<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: March 31, 1997
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)
1820 South 3594 West
Salt Lake City, UT 84104
------------------ --------
(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
April 30, 1997 were 2,224,104. The aggregate market value of voting stock
held by non affiliates of the Company at April 30, 1997 was $10,499,406.
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 first quarter ended March 31, 1997, and results of calendar
year 1996. These Financial Statements are hereby incorporated by reference. The
information for the Company's first quarter ended March 31, 1997 and 1996 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 first quarter of calendar year 1997 ending on March
31, 1997 were $2,554,618. Total revenues for the first quarter of calendar year
1996 ending on March 31, 1996 were $2,164,791. This represents a $389,827 (18%)
increase in revenues for the quarter ended March 31, 1997 compared to March 31,
1996. The telephone accessories products experienced a overall increase in
sales. Specifically, the Softalk product experienced an increase of $11,750
(3%) over the same period for the prior year while the Mini-Softalk had an
increase of $13,147 (14%). The Twisstop product experienced an increase of
$57,910 (16%) as a result of increased sales to volume wholesalers. Sales to
wholesalers are expected to rise in fiscal year 1997. TwistCord sales decreased
by $3,853 (6%). The Universal Softalk registered a sales increase of $2,831
(3%) for the three month period ending March 31, 1997 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 sales increases of
$186,233 (69%). The Company introduced the Value Pack product in early 1996.
The Value Pack includes a Softalk II, TwistCord and Twisstop in a retail
package. The Value Pack experienced sales of $4,486 in the first quarter of
1997, a decrease of $1,185 (21%) over the same period of the prior calendar
year. Hardware/Housewares products experienced an overall increase in sales of
$139,567 over the same period for the prior year principally caused by a
increase in Sofstop sales of $20,695 (37%), an increase in Expand-A-Shelf sales
of $35,209 (10%), and an increase in Mini Expand-A-Shelf sales of $27,083 (88%).
Several new home organization products were being marketed in late 1996 and
early 1997 including the Medicine Cabinet Organizer, Drawer Organizer, Freedom
Hanger, and Tote Bags. These items experienced sales of $119,796 collectively
in the first quarter of calendar year 1997. Various other hardware/housewares
products experienced sales decreases including; Cover-Up $32,374 (32%), Hide It
$926 (45%), Wedge $776 (2%), Mega Shelf $9,620 (7%), and the Expandable Book
Shelf $19,520 (59%). The miscellaneous product lines decreased by $100,078 as
the Company discontinued its sales efforts with Fuji Film, and contract
packaging for AT&T. The Company made the decision in 1996 to discontinue its
marketing efforts with the Fuji Novel line of dry cell batteries. Sales of the
batteries have decreased by $44,628 over the three month period of the previous
year. The management of the Company believes that a great opportunity exists
with the home organization products. This is an expanding market that the
Company will be concentrating efforts on. During late 1996, the Company entered
into the flashlight production and marketing business with a high end line of
flashlight products. The Company has been marketing several items under the
Nordic Lites name and operating a plant in Texas. Management has also begun
aggressively pursuing the production of lights in the far east and expects to
have product from such sources within the next calendar quarter. Such products
will allow for higher margins and product profitability. At this time
management is unsure of the future of the Texas facility. Sales during the
first quarter of calendar year 1997 of flashlight product amounted to $128,143.
The Company experienced a net loss of $511,864 in the first quarter of
3
<PAGE>
calendar year 1997. For the first quarter of the prior year the company
experienced a net loss of $112,316. The decrease in profitability is largely
due to the decline of margins in the telephone accessory products and
substantial increase in labor and the cost of plastics. The Company also had a
significant increase in selling costs, in particular; advertising, freight and
promotions. General and administrative costs have also increased. The Company
has also been involved in significant research and development costs for a new
line of wired and wireless headsets, a new telecommunications product, and the
development of an overseas supplier of flashlight products. Management believes
that such expenses will result in a line of new products within the next
calendar quarter.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities is .96 at March 31, 1997
as compared to .96 as of December 31, 1996 calendar year-end 1996 audit date.
The current assets at March 31, 1997 were $3,271,517 compared to $2,967,434 at
December 31, 1996. The current liabilities of the company at March 31, 1997
were $3,417,992 compared to $3,088,908 at December 31, 1996.
For the three month period ending March 31, 1997 the Company experienced a
decrease in their cash position of $178,657. For the three month period ending
March 31, 1996 the company experienced an $18,817 increase in cash.
