
can be reached with WAC.
NOTE 13 - ROYALTIES
The following is a summary of royalties for the nine month periods
ended September 30, 1996 and 1995.
Terms 1996 1995
--------- -------- --------
WAC Research
Telephone accessories 5% of net sales. $131,342 $127,904
Hardware products (Same) 9,772 8,413
Other Entities 3% of net sales prior to 1996
Hardware products 1% of net sales 14,337 33,825
Hardware products 10% of net sales 33,157 28,557
Miscellaneous products 1,899 --
-------- --------
$190,507 $198,699
-------- --------
-------- --------
NOTE 14 - 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 September 30, 1996, the Company had
outstanding letters of credit in the amount of $34,385 for the future
purchases of inventory.
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. Concentration 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 excess of the FDIC
insurance limit.
20
<PAGE>
NOTE 15 - SEGMENT REPORTING
A summary of information about the Company's operations by segment
follows:
September 30 September 30
1996 1995
------------ ------------
Revenues:
Telephone accessories $4,670,628 $3,990,424
Hardware products 2,262,231 1,912,143
Batteries 44,302 415,725
Other segments 487,059 222,807
---------- ----------
Total $7,464,220 $6,541,099
---------- ----------
---------- ----------
Operating income (loss):
Telephone accessories $ 391,442 $ 488,740
Hardware products (49,856) (434,055)
Batteries (58,964) (99,446)
Other segments (7,579) (17,532)
---------- ----------
Total $ 275,043 $ (62,293)
---------- ----------
---------- ----------
Identifiable assets:
Telephone accessories $7,796,249 $4,545,542
Hardware products 551,993 535,437
Batteries -- 427,699
Other segments 34,988 104,352
---------- ----------
Total $8,383,230 $5,613,030
---------- ----------
---------- ----------
Depreciation and amortization:
Telephone accessories $ 180,589 $ 166,937
Hardware products 111,276 105,711
Batteries 2,334 9,546
Other segments 15,547 393
---------- ----------
Total $ 309,746 $ 282,587
---------- ----------
---------- ----------
Capital expenditures:
Telephone accessories $2,499,753 $ 126,019
Hardware products 71,318 159,339
Batteries - 43,437
Other segments - 1,367
---------- ----------
Total $2,571,071 $ 330,162
---------- ----------
---------- ----------
21
<PAGE>
Schedule 1
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED COST OF SALES
For the Three and Nine Month periods ended September 30, 1996 and 1995
<TABLE>
Three Months Ended Nine Months Ended
----------------------- -----------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
COST OF SALES - PRODUCTS
Beginning inventory finished $ 784,228 $1,092,682 $ 866,690 $ 218,369
Cost of goods manufactured
(Schedule 2) 1,287,203 1,112,045 3,944,722 4,289,073
Amortization 25,318 34,931 75,951 92,294
Less ending inv.-finished (631,266) (791,461) (631,266) (791,461)
---------- ---------- ---------- ----------
TOTAL COST OF SALES-PRODUCT $1,465,483 $1,448,197 $4,256,097 $3,808,275
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
Schedule 2
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED COST OF GOODS MANUFACTURED
For the Three and Nine month periods ended September 30, 1996 and 1995
<TABLE>
Three Months Ended Nine Months Ended
----------------------- -----------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
COST OF GOODS MANUFACTURED
Beginning inventory-raw $ 372,761 $ 329,795 $ 390,490 $ 999,712
Materials - raw 1,072,811 965,248 3,138,200 2,854,243
Freight in 44,047 33,303 156,166 120,441
Depreciation 56,328 46,208 155,439 126,489
Labor 153,272 173,607 461,746 575,366
Repairs & maintenance -- 7,089 9,630 16,157
Miscellaneous - direct 21,767 22,759 66,834 62,629
Less: ending inventory-raw (433,783) (465,964) (433,783) (465,964)
---------- ---------- ---------- ----------
TOTAL COST OF GOODS MANUFACTURED $1,287,203 $1,112,045 $3,944,722 $4,289,073
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Schedule 3
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED EXPENSES
For the Three and Nine month periods ended September 30, 1996 and 1995
<TABLE>
Three Months Ended Nine Months Ended
------------------- ------------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
SELLING EXPENSES
Advertising $127,868 $ 37,500 $ 202,808 $ 68,565
Commissions 149,908 123,327 409,272 358,907
Depreciation - selling 14,361 13,782 44,330 39,091
Freight out 90,560 81,751 269,720 410,619
Miscellaneous 367 1,791 5,765 16,046
Promotions & Literature 37,369 30,918 103,783 100,052
Salaries-sales 136,770 116,727 391,874 318,420
Travel & entertainment 32,173 32,879 109,180 157,716
-------- -------- ---------- ----------
TOTAL SELLING EXPENSES $589,376 $438,675 $1,536,732 $1,469,416
-------- -------- ---------- ----------
-------- -------- ---------- ----------
GENERAL & ADMINISTRATIVE EXPENSES
Corporate expense $ 51,907 $ 73,526 $ 130,217 $ 160,886
Depreciation & amortization office 13,044 9,190 34,498 24,713
Insurance 53,337 40,019 146,083 152,614
Legal & accounting 36,028 28,942 88,651 72,729
Miscellaneous - 2,372 4,165 2,657
Office Expense 39,744 19,754 102,572 69,255
Payroll Taxes 24,943 32,133 98,496 109,951
Rent 34,665 35,117 116,800 109,485
Salaries-office & officers 128,947 100,851 359,077 316,731
Taxes 4,976 8,167 16,643 18,304
Telephone 17,321 11,581 46,742 41,574
Utilities 14,417 7,265 38,897 33,103
-------- -------- ---------- ----------
TOTAL GENERAL & ADMIN EXPENSE $419,329 $368,917 $1,182,841 $1,112,002
-------- -------- ---------- ----------
-------- -------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 470,185
<SECURITIES> 0
<RECEIVABLES> 2,037,110
<ALLOWANCES> 0
<INVENTORY> 1,065,049
<CURRENT-ASSETS> 3,840,145
<PP&E> 3,850,734
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,383,230
<CURRENT-LIABILITIES> 3,181,229
<BONDS> 0
0
0
<COMMON> 9,474
<OTHER-SE> 2,887,825
<TOTAL-LIABILITY-AND-EQUITY> 8,383,230
<SALES> 7,464,220
<TOTAL-REVENUES> 7,464,220
<CGS> 4,446,604
<TOTAL-COSTS> 2,742,573
<OTHER-EXPENSES> 180,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166,191
<INCOME-PRETAX> 94,969
<INCOME-TAX> 300
<INCOME-CONTINUING> 94,969
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,669
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
