<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, 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)
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, 1997, were 2,193,795. The aggregate market value of voting
stock held by non affiliates of the Company at November 5, 1997 was
$15,082,341.
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 1997
and 1996. These Financial Statements are hereby incorporated by reference. The
information for the Company's third quarter and first nine months of calendar
years 1997 and 1996 ended September 30, 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
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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 1997 ending on
September 30, 1997 were $5,041,055. Total revenues for the third quarter of
calendar year 1996 ending on September 30, 1996 were $2,605,008. This
represents a 2,436,047 (93.5%) increase in revenues for the quarter ended
September 30, 1997 compared to September 30, 1996. Total revenues for the nine
month period ended September 30, 1997, were $11,086,616 compared to $7,464,220
for the nine month period ended September 30, 1996. This represents a
$3,622,396 (48.5%) increase.
TELEPHONE ACCESSORIES
The telephone accessories products experienced an overall decrease in
sales. In total, the telephone accessories line experienced sales of
$4,611,360 for the nine month period ended September 30, 1997, in comparison to
$4,670,629 for the same nine month period in the prior calendar year. This
represents an overall decrease of $59,269 (1%). Specifically, the Softalk
product experienced a decrease of $80,620 (7%) over the same period for the
prior year while the Mini-Softalk had an increase of $109,643 (38%). The
Universal Softalk registered a sales decrease of $110,872 (29%) for the nine
month period ending September 30, 1997 over the same period for the prior
calendar year. The Universal Softalk is currently marketed to Lucent
Technologies on an exclusive basis. The Softalk II product experienced a sales
increase of $510,299 (62%). The Value Pack experienced a sales decrease of
$392,337 in the first nine months of 1997. The Value Pack was introduced in
1996 and enjoyed large sales volumes due to the initial orders to fill
distribution channels. The Twisstop product experienced a decrease in sales of
$131,157 (10%). TwistCord sales increased by $7,272. The company recently
introduced the Cord Manager product. The Cord Manager is a device that
features a retractable phone cord which allows you to use your telephone
headset a greater distance away from the base unit. Sales of the Cord Manager
were $23,778 for the first nine months of 1997. In addition, the Company also
introduced a new line of headset amplifiers featuring professional, studio-
sound quality. Sales for this new line were $4,726 for the fist nine months of
1997.
HARDWARE/HOUSEWARES
Hardware/Housewares products experienced an overall increase in sales of
$471,350 (21%) in the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996. Sofstop sales decreased $11,761 (6%) while
Cover-Up and Hide-It sales decreased $100,794 (29%). Expand-A-Shelf and Mini
Expand-A-Shelf experienced sales increases of $73,341 (7%) and $43,010 (54%)
respectively, while Mega Expand-a-Shelf had a decline in sales of $15,071 (5%).
The sales of Wedge products increased by $6,094 (5%). The Expandable Drawer
Organizer and Medicine Cabinet Organizer experienced sales increases of
$336,659 and $12,003 respectively. Both of these products were introduced late
in 1996 and
3
<PAGE>
showed negligible sales in 1996. The Expandable Bookshelf experienced a
sales decrease of $8,690 (17%). Management believes that the housewares line
will continue to show overall increases as market penetration occurs. The
Company introduced the Closet Hanger and Tote Bag products in late 1996 to
compliment the hardware/housewares line. These products experienced sales of
$94,371 and $34,982 respectively, for the first nine months of 1997. The
overall housewares business is increasing as the company is adding new
customers and expanding existing product lines.
MASS MARKET
The Company has been aggressively pursuing the marketing of commodity type
products to national mass market merchandisers. Sales in the mass market
product lines increased $2,792,426 (855%) over 1996. Disposable camera sales
through September 30, 1997 have increase $2,543,492 (779%) over the same nine
month period for 1996. In addition, the Company recently began supplying audio
tapes and three-piece flashlights with September 30, 1997 year-to-date sales of
$146,628 and $102,306, respectively.