The cash decrease for the three month period ending March 31, 1997 was a
result of cash being used by operating activities in excess of cash inflow from
operations of $612,622, cash being used to pay down net borrowings $39,212, and
cash being generated by investing activities $473,177.
At March 31, 1997, the stockholders' equity was $2,632,418. At December
31, 1996 the stockholders' equity was $2,644,282.
PART II-OTHER INFORMATION
ITEM 3. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibit List.
Exhibit 27-SDS
(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 ___th day of May, 1997.
DYNATEC INTERNATIONAL, INC.
/s/ Donald M. Wood
----------------------------------------
Donald M. Wood
President-Chief Executive Officer
/s/ David J. White
----------------------------------------
David J. White,
Vice-President - Chief Financial Officer
(Principal Financial and Accounting Officer)
5
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DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
1
<PAGE>
C O N T E N T S
Page
UNAUDITED CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . .3
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . . . . . . . . .5
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . . .6
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . .7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . .9
UNAUDITED CONSOLIDATED COSTS OF SALES (SCHEDULE 1) . . . . . . . . . . . . 20
UNAUDITED CONSOLIDATED SELLING EXPENSES (SCHEDULE 2) . . . . . . . . . . . 21
UNAUDITED CONSOLIDATED GENERAL & ADMINISTRATIVE EXPENSES (SCHEDULE 3). . . 22
2
<PAGE>
The information for the Company's first quarter ended March 31, 1997 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 BALANCE SHEETS
March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Audited
Calendar
Unaudited Year-End
ASSETS March 31 December 31
1997 1996
------------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 61,488 $ 240,145
Receivables
Trade accounts-net 1,511,895 1,125,750
Employee advances - -
Related parties (Note 12) 84,543 145,419
Inventory (Note 2) 1,407,947 1,256,440
Prepaid expenses 149,716 133,997
Prepaid Income Tax 46,160 46,160
Trade Show Deposits 9,117 15,617
Unamortized debt issue costs 651 3,906
--------- ----------
TOTAL CURRENT ASSETS 3,271,517 2,967,434
PROPERTY AND EQUIPMENT (Note 3) 4,651,027 4,673,999
OTHER ASSETS
Deposits 52,645 22,355
Deferred tax asset 69,960 69,960
Note receivable-related party (Note 12) 150,000 150,000
License, patents and agreements (Note 4) 316,026 332,092
---------- -----------
TOTAL OTHER ASSETS 588,631 574,407
----------- -----------
TOTAL ASSETS $ 8,511,175 $ 8,215,840
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Audited
Calendar
Unaudited Year-End
LIABILITIES AND EQUITY March 31 December 31
1997 1996
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Short-term notes payable (Note 5) $ 850,507 $ 1,222,722
Current portion of long-term debt (Note 6) 1,149,718 795,415
Current portion of capital lease obligations (Note 7) 22,948 22,363
Accounts payable 925,326 523,668
Accrued expenses 426,827 489,552
Accrued royalties - related parties (Note 12) 42,066 34,688
Income taxes - current 600 500
-------- --------
TOTAL CURRENT LIABILITIES 3,417,992 3,088,908
LONG-TERM LIABILITIES
Long-term debt (Note 6) 2,378,560 2,393,052
Capital lease obligations (Note 7) 68,803 76,196
Deferred income taxes 13,402 13,402
---------- ----------
TOTAL LIABILITIES 5,878,757 5,571,558
STOCKHOLDERS' EQUITY
Common stock, $.01 par value (Note 10)
Authorized 100,000,000 shares
Issued 2,224,104 shares at March 31, 1997
1,974,104 shares at December 31, 1996 22,241 19,741
Additional paid-in capital 4,093,199 3,595,699
Retained earnings (1,483,022) (971,158)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY 2,632,418 2,644,282
------------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 8,511,175 $ 8,215,840
------------- ------------
------------- ------------
</TABLE>
4
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month Periods Ended
March 31, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31 Ended March 31
1997 1996
-------------- --------------
<S> <C> <C>
SALES $ 2,554,618 $ 2,164,791
COST OF SALES (Schedule 1) 1,779,783 1,335,753
----------- -----------
GROSS PROFIT 774,835 829,038
OPERATING EXPENSES
Selling expenses (Schedule 2) 587,749 472,788
Research & Development Expenses 136,154 8,754
General & Administrative (Schedule 2) 457,563 375,591
----------- -----------
TOTAL EXPENSES 1,181,466 857,133
----------- -----------
OPERATING INCOME/(LOSS) (406,631) (28,095)
----------- -----------
OTHER INCOME/(EXPENSE)
Interest Income 3,982 6,684
Interest Expense (103,715) (41,070)
Consulting Income - 16,667
Loss from affiliate - (50,202)
Bad Debts (5,000) (16,000)
----------- -----------
TOTAL OTHER INCOME/(EXPENSE) (104,733) (83,921)
------------ ------------
Income/(loss) from
Continuing Operations (511,364) (112,016)
INCOME TAX EXPENSE
Income tax expense
(Note 8) 500 300
