<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: June 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 organization) Identification No.)
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 June
30, 1997, were 2,224,104. The aggregate market value of voting stock held by non
affiliates of the Company at July 31, 1997 was $12,266,807.
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 second quarter and first six months of calendar years 1997
and 1996. These Financial Statements are hereby incorporated by reference. The
information for the Company's second quarter and first six months of calendar
years 1997 and 1996 ended June 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
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues for the second quarter of calendar year 1997 ending on
June 30, 1997 were $3,490,943. Total revenues for the second quarter of
calendar year 1996 ending on June 30, 1996 were $2,694,419. This represents a
$796,524 (30%) increase in revenues for the quarter ended June 30, 1997 compared
to June 30, 1996. Total revenues for the six month period ended June 30, 1997
were $6,045,561 compared to $4,859,210 for the six month period ended June 30,
1996. This represents a $1,186,351 (24%) increase.
TELEPHONE ACCESSORIES
The telephone accessories products experienced a overall decrease in
sales. In total, the telephone accessories line experienced sales of $2,846,294
for the six month period ended June 30, 1997, in comparison to $3,130,392 for
the same six month period in the prior calendar year. This represents an
overall decrease of $284,098 (9%). Specifically, the Softalk product
experienced a decrease of $46,397 (6%) over the same period for the prior year
while Mini-Softalk had a increase of $3,435 (2%). The Universal Softalk
registered a sales decrease of $133,454 (44%) for the six month period ending
June 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 sales increases of $313,452 (66%). The Value
Pack experienced sales decreases of $423,168 in the first six 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 slight decrease in sales of $10,135 (1%). TwistCord sales decreased by $245.
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 $12,414 for the first six months of 1997.
HARDWARE/HOUSEWARES
Hardware/Housewares products experienced an overall increase in sales
of $344,449 (22%) in the six months ended June 30, 1997 compared to the six
months ended June 30, 1996. Softstop sales increased $18,032 (14%) while
Coverup and Hide It sales decreased $91,474 (36%). Expand A Shelf and Mini
Expand A Shelf experienced sales increases of $87,134 (12%) and $41,652 (82%)
respectively, while Mega Expand A Shelf had a decline in sales of $30,234 (13%).
The sales of Wedge product increased by $5,487 (6%). The Expandable Drawer
Organizer and Medicine Cabinet Organizer experienced sales increases of $176,038
and $29,021 respectively. Both of these products were introduced late in 1996
and showed negligible sales in 1996. The Expandable Book Shelf experienced a
sales decrease of $8,911 (21%). 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
3
<PAGE>
compliment the hardware/housewares line. These products experienced sales of
$92,434 and $30,906 respectively for the first six months of 1997.
Miscellaneous and discontinued hardware items registered sales of $2,072 for the
six month period ended June 30, 1997. The overall hardware/housewares business
is continuing to expand as the company is adding new customers and expanding
it's existing line of products.
MISCELLANEOUS AND OTHER
The miscellaneous product lines decreased sales by $67,776 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 a decision to
discontinue contract packaging of cellular phone accessories with the
company. The company has begun supplying a line of disposable camera
products to a national mass merchandiser. At this time the company is unsure
of the future of the camera business but is also aggressively pursuing the
marketing of other commodity type products in the mass market. Sales of the
cameras for the first six months of 1997 were $833,049.
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 six months of 1997 amounted to $404,178.
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 $78,720 for the second quarter
of calendar year 1997, ended June 30, 1997, versus a profit of $201,565 for the
three month period ended June 30, 1996. For the comparative six month periods
ended June 30, 1997 and 1996 the company experienced a net loss of $433,144
compared to a profit of $89,250. The loss in mainly attributable to the
flashlight line of products produced domestically. Management expects all
production to move overseas resulting in significant profit margin increases.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities is .98 at June 30,
1997 as compared to .96 at the calendar year audit date of December 31, 1996.
The current assets at June 30, 1997 were $3,961,084 compared to $2,967,434 at
December 31, 1996. The current liabilities of the company at June 30, 1997 were
$4,058,642 compared to $3,088,908 at December 31, 1996.
For the six month period ending June 30, 1997 the company experienced
a decrease in their cash position of $129,801. For the six month period ending
June 30, 1996 the company experienced a $59,445 decrease in cash. The cash
decrease for the six month period ending June 30, 1997 was a result of cash
being used by operating activities in excess of cash generated by operations,
borrowing, and investing activities.
4
<PAGE>
PART II-OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit List.