MISCELLANEOUS AND OTHER
The miscellaneous product lines decreased in sales by $189,671 as the
Company is winding down the sales of erasable boards and various other
products. Packaging revenues have also declined as AT&T has made the decision
to discontinue contract packaging of cellular phone accessories with the
Company.
FLASHLIGHTS
The Company has been aggressively pursuing the production of a line of
flashlight products in the far east. The Company expects to have a full line
of high end flashlight products available to market in the next quarter. Sales
of flashlight products for the first nine months of 1997 amounted to $607,560.
Virtually all of the sales were generated from the production of flashlights
domestically. Management believes that substantial savings will result from
the production of flashlights overseas.
PROFITABILITY
The Company experienced a net profit of $648,926 in the third quarter of
calendar year 1997, ended September 30, 1997, versus a profit of $5,418 for the
three month period ended September 30, 1996. For the comparative nine month
periods ended September 30, 1997 and 1996, the Company experienced a net profit
of $215,782, compared to $94,669.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities is 1.24 at September
30, 1997 as compared to .96 at the calendar year audit date of December 31,
1996. The current assets at September 30, 1997 were $4,735,011 compared to
$2,967,434 at December 31, 1996. The current liabilities of the company at
September 30, 1997 were $3,830,482 compared to $3,088,908 at December 31, 1996.
4
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For the nine month period ending September 30, 1997 the company
experienced an increase in their cash position of $45,602. For the nine month
period ending September 30, 1996 the company experienced a $151,262 increase in
cash.
5
<PAGE>
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
C. Equity Securities Sold by the Registrant
On March 11, 1997, at a regularly scheduled meeting, the Board
of Directors approved a Regulation S offering of its common stock.
The stock was made available to foreign investors at $2.00 per share.
The bid price of the shares at March 11, 1997 was $3.87 per share.
Regulation S stock is routinely offered at a discount from the bid
price. The subscription agreements were executed in reliance upon
the transaction exemption afforded by Regulation S based upon the
following facts:
1. The Regulation S stock purchasers were not U.S. persons as
defined under Regulation S;
2. At the time the buy order was originated, the purchasers were
outside the U.S. as of the date of execution and delivery of the
subscription agreements;
3. Shares were purchased for purchasers own accounts and not on
behalf of any U.S. person, sales had not been pre-arranged with
a purchaser in the U.S., and all offers and resales of securities
have been made in compliance with Regulation S provisions;
4. The purchasers were not entities organized under foreign law by
a U.S. person (as defined in Regulation S Rule 902 (o)) for the
purpose of investing in unregistered securities, unless the
purchasers were organized and owned by accredited investors (as
defined in Regulation D, Rule 501 (a)) who are not natural
persons, estates, or trusts;
5. Purchase transactions were not pursuant to a fiduciary account
where a U.S. person had discretion to make investment decisions
for the account;
6. To the knowledge of the registrant, all offers and sales of the
Regulation S shares by purchasers prior to the expiration of
a 40-day restricted period were only to be made in compliance
with the safe harbor contained in Regulation S, pursuant to
registration of securities under the 1933 Act, or pursuant to
an exemption from registration. Offers and sales made after
the expiration of the restricted period were to be made only
after shares had been registered or became subject to
exemption from registration. The restricted period began on
the closing of the offering or upon the completion of the
distribution of the offering as announced by the registrant;
6
<PAGE>
7. All offering documents received by purchasers included
statements to the effect that the shares had not been
registered under the 1933 Act and may not be offered or sold
in the U.S. or to U.S. persons unless the shares become
registered under the Securities Act of 1933 or an exemption
from the registration requirements was available;
8. The purchasers acknowledged that the purchase of the shares
involved a high degree of risk, and that the purchasers could
bear the economic risk of the purchase of the shares, including
the total loss of their investment; and
The following table shows sales of Regulation S securities of the
Company during 1997:
Offering
Date of Sale Title of Security # of Shares Price
---------------- ----------------- ----------- --------
February 26, 1997 Common Stock 173,500 $1.44
March 26, 1997 Common Stock 125,000 $2.00
July 1, 1997 Common Stock 125,000 $2.00
July 10, 1997 Common Stock 125,000 $2.00
In the amended Form 10-KSB report of the Company electronically filed with
the Securities and Exchange Commission on May 28, 1997 for the year ended
December 31, 1996, the Company disclosed in the text of Items 10, 11, and 12
(at pages 14-17) of its annual report certain grants of options pursuant to the
incentive stock option plans of the Company and the grant of certain non-
qualified options. This information is incorporated herein by this reference.