------------- -------------
NET INCOME/(LOSS) $ (511,864) $ (112,316)
------------- -------------
------------- -------------
Earnings/ (loss) per share:
Continuing Operations (.23) (.08)
------------- ------------
NET EARNINGS/
(loss) PER SHARE $ (.23) $ (.08)
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Month Periods Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Three month period ending March 31, 1997
----------------------------------------
Total Additional
Shares Common Paid-In Retained
Issued Stock Capital Earnings
-------- ------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 1,974,104 $ 19,741 $ 3,595,699 $ (971,158)
Shares issued pursuant to
Regulation S Offshore
Stock offering 250,000 2,500 497,500 -
Net Income (March 31, 1997) - - - (511,864)
-------------- --------- ------------- ------------
-------------- --------- ------------- ------------
BALANCE MARCH 31, 1997 2,224,104 $ 22,241 $ 4,093,199 $(1,483,022)
-------------- --------- ------------- ------------
-------------- --------- ------------- ------------
Three month period ending March 31, 1996
----------------------------------------
Total Additional
Shares Common Paid-In Retained
Issued Stock Capital Earnings
-------- ------- ----------- ----------
BALANCE DECEMBER 31, 1995 1,411,829 $ 14,118 $ 2,694,532 $ 73,991
Shares issued for rights
& non-compete 3,153 32 6,631 (112,319)
Net Income (March 31, 1996) - - - -
--------- -------- ----------- --------
--------- -------- ----------- --------
BALANCE MARCH 31, 1996 1,414,982 $ 14,150 $ 2,701,163 $ (38,328)
------------ ---------- ------------- -----------
------------ ---------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Month Periods Ended March 31, 1997 and 1996
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
March 31 March 31
1997 1996
----------- ------------
Net Income (loss) (511,864) $ (112,316)
Adjustments to reconcile
net (loss) to net cash
provided by operating
activities:
Depreciation 110,670 69,709
Amortization 16,067 25,442
Provisions for losses
on accounts receivable (14,577) (3,899)
Change in assets & liabilities:
Decrease (increase) in
accounts receivable (371,568) 274,153
Decrease (increase) in
Employee advances - 1,105
Decrease (increase) in
inventory (151,507) (30,282)
Decrease (increase) in
prepaids (15,719) 33,750
Decrease (increase) in
trade show deposits 6,500 -
Decrease (increase) in
deposits (30,290) (11,283)
Decrease (increase) in
debt issue costs 3,255 2,344
Decrease (increase) in
other assets - (5,534)
Increase (decrease) in
royalties payable-
related 7,378 24,260
Increase (decrease) in
accounts payable 401,658 (54,306)
Increase (decrease) in
accrued expenses (62,725) (95,058)
Increase (decrease) in
income tax payable 100 (17,950)
TOTAL ADJUSTMENTS $ (100,758) $ 212,451
------------ ----------
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES $ (612,622) $ 100,135
------------ ----------
------------ ----------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Month Periods Ended March 31, 1997 and 1996
March 31 March 31
1997 1996
----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Received from related parties 60,876 13,121
Stock issuance for rights
and non-compete - 6,664
Issuance of stock pursuant
to Regulation S offering 500,000 -
Capital expenditures (87,699) (28,852)
Minority Interest in affiliate - 50,202
Construction in Progress - (373,197)
Advances to affiliate - (149,352)
------------ -------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 473,177 (481,414)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (payments)
under line of credit
agreements (372,215) 100,000
Net (payments) borrowings
under capital lease
obligations (6,808) (4,712)
Net (payments) borrowings
on long-term debt 339,811 4,111
Net short-term (payments)
borrowings - -
Net borrowings (payments)
on construction obligations - 300,697
-------- ----------
NET CASH (USED) BY
FINANCING ACTIVITIES (39,212) 400,096
NET INCREASE (DECREASE)
IN CASH (178,657) 18,817
CASH AT BEGINNING OF
PERIOD 240,145 318,923
CASH AT END OF PERIOD $ 61,488 $ 337,740
---------- -----------
---------- -----------
CASH PAID FOR:
Interest 93,587 40,059
Income taxes 400 18,250
NON-CASH INVESTING AND
FINANCING ACTIVITIES
Issuance of stock for rights
and non-compete agreement - 6,664
Issuance of stock for capital 500,000 -
Acquisition of property and
equipment by accounts payable 87,699 28,852
8
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dynatec International, Inc. (the Company) was incorporated in the
State of Utah on January 29, 1981. The Company and its
subsidiaries are principally engaged in the manufacture, assembly
and distribution of consumer products consisting primarily of
telephone accessories, hardware and housewares and other related
products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Softalk, Inc., Arnco
Marketing, Inc., Softalk Communications, Inc. and Nordic
Technologies, Inc. All significant intercompany accounts and
transactions have been eliminated.