Exhibit 27-SDS
(b) Reports on Form 8-K.
None
5
<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 August, 1997.
DYNATEC INTERNATIONAL, INC.
/s/ Donald M. Wood
----------------------------------
Donald M. Wood
Chairman-Chief Executive Officer
/s/ David J. White
----------------------------------
David J. White,
Executive Vice-President - Chief
Financial Officer (Principal
Financial and Accounting Officer)
6
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 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)........................ 20
UNAUDITED CONSOLIDATED SELLING EXPENSES (SCHEDULE 2)...................... 21
UNAUDITED CONSOLIDATED GENERAL & ADMINISTRATIVE EXPENSES (SCH.2).......... 21
2
<PAGE>
The information for the Company's six month period ended June 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
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Audited
Unaudited Year-End
ASSETS June 30 December 31
1997 1996
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 110,344 $ 240,145
Receivables
Trade accounts Receivable, net 1,730,229 1,125,750
Employee advances 410 -
Receivables-related parties
(Note 11) - 145,419
Accounts Receivable- income tax 90,536 -
Inventory (Note 2) 1,660,430 1,256,440
Prepaid expenses 316,028 133,997
Prepaid income taxes 37,660 46,160
Unamortized debt issue costs 1,042 3,906
Trade show deposits 14,405 15,617
----------- -----------
TOTAL CURRENT ASSETS 3,961,084 2,967,434
PROPERTY AND EQUIPMENT (Note 3) 4,581,892 4,673,999
OTHER ASSETS
Deposits 119,599 22,355
Deferred tax asset 69,960 69,960
Note receivable-related party (Note 11) - 150,000
License, patents and agreements (Note 4) 299,958 332,092
----------- -----------
TOTAL OTHER ASSETS 489,517 574,407
----------- -----------
TOTAL ASSETS $9,032,493 $8,215,840
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Audited
Unaudited Year-End
LIABILITIES AND EQUITY June 30 December 31
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Short-term notes payable (Note 5) $ 1,471,802 $ 1,222,722
Current portion of long-term debt (Note 6) 1,107,603 795,415
Current portion of capital lease obligations
(Note 7) 22,761 22,363
Accounts payable 630,842 523,668
Accrued expenses 778,991 489,552
Accrued royalties - related parties (Note 12) 46,243 34,688
Income taxes - current 400 500
----------- -----------
TOTAL CURRENT LIABILITIES 4,058,642 3,088,908
LONG-TERM LIABILITIES
Long-term debt (Note 6) 2,366,297 2,393,052
Capital lease obligations (Note 7) 63,014 76,196
Deferred income taxes 13,402 13,402
----------- -----------
TOTAL LIABILITIES 6,501,355 5,571,558
STOCKHOLDERS' EQUITY
Common stock, $.01 par value (Note 10)
Authorized 100,000,000 shares
Issued 2,224,104 shares at June 30, 1997
1,974,104 shares at December 31, 1996 22,241 19,741
Treasury Stock (180,000) -
Additional paid-in capital 4,093,199 3,595,699
----------- -----------
Retained earnings (1,404,302) (971,158)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,531,138 2,644,282
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 9,032,493 $ 8,215,840
----------- -----------
----------- -----------
</TABLE>
4
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Month Periods Ended
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended June 30 Ended June 30 Ended June 30 Ended June 30
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SALES $3,490,943 $2,694,419 $6,045,561 $4,859,210
COST OF SALES 2,344,651 1,580,167 4,124,434 2,915,921
---------- ---------- ---------- ----------
GROSS PROFIT 1,146,292 1,114,252 1,921,127 1,943,289
OPERATING EXPENSES
Selling expenses (Sch 2) 531,829 474,569 1,119,578 947,356
Research & Development Expenses 161,724 - 297,878 8,755
General & Administrative (Sch 2) 468,030 387,923 925,594 763,512
---------- ---------- ---------- ----------
TOTAL EXPENSES 1,161,583 862,492 2,343,050 1,719,623
---------- ---------- ---------- ----------
OPERATING INCOME/(LOSS) (15,291) 251,760 (421,923) 223,666
---------- ---------- ---------- ----------
OTHER INCOME/(EXPENSE)
Interest Income 2,033 6,531 6,015 13,215
Interest Expense (120,058) (61,539) (223,772) (102,610)
Consulting Income - 49,999 - 66,667
Loss from affiliate - (26,895) - (77,097)
Bad Debts (8,500) (7,000) (13,500) (23,000)
Research & Development 130,000 - 130,000 -
Miscellaneous 90,536 21,363 90,536 21,363
Gain or Loss on Sale of Asset - 1,400 - 1,400