The grant of these options is deemed by the Company to be exempt from
registration pursuant to Regulation D promulgated by the Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit List.
None
(b) Reports on Form 8-K.
None
7
<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 17th day of November, 1997.
DYNATEC INTERNATIONAL, INC.
-----------------------------------------
Donald M. Wood
President-Chief Executive Officer
/s/ JERRY R. ANDERSEN
-----------------------------------------
Jerry R. Andersen, C.P.A.
V.P. Finance-Chief Financial Officer
8
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
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 6
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 9
UNAUDITED CONSOLIDATED COSTS OF SALES (SCHEDULE 1) 18
UNAUDITED CONSOLIDATED COST OF GOODS MANUFACTURED (SCHEDULE 2) 19
UNAUDITED CONSOLIDATED EXPENSES (SCHEDULE 3) 19
2
<PAGE>
The information for the Company's nine month period ended September 30, 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 STATEMENTS OF FINANCIAL POSITION
September 30, 1997 and December 31, 1996
Audited
Unaudited Year-End
ASSETS September 30 December 31
1997 1996
------------ ------------
CURRENT ASSETS
Cash $ 285,747 $ 240,145
Trade Accounts Receivable 2,096,114 1,125,750
Employee advances 532 - -
Accounts Receivable-related parties
(Note 11) - - 145,419
Accounts Receivable- other 460,000 - -
Inventory (Note 2) 1,848,167 1,256,440
Prepaid expenses 394,916 133,997
Deposits-Trade shows 11,875 15,617
Prepaid taxes 37,660 46,160
Unamortized debt issue costs - - 3,906
----------- -----------
TOTAL CURRENT ASSETS 5,135,011 2,967,434
PROPERTY AND EQUIPMENT (Note 3) 3,985,079 4,673,999
OTHER ASSETS
Deposits 48,526 22,355
Deferred tax asset 69,960 69,960
Note receivable-related party (Note 11) - - 150,000
License, patents and agreements (Note 4) 283,892 332,092
----------- -----------
TOTAL OTHER ASSETS 402,378 574,407
----------- -----------
TOTAL ASSETS $ 9,522,468 $ 8,215,840
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
Audited
Unaudited Year-End
September 30 December 31
1997 1996
------------ -----------
LIABILITIES AND EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Short-term notes payable (Note 5) $ 1,251,983 $ 1,222,722
Current portion of long-term debt
(Note 6) 961,760 795,415
Current portion of capital lease
obligations (Note 7) 15,897 22,363
Accounts payable 491,235 523,668
Accounts payable-other 400,000 - -
Accrued expenses 721,434 153,533
Accrued advertising 281,370 304,500
Accrued royalties payable 17,531 31,519
Accrued royalties - related parties
(Note 12) 88,872 34,688
Income taxes - current 400 500
----------- -----------
TOTAL CURRENT LIABILITIES 4,230,482 3,088,908
LONG-TERM LIABILITIES
Long-term debt (Note 6) 2,292,809 2,393,052
Capital lease obligations (Note 7) 48,862 76,196
Deferred income taxes 13,402 13,402
----------- -----------
TOTAL LIABILITIES 6,585,555 5,571,558
STOCKHOLDERS' EQUITY
Common stock, $.01 par value (Note 10)
Authorized 100,000,000 shares
Issued 2,522,604 shares at September 30, 1997
1,974,104 shares at December 31, 1996 25,225 19,741
Treasury Stock (923,150) - -
Additional paid-in capital 4,590,214 3,595,699
Retained earnings (755,376) (971,158)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,936,913 2,644,282
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 9,522,468 $ 8,215,840
----------- -----------
----------- -----------
</TABLE>
4
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Month Periods Ended
September 30, 1997 and 1996
<TABLE>
Three Months Three Months Nine Months Nine Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