Softalk Communications, Inc. was incorporated in the State of
Utah on December 23, 1996 and is engaged in research and
development of a telephone headset product. Through March 31,
1997, this subsidiary has incurred $89,898 of expenditures with
respect to this product which have been reflected as research and
development expenses in the accompanying consolidated financial
statements. The product is not yet in production and,
accordingly, no related sales have occurred. Softalk, Inc., has
also been involved in research and development on various
products. The total spent on such research and development was
$46,256.
Nordic Technologies, Inc. (Nordic) was incorporated in the State
of Utah on October 25, 1996. Effective December 1, 1996, Nordic
and the Company entered into an agreement with unrelated parties
to acquire certain assets and assume certain related liabilities
in exchange for 550,000 shares of restricted common stock of the
Company. This acquisition has been accounted for using the
purchase method. The assets and liabilities were placed into
Nordic and valued at the estimated market value of the Company's
common stock which approximated fair market or replacement value
of the acquired assets, net of the assumed liabilities. These
assets are being utilized to manufacture and assemble flashlight
products.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
Certain amounts in the consolidated financial statements of prior
periods have been reclassified to be consistent with the current
year presentation.
9
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE OF REPORTING PERIOD
The Company elected to change its year-end from June 30 to
December 31, first effective for the period ended December 31,
1995.
The accompanying consolidated financial statements present the
results of operations, changes in stockholders' equity and cash
flows for the three months ended March 31, 1997 and 1996.
CASH AND CASH EQUIVALENTS
For purposes of financial statement presentation, the Company
considers all highly liquid investments with a maturity of three
months or less, from the date of purchase, to be cash
equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are reflected net of allowance for doubtful
accounts in the accompanying consolidated financial statements.
These amounts were determined to be $14,423 and $29,000 at March
31, 1997 and December 31, 1996 respectively.
INVENTORY
Inventory is recorded in the Company's subsidiaries Softalk, Inc.
and Nordic Technologies, Inc. at the lower of cost, (last-in,
first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost with depreciation
computed on the straight line method. Property and equipment are
depreciated over the following estimated useful lives:
Capital Leases 5-7 years
Machinery and Equipment 5-10 years
Office Equipment 5-7 years
Signs 5-7 years
Vehicles 5 years
UNAMORTIZED DEBT ISSUE COSTS
Unamortized debt issue costs represent costs associated with
borrowings and are amortized using the straight-line method over
the life of the respective debt issue.
10
<PAGE>
DYNATEC INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 consolidated 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.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated using a weighted
average of common stock. Stock options issued are not considered
to be common stock equivalents for purposes of calculating net
income (loss) per share as they are anti-dilutive.
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.
FORWARD STOCK SPLIT
On November 12, 1996, the shareholders and board of directors
authorized the Company to forward split its shares of common
stock on a 1 1/2 shares for 1 share basis. All references to
shares outstanding and net income (loss) per share have been
restated on a retroactive basis to reflect this forward stock
split.
11
<PAGE>
DYNATEC INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1996, the
Company had bank deposits in excess of federally insured limits.
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts o
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 - INVENTORY
Inventory as of March 31, 1997 and December 31, 1996 is
summarized as follows:
March 31 December 31
1997 1996
---------- -----------
Raw $ 771,822 $ 583,138
Finished 636,125 673,302
----------- -----------
$1,407,947 $ 1,256,440
----------- -----------
----------- -----------
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 $2,000 at March 31, 1997.
12
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DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1997 and 1996
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1997 and December 31, 1996
are detailed in the following summary:
March 31 December 31
---------- -----------
1997 1996
---------- -----------
Equipment $ 3,012,189 $ 2,977,130
Office equipment & furniture 310,582 301,114
Signs & Show booths 21,901 17,198
Vehicles 65,588 65,588
Capital leases 82,357 91,857
Land 626,153 626,153
Building & Improvements 2,214,144 2,214,144
---------- -----------
$6,332,914 $ 6,293,184
Less Accumulated Depreciation (1,681,887) (1,619,185)
------------- ------------
Net Property & Equipment $ 4,651,027 $ 4,673,999
------------- ------------
------------- ------------
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 three
months ended March 31, 1997 amounted to $110,670 ($ 69,709 for March
31, 1996).
Rental expense charged to operations for the three month periods
ending March 31, 1997 and 1996 is summarized below:
03-31-97 03-31-96
-------- --------
Gross rental expense $ 19,901 $ 35,165
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 $150,000. The
majority 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 three months ended March 31,
1997 amounted to $16,067 ($25,442 for 1996).
13
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1997 and 1996
NOTE 5 - SHORT-TERM NOTES PAYABLE
Short-term notes payable as of March 31, 1997 and December 31,
1996, are detailed in the following summary:
The short-term note payable consists of a revolving line-of-
credit with a bank up to $1,500,000 bearing interest at a rate
1.0% over prime, with interest payable monthly. The note is
secured by accounts receivable, inventory and equipment and is
personally guaranteed by the chief executive officer of the
Company who is also a director. The note is due April 30, 1997.
As of March 31, 1997 and December 31, 1996, the outstanding
balance of this revolving line-of-credit note payable was
$850,507 and $1,222,722 respectively.
Under the terms of the aforementioned bank line-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 March 31, 1997 the Company had a ratio of current
assets to current liabilities of .96 to 1 which is not in
compliance with the provisions requiring a ration of no less than
1.5 to 1.
Pertinent data regarding aggregate short-term borrowings as of
March 31, 1997 and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
March 31
1997 1996
---------- ----------
<S> <C> <C>
Maximum outstanding $ 1,176,976 $ 1,453,340
Average outstanding 985,019 1,038,877
Weighted average interest rate 9.25% 9.27%
</TABLE>
14
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1997 and 1996
NOTE 6 - LONG-TERM DEBT
Long-term notes payable as of March 31, 1997 and December 31,
1996, are detailed in the following summary:
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
---------- -------------
<S> <C> <C>
Revolving line of credit up to $1,000,000
payable to a bank, interest at prime
plus 1.0% until April 30, 1997;
secured by machinery & equipment
amortized over 60 months. 989,918 620,552
Note payable to a company due in
quarterly installments of $15,908
with interest at 8.0% due
December 1996. - 15,596
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 a company;
due in annual installments of
$79,560 plus interest at 7%
beginning December 31, 1997;
unsecured. 238,680 238,680
Note payable to a financial
institution; due in monthly
installments of $455 for
60 months through November
2001 with interest at 8.92%;
secured by a vehicle. 20,778 21,958
Note payable to an unrelated company;
due in monthly installments of
$1,160 plus accrued interest for
72 months through December 2002
with interest at 7.9%; secured by
machinery & equipment. 78,920 82,400
</TABLE>
15
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1997 and 1996
NOTE 6 - LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
---------- -------------
<S> <C> <C>
Note payable to a bank; due in
monthly installments of $10,234 for
300 months through November 2021
with interest at 9.25%; secured by an
office and warehouse building and
related land and personal guarantees
and real estate of the Company's CEO
who is also a director. 1,191,044 1,194,602
Note payable to the small business
administration; due in monthly
installments of $8,541 for 240 months
with interest at 7.31% through August
2016; secured by an office and warehouse
building, land and personal guarantees
of the Company's CEO who is also
a director. 983,938 989,679