1997 1996 1997 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUE $5,041,055 $2,605,008 $11,086,616 $7,464,220
COST OF SALES (Sch. 1) 3,592,528 1,530,682 7,716,962 4,446,604
---------- ---------- ---------- ---------
GROSS PROFIT 1,448,527 1,074,326 3,369,654 3,017,616
EXPENSES
Selling expenses (Sch 2) 696,863 589,376 1,816,441 1,536,732
Research and Development 59,864 16,950 227,742 25,704
General & adm exp (Sch 3) 433,439 419,329 1,359,033 1,182,841
---------- ---------- ---------- ---------
TOTAL EXPENSES 1,190,166 1,025,655 3,403,216 2,745,277
---------- ---------- ---------- ---------
OPERATING INCOME/(LOSS) 258,361 48,671 (33,562) 272,339
---------- ---------- ---------- ---------
OTHER INCOME/(EXPENSE)
Interest Income 2,635 8,281 8,650 21,496
Interest expense (109,089) (63,581) (332,861) (166,191)
Consulting Income -- (66,667) -- --
Loss from affiliate (Note 11) -- 77,097 -- --
Bad debts (19,000) -- 32,500 23,000
Gain (loss) on Sale of Asset 402,361 (11,074) 402,361 (9,675)
Miscellaneous Income 113,658 (21,363) 204,194 --
TOTAL OTHER INCOME/(EXPENSE) 390,565 (77,307) 249,844 (177,370)
---------- ---------- ---------- ---------
Income/(loss) from
Continuing Operations 648,926 (28,636) 216,282 94,969
INCOME TAX EXPENSE
Income tax expense (benefit)
(Note 8) -- (34,054) 500 300
---------- ---------- ---------- ---------
NET INCOME/(LOSS) $ 648,926 $ 5,481 $ 215,782 $ 94,669
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Earnings/ (loss) per share
Continuing Operations .26 .01 .09 .10
---------- ---------- ---------- ---------
NET EARNINGS/(LOSS) PER SHARE $ .26 $ .01 $ .09 $ .10
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</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 Six Month Periods Ended September 30, 1997 and 1996
<TABLE>
Nine month period ending September 30, 1997
-------------------------------------------
Total Additional
Shares Common Paid-In Retained Contra-
Issued Stock Capital Earnings Equity
--------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 1,974,104 $19,741 $3,595,699 $ (971,158) --
Shares issued pursuant to Regulation S
Stock offerings 548,500 5,485 997,516 -- --
Treasury stock (88,776 shares) received
to satisfy debt -- -- -- -- $(923,150)
Net Income (September 30, 1997) -- -- -- 215,782 --
--------- ------- ---------- ----------- ---------
BALANCE SEPTEMBER 30, 1997 2,522,604 $25,225 $4,093,199 $(1,404,302) $(923,150)
--------- ------- ---------- ----------- ---------
--------- ------- ---------- ----------- ---------
</TABLE>
<TABLE>
Nine month period ending September 30, 1996
-------------------------------------------
Total Additional
Shares Common Paid-In Retained
Issued Stock Capital Earnings
--------- ------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 941,223 $ 9,412 $2,699,238 $ 73,991
Shares issued for rights
& non-compete 6,306 63 19,927 --
Net Income (September 30,1996) -- -- -- 215,782
--------- ------- ---------- -----------
BALANCE SEPTEMBER 30, 1996 947,529 $ 9,475 $2,719,165 $ 289,773
--------- ------- ---------- -----------
--------- ------- ---------- -----------
</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 and Nine Month Periods Ended September 30, 1997 and 1996
<TABLE>
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Three Months Ended Six Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1997 1996 1997 1996
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net Income (loss) $ 648,926 5,418 215,782 94,669
Adjustments to reconcile
net (loss) to net cash
provided by operating
activities:
Depreciation 93,756 83,137 317,976 233,420