Total long-term debt 3,528,278 3,188,467
Less: current portion (1,149,718) (795,415)
------------- -----------
Total long-term debt excluding
current portion $ 2,378,560 $ 2,393,052
------------- -------------
------------- -------------
Aggregate maturities are as follows:
Year ending March 31, 1998 $357,800
1999 336,273
2000 337,803
2001 264,875
2002 267,095
Later 1,964,432
----------
Total long-term debt $ 3,528,278
-----------
-----------
</TABLE>
16
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1997 and 1996
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
March 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
--------- -----------
<S> <C> <C>
Equipment $ 82,357 $ 91,857
Less: Accumulated depreciation (8,687) (5,211)
----------- ----------
Net property under capital lease $ 73,670 $ 86,646
--------- ---------
--------- ---------
At March 31, 1997, the Company is liable under the terms of non-
cancelable leases for the following minimum lease commitments:
Capital Operating
Leases Leases
------------ ------------
Year Ended March 31:
1998 30,477 29,561
1999 30,477 10,330
2000 22,549 2,287
2001 14,918 -
2002 6,216
Later years - -
------------ ------------
Total minimum lease payments $ 104,637 $ 42,178
----------
----------
Less: Interest (12,886)
-----------
Present value of net minimum
lease payments $ 91,751
Less: Current portion (22,948)
-----------
Capital lease obligations
payable long-term $ 68,803
-----------
-----------
</TABLE>
17
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1997 and 1996
NOTE 8 - INCOME TAX EXPENSE
The provisions for taxes on earnings from continuing operations
consisted of the following:
<TABLE>
<CAPTION>
03-31-97 03-31-96
-------- --------
<S> <C> <C>
Current
Federal $ - $ -
State 500 300
-------- --------
500 300
-------- --------
-------- --------
</TABLE>
NOTE 9 - MAJOR CUSTOMERS
Sales to major customers for the three months ended March 31,
1997 are summarized as follows:
Percent of
Sales Company Wide
Customer Dollars Revenues
-------- ------- --------
United Stationers 316,287 12%
NOTE 10 - COMMON STOCK
During the first quarter of calendar year 1997, the Company
approved a regulation S offering of its company stock. The stock
was made available to foreign off-shore investors at $2.00 per
share. During the first quarter the Company sold 250,000 shares
at $2.00 per share.
NOTE 11 - STOCK OPTION PLAN
In 1996 and 1992, the Company stockholders approved Incentive
Stock Options Plans for the benefit of the officers and employees
of the Company and its subsidiaries. Options to issue a total of
117,000 shares of the Company's common stock were authorized,
granted and exercised pursuant to these plans prior to December
31, 1995 at prices ranging from $1.00 to $1.38 per share, taking
into account all reverse and forward splits of the Company's
common stock. In November 1996, the stockholders of the Company
approved an additional Incentive Stock Option Plan for the
benefit of the officers and employees of the Company and its
subsidiaries.
The November 12, 1996 plan authorizes the officers and directors
of the Company to grant for a period of up to 10 years, options
to issue 300,000 shares of the Company's common stock, taking
into consideration the 1 1/2 for 1 stock split, at a price equal
to market value as of the date the option is granted. Options
granted are for five years and are exercisable upon issuance. As
of December 31, 1996, 104,000 options have been granted pursuant
to this plan.
18
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1997 and 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. Don Wood, CEO
and director of the Company is the beneficial owner of one-half
of WAC Research. Prepaid royalties owed to the Company amounted
to $55,882 at March 31, 1997.
During the first three months of calendar year 1995 the Company
paid the personal credit card bills for a member of the Board of
Directors. The amount is generally paid back to the Company the
next month. At March 31, 1997 the amount owed to the company was
$1,386.
During 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 $1,967 remains outstanding at March 31,
1997.
As part of the transaction, inventory was sold at cost for
$38,441 at June 30, 1995. The outstanding receivable due from
WAC Research at March 31, 1997 is $5,570.
During the first quarter of 1997, Mr. Wood voluntarily and
retroactively reduced his annual compensation by $100,000. The
receivable due at March 31, 1997 was $19,737.
NOTE 13 - CONTINGENCIES
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 Company
is representing itself and expects to prevail.
NOTE 14 - NON-QUALIFIED STOCK OPTIONS
The board of directors of the Company authorized during 1996 the
granting of stock options which are tied to the profitability of
the Company and based upon minimum years of employment. A total
of 840,000 shares at a strike price of $1.25 per share were
authorized. Employment must continue through the year 2001, the
Company must be profitable three out of the four years commencing
January 1, 1998.
The board of directors also authorized 537,500 shares to Muito
Bem at $1.25 for consideration of all knowledge, trade secrets
and a continuing non-compete, regarding the telephone headset
product line, as well as personal real estate pledged as
collateral on Company debts.
In addition, WAC Research, Inc., is authorized to receive 200,000
shares at a strike price of $1.25 per share for past forgiveness
and the reduction of royalties as well as the assumption of
Company travel liabilities and the purchasing of questionable
assets from the Company as a financial assistance to the Company.
19
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULES
For the Three Months Ended March 31, 1997 and 1996
Schedule 1
UNAUDITED CONSOLIDATED COST OF SALES
<TABLE>
<CAPTION>
March 31 March 31
1997 1996
-------- --------
(3 months) (3 months)
<S> <C> <C>
COST OF GOODS MANUFACTURED
Beginning inventory - raw materials $ 583,138 $ 390,490
Raw materials purchased 1,252,467 884,820
Freight 65,098 61,207
Depreciation 87,013 47,069
Labor 266,233 137,825
Repairs and maintenance 4,565 6,994
Miscellaneous direct 25,295 15,597
Engineering, other 28,984 -
Less: ending inventory - raw materials (771,822) (379,950)
--------- ---------
TOTAL COST OF GOODS MANUFACTURED 1,540,971 1,164,052
--------- ---------
--------- ---------
COST OF FINISHED GOODS
Beginning inventory -finished goods 673,302 866,690
Purchases 115,628 130,313
Amortization 15,942 25,317
Less: ending inventory - finished goods (636,125) (907,512)
--------- ---------
TOTAL COST OF FINISHED GOODS 168,747 114,808
------- -------
ROYALTIES 70,065 56,893
------- -------
TOTAL COST OF SALES $ 1,779,783 $ 1,335,753
----------- -----------
----------- -----------
</TABLE>
20
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES
For the Three Months Ended March 31, 1997 and 1996
UNAUDITED CONSOLIDATED SELLING EXPENSES
Schedule 2
March 31 March 31
1997 1996
-------- --------
(3 Months) (3 Months)
Advertising $ 87,543 $ 34,895
Commissions 126,128 133,394
Depreciation - selling 4,590 12,230
Freight 102,521 89,236
Miscellaneous 4,565 1,208
Promotions & Literature 61,868 41,384
Salaries - sales 126,947 115,145
Travel and entertainment 73,587 45,296
--------- ---------
TOTAL SELLING EXPENSES $ 587,749 $ 472,788
--------- ---------
--------- ---------
21
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES
For the Three Months Ended March 31, 1997 and 1996
UNAUDITED CONSOLIDATED GENERAL AND ADMINISTRATIVE EXPENSES
Schedule 3
March 31 March 31
1997 1996
-------- --------
(3 months) (3 months)
Amortization $ 125 $ 125
Automobile 75 -
Bank Charges 4,128 1,951
Consulting 12,690 -
Corporate expense 63,767 46,376
Depreciation - office 19,067 10,410
Dues and subscriptions 1,366 225
Insurance 68,097 46,782
Janitorial 1,778 1,227
Legal and accounting 32,776 35,308
Miscellaneous 2,201 4,308
Office expense 34,735 17,085
Payroll taxes 53,459 45,156
Rent 19,901 35,165
Repairs and maintenance 2,455 2,897
Salaries - office 97,359 100,291
Taxes 8,390 2,902
Telephone 22,069 12,614
Utilities 13,125 12,769
--------- --------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES $ 457,563 $ 375,591
---------- ----------
---------- ----------
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 61,488
<SECURITIES> 0
<RECEIVABLES> 1,511,895
<ALLOWANCES> 0
<INVENTORY> 1,407,947
<CURRENT-ASSETS> 3,271,517
<PP&E> 4,651,027
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,511,175
<CURRENT-LIABILITIES> 3,417,992
<BONDS> 0
0
0
<COMMON> 22,241
<OTHER-SE> 2,610,177
<TOTAL-LIABILITY-AND-EQUITY> 8,511,175
<SALES> 2,554,618
<TOTAL-REVENUES> 2,554,618
<CGS> 1,779,783
<TOTAL-COSTS> 1,181,466
<OTHER-EXPENSES> 104,733
<LOSS-PROVISION> 5,000
<INTEREST-EXPENSE> 103,715
<INCOME-PRETAX> (511,364)
<INCOME-TAX> 500
<INCOME-CONTINUING> (511,864)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (511,864)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