Amortization 16,067 25,442 48,201 76,326
(Gain)/Loss on sale of assets (402,361) - (402,361) -
Change in assets & liabilities:
Decrease (increase) in
accounts receivable (765,885) (103,925) (970,364) (248,577)
Decrease (increase) in
Employee advances (122) 1,848 (532) 3,838
Decrease (increase) in
inventory (187,737) 91,940 (591,727) 192,131
Decrease (increase) in
prepaid expenses (78,888) (68,416) (260,919) (53,011)
Decrease (increase) in
prepaid income taxes - - 8,500 -
Decrease (increase) in
prepaid royalties-related - 22,221 - 15,672
Decrease (increase) in
deposits 73,603 7,112 (22,429) (36,395)
Decrease (increase) in
debt issue costs 1,042 2,344 3,906 7,032
Decrease (increase) in
deferred tax assets - - - (5,532)
Decrease (increase) in
other assets 90,356 - - -
Increase (decrease) in
accounts payable 217,893 94,293 (32,433) 229,796
Increase (decrease) in
accrued expenses 266,296 45,387 567,901 14,201
Increase (decrease) in
royalties payable (22,601) (1,834) (13,988) 1,126
Increase (decrease) in
royalties payable-related 42,629 - 54,184 -
Increase (decrease) in a
income tax payable - (41,794) (100) (29,429)
Increase (decrease) in
accrued advertising 40,149 45,000 (23,130) (30,000)
TOTAL ADJUSTMENTS $ (615,803) $ 202,755 $ (1,317,315) $ 370,598
----------- ---------- ------------ ----------
----------- ---------- ------------ ----------
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES $ 33,123 $ 208,173 $ (1,101,533) $ 465,267
----------- ---------- ------------ ----------
----------- ---------- ------------ ----------
</TABLE>
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 and Nine Month Periods Ended September 30, 1997 and 1996
<TABLE>
Three Months Ended Six Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1997 1996 1997 1996
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of assets 1,196,687 17,778 1,196,687 17,778
Received from related parties - 41,538 295,419 37,661
Stock issuance for rights
and non-compete - 6,663 - 19,989
Issuance of Stock pursuant to
a Regulation S offering 500,000 - 1,000,000 -
Receipt of Treasury Stock (743,150) - (923,150) -
Capital expenditures (291,091) (2,400,783) (423,384) (2,571,071)
Minority Interest in affiliate - (77,097) - -
Construction in Progress - 1,460,538 - 592,810
Advances to third parties (60,000) (81,833) (60,000) (81,833)
Advances to affiliate - 68,087 - (341,788)
----------- ---------- ------------ ----------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 602,446 (965,109) 1,085,572 (2,326,454)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (payments)
under line of credit
agreements (219,819) 333,823 29,260 733,824
Net (payments) borrowings
under capital lease obligations (21,016) 45,433 (33,800) 67,105
Net (payments) borrowings
on long-term debt (219,331) 2,119,466 66,103 2,073,264
Net borrowings (payments)
on construction obligations - (1,531,071) - (861,744)
----------- ---------- ------------ ----------
NET CASH (USED) BY
FINANCING ACTIVITIES (460,166) 967,643 61,563 2,012,449
NET INCREASE (DECREASE)
IN CASH 175,403 210,707 45,602 151,262
CASH AT BEGINNING OF
PERIOD 110,344 259,478 240,145 318,923
CASH AT END OF PERIOD $ 285,747 $ 470,185 $ 285,747 $ 470,185
----------- ---------- ------------ ----------
----------- ---------- ------------ ----------
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital acquisitions financed by:
Accounts payable 236,979 109,358 369,272 138,210
Capital lease obligations - 33,873 - 33,873
Receipt of stock in exchange
For debt 180,000 - 923,150 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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, 1995.
The accompanying consolidated financial statements present the results
of operations, changes in stockholders' equity and cash flows for the
nine months ended September 30, 1997 and 1996.
CASH AND CASH EQUIVALENTS
For purposed 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 $28,966 and $29,000 at September
30, 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.
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.
9
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The differences relate primarily to depreciable assets and intangible
assets, which use different methods and lives for depreciation and
amoritization 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 recognition is 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.
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 September 30, 1997, the Company had
bank deposits in excess of federally insured limits.
10
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of 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 September 30, 1997 and December 31, 1996 is
summarized as follows:
September 30 December 31
1997 1996
------------ ------------
Raw $ 696,969 $ 583,138
Finished 1,151,198 673,302
---------- ----------
$1,848,167 $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 exceeds the carrying amount by less
than $60,000 at September 30, 1997.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1997 and December 31, 1996
are detailed in the following summary:
September 30 December 31
1997 1996
------------ -----------
Equipment $2,480,833 2,977,130
Office Equipment 264,894 301,114
Signs and Show Booths 22,275 17,198
Vehicles 104,000 65,588
Capital Leases 82,357 91,857
Land 626,153 626,153
Building & Improvements 2,214,144 2,214,144
---------- ----------
5,794,656 6,293,184
Less accumulated depreciation 1,809,577 1,619,185
---------- ----------
---------- ----------
NET PROPERTY & EQUIPMENT $3,985,079 $4,673,999
---------- ----------
---------- ----------
11
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
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, 1997 amounted to $ 317,976 ($ 233,420 for
September 30, 1996).
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, 1997 amounted to $48,201
($76,326 for 1996).
NOTE 5 - SHORT-TERM NOTES PAYABLE
Short-term notes payable as of September 30, 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 December 10, 1997. As of September 30,
1997 and December 31, 1996, the outstanding balance of this revolving
line-of-credit note payable was $1,251,983 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 September 30, 1997 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 ration of no less than 1.5 to 1.
Pertinent data regarding aggregate short-term borrowings as of
September 30, 1997 and December 31, 1996 is as follows:
September 30 December 31
1997 1996
------------ -----------
Maximum Outstanding $1,471,802 $1,453,340
Average Outstanding 1,166,016 1,038,877
Weighted average interest rate 9.73% 9.27%
12
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
NOTE 6 - LONG-TERM DEBT
Long-term notes payable as of September 30, 1997 and December 31,
1996, are detailed in the following summary:
September 30 December 31
1997 1996
------------ -----------
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 881,868 620,552
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
Note payable to a company; due in
annual installments of $79,560
plus interest at 7% beginning
December 31, 1997; unsecured 195,992 238,680
Note payable to a financial
institution; due in monthly
installments of $455 for 60
months thru November 2001
with interest at 8.75%; secured
by a vehicle 18,941 21,958
Note payable to an unrelated company;
due in monthly installments of
$1,160 plus accrued interest for
72 months thru December 2002
with interest at 7.9%; secured by
machinery & equipment - - 82,400
Note payable to a bank; due in
monthly installments of $10,234
for 300 months thru 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 1,185,630 1,194,602
13
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
NOTE 6 - LONG-TERM DEBT (Continued)
September 30 December 31
1997 1996
------------ -----------
Note payable to the small business
administration; due in monthly
installments of $8,541 for 240
months with interest at 7.31%
thru August 2016; secured by an
office and warehouse building, land
and personal guarantees of the
Company's CEO who is also a director 972,138 989,679
Total long-term debt 3,254,569 3,188,467
Less: current portion (961,760) (795,415)
---------- ----------
Total long-term debt excluding
current portion $2,292,809 $2,393,052
---------- ----------
---------- ----------
Aggregate maturities are as follows:
Year ending September 30, 1998 $1,004,341
1999 126,200
2000 87,440
2001 54,830
2002 54,752
Later 1,927,006
----------
Total Long-Term Debt $3,254,569
----------
----------
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, 1997 and December 31, 1996.
September 30 December 31
1997 1996
------------ -----------
Equipment $ 82,357 $91,857
Less: Accumulated depreciation (15,835) (5,211)
-------- -------
Net property under capital lease $ 66,522 $86,646
-------- -------
-------- -------
14
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
At September 30, 1997, 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: 1998 $ 20,786 $ 15,580
1999 20,786 7,053
2000 17,363 3,305
2001 13,675 3,030
2002 - -
Later years - -
-------- --------
Total minimum lease payments $ 72,610 $ 28,968
Less: Interest (7,850) --------
-------- --------
Present value of net minimum
lease payments $ 64,760
Less: Current portion (15,897)
--------
Capital lease obligations
payable long-term $ 48,863
--------
--------
NOTE 8 - INCOME TAX EXPENSE
The provisions for taxes on earnings from continuing operations
consisted of the following:
09-30-97 09-30-96
-------- --------
Current
Federal $ - $ -
State 500 300
---- ----
500 300
---- ----
---- ----
NOTE 9 - MAJOR CUSTOMERS
Sales to major customers for the nine months ended September 30, 1996
are summarized as follows:
Percent of
Sales Company Wide
Customer Dollars Revenues
-------- ---------- ------------
Dolgencorp $3,306,723 29.8%
15
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
NOTE 10 - COMMON STOCK
On March 11, 1997, at a regularly scheduled meeting, the Board of
Directors approved Regulation S offerings of its common stock. The
stock was made available to foreign investors at $2.00 per share.
The bid price of the shares at March 11, 1997 was $3.87 per share.
Regulation S stock is routinely offered at a discount from the bid
price.
During June 1997, the Company received 18,000 shares of stock in
exchange for debts owed to the Company. These shares were recorded
at the fair market value of $10.00 per share. In July 1997, the
Company received an additional 70,776 shares of stock in exchange
for assets sold by the Company. The shares received for these
transactions is represented as treasury stock at a price of $10.50
per share.
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. Donald M. Wood, CEO and
director of the Company is the beneficial owner of one-half of WAC
Research.
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.
WAC Research and Mr. Wood have at various times been involved in
assisting Dynatec financially. Mr. Wood has voluntarily reduced
his annual compensation by $100,000 for calendar year 1997.
During June 1997, the Company received 18,000 shares of common
stock from WAC as payment in full of all outstanding balances.
Such shares were valued at the market price of $10.00 per share.
NOTE 12 - STOCK OPTION PLAN
In 1996 and 1992, the Company stockholders approved Incentive Stock
Option 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
September 30, 1997, 200,000 shares have been granted pursuant to
this plan.
16
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
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 the 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
1,680,000 shares at a strike price of $2.00 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 537,000 shares to Muito Bem
at $2.00 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 $2.00 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.
17
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED COSTS OF SALES
September 30, 1997 and 1996
SCHEDULE 1
<TABLE>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
COST OF GOODS
MANUFACTURED
Beginning inventory-raw $ 864,024 $ 372,761 $ 583,138 $ 390,490
Raw materials purchased 3,069,836 1,072,811 6,170,079 3,138,200
Freight in 164,405 44,047 341,570 156,166
Depreciation & Equipment Rental 70,898 56,328 244,311 155,439
Labor 220,918 153,272 735,004 461,746
Repairs & maintenance 9,336 -- 16,021 9,630
Miscellaneous - direct 23,521 21,767 69,148 66,834
Engineering, other 21,250 74,290
Less: ending inventory-raw (684,941) (433,783) (696,969) (433,783)
----------- ----------- ---------- ----------
TOTAL COST OF GOODS
MANUFACTURED $ 3,759,247 $ 1,287,203 $7,536,592 $3,944,722
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
COST OF FINISHED GOODS
Beginning Inventory-finished goods 796,406 784,228 673,302 866,690
Purchases 87,223 - 388,333 -
Amortization 15,942 25,318 47,826 75,951
Less: Ending Inventory-
Finished goods (1,151,198) (631,266) (1,151,198) (631,266)
----------- ----------- ---------- ----------
TOTAL COST OF
FINISHED GOODS (251,627) 178,280 (41,737) 311,375
ROYALTIES 84,908 65,199 222,107 190,507
TOTAL COST OF SALES $ 3,592,528 $ 1,530,682 $7,716,962 $4,446,604
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
18
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED COST OF GOODS MANUFACTURED
September 30, 1997 and 1996
SCHEDULE 2
<TABLE>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SELLING EXPENSES
Advertising $ 87,862 $127,868 $ 267,436 $ 202,808
Commissions 225,178 149,908 487,252 409,272
Depreciation - selling 5,058 14,361 14,444 44,330
Freight out 103,188 90,560 296,388 269,720
Miscellaneous 8,752 367 23,414 5,765
Promotions & Literature 52,944 37,369 143,439 103,783
Salaries-sales 152,803 136,770 413,116 391,874
Travel & entertainment 61,078 32,173 170,952 109,180
-------- -------- ---------- ----------
TOTAL SELLING EXPENSES $696,863 $589,376 1,816,441 1,536,732
-------- -------- ---------- ----------
-------- -------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED EXPENSES
SCHEDULE 3
<TABLE>
<S> <C> <C> <C> <C>
GENERAL & ADMINISTRATIVE EXPENSES
Amoritization $ 125 $ 125 $ 375 $ 375
Automobile 48 3,311 1,036 4,294
Bank Charges 10,355 3,186 20,729 7,358
Consulting 4,120 0 20,209 0
Corporate expense 97,439 32,584 245,676 110,894
Depreciation- office 20,803 12,919 62,808 34,123
Dues and Subscriptions 817 903 3,831 1,541
Insurance 76,622 53,337 207,898 146,083
Janitorial 2,484 2,754 6,008 5,231
Legal & accounting 28,639 36,028 125,012 88,651
Miscellaneous 6,981 10,036 12,858 11,114
Office Expense 29,119 33,975 88,925 86,771
Payroll Taxes 33,970 24,943 123,171 98,496
Rent 4,000 34,666 27,426 116,800
Repairs and Maintenance 1,032 4,901 18,457 9,751
Salaries-office & officers 63,880 128,947 254,176 359,077
Taxes 11,325 4,977 25,952 16,643
Telephone 25,520 17,320 70,732 46,742
Utilities 16,160 14,417 43,755 38,897
-------- -------- ---------- -----------
TOTAL GENERAL &
ADMIN. EXPENSES $433,439 $419,329 $1,359,034 $1,182,841
-------- -------- ---------- -----------
-------- -------- ---------- -----------
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 285,747
<SECURITIES> 0
<RECEIVABLES> 2,556,114
<ALLOWANCES> 28,966
<INVENTORY> 1,848,167
<CURRENT-ASSETS> 5,135,011
<PP&E> 3,985,079
<DEPRECIATION> 1,809,577
<TOTAL-ASSETS> 9,522,468
<CURRENT-LIABILITIES> 4,230,482
<BONDS> 2,341,671
0
0
<COMMON> 25,225
<OTHER-SE> 2,911,688
<TOTAL-LIABILITY-AND-EQUITY> 9,522,468
<SALES> 5,041,055
<TOTAL-REVENUES> 5,041,055
<CGS> 3,592,528
<TOTAL-COSTS> 1,190,166
<OTHER-EXPENSES> 390,565
<LOSS-PROVISION> (19,000)
<INTEREST-EXPENSE> (109,089)
<INCOME-PRETAX> 648,926
<INCOME-TAX> 0
<INCOME-CONTINUING> 648,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 648,926
<EPS-PRIMARY> .26
<EPS-DILUTED> 0
</TABLE>