---------- ---------- ---------- ----------
TOTAL OTHER INCOME
/(EXPENSE) 94,011 (16,141) (10,721) (100,062)
---------- ---------- ---------- ----------
Income/(loss) from
Continuing Operations $ 78,720 $ 235,619 (432,644) $ 123,604
INCOME TAX EXPENSE
Income tax expense (Note 8) - 34,054 500 34,354
---------- ---------- ---------- ----------
NET INCOME/ (LOSS) $ 78,720 $ 201,565 (433,144) $ 89,250
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings/(loss) per share:
Continuing Operations .04 .09 (.19) .04
---------- ---------- ---------- ----------
NET EARNINGS/(loss) PER SHARE $ .04 $ .09 $ (.19) $ .04
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 June 30, 1997 and 1996
Six month period ending June 30, 1997
-------------------------------------
<TABLE>
<CAPTION>
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
stock offering 250,000 2,500 497,500 -
Net Income (June 30, 1997) - - - (433,144)
--------- -------- ----------- -----------
BALANCE JUNE 30, 1997 2,224,104 $ 22,241 $ 4,093,199 $(1,404,302)
--------- -------- ----------- -----------
--------- -------- ----------- -----------
</TABLE>
Six month period ending June 30, 1996
-------------------------------------
<TABLE>
<CAPTION>
Total Additional
Shares Common Paid-In Retained
Issued Stock Capital Earnings
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 941,219 $ 9,412 $ 2,699,238 $ 73,991
Shares issued for rights
& non-compete 4,204 42 13,284 -
Net Income (June 30, 1996) - - - 89,251
------- -------- ----------- ---------
BALANCE JUNE 30, 1996 945,423 $ 9,454 $ 2,712,522 $ 163,242
------- -------- ----------- ---------
------- -------- ----------- ---------
</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 Six Month Periods Ended June 30, 1997 and 1996
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ------------------------
June 30 June 30 June 30 June 30
1997 1996 1997 1996
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net Income (loss) $ 78,720 201,563 (433,144) 89,250
Adjustments to reconcile
net (loss) to net cash
provided by operating
activities:
Depreciation 113,550 80,574 224,220 150,283
Amortization 16,067 25,442 32,134 50,884
Provisions for losses
on accounts receivable 5,607 (6,232) (8,970) (9,131)
Change in assets & liabilities:
Decrease (increase) in
accounts receivable (223,941) (408,674) (595,509) (134,521)
Decrease (increase) in
Employee advances (410) 885 (410) 1,990
Decrease (increase) in
inventory (252,483) 130,473 (403,990) 100,191
Decrease (increase) in
prepaids (157,812) (18,345) (173,531) 15,405
Decrease (increase) in
prepaid royalties - (6,549) - (6,549)
Decrease (increase) in
deposits (72,242) (32,224) (96,032) (43,507)
Decrease (increase) in
debt issue costs (391) 2,344 2,864 4,688
Decrease (increase) in
prepaids-related - (16,998) - (16,998)
Decrease (increase) in
other assets (90,356) - (90,356) (6,736)
Increase (decrease) in
royalties payable - 8,705 - 2,960
Increase (decrease) in
royalties payable-
related 4,177 (24,260) 11,555 -
Increase (decrease) in
accounts payable (294,484) 189,809 107,174 135,503
Increase (decrease) in
accrued expenses 352,164 7,067 289,439 (30,984)
Increase (decrease) in
income tax payable (200) 30,315 (100) 12,365
Increase (decrease) in
accrued advertising - (23,933) - (75,000)
TOTAL ADJUSTMENTS $(600,754) $ (61,601) $ (701,512) $ 150,843
--------- --------- ----------- ---------
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES $(522,034) $ 139,962 $(1,134,656) $ 240,093
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</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 Six Month Periods Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- -------------------------
June 30 June 30 June 30 June 30
1997 1996 1997 1996
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Received from related parties 234,543 - 295,419 13,122
Stock issuance for rights
and non-compete - 6,663 - 13,326
Issuance of Stock pursuant to
a Regulation S offering - 500,000
Receipt of Treasury Stock (180,000) (180,000)
Capital expenditures (44,594) (143,231) (132,293) (172,083)
Minority Interest in affiliate - 26,895 - 77,097
Construction in Progress - (495,738) - (868,935)
Advances to affiliate - (260,523) - (409,875)
--------- --------- --------- -----------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 9,949 (865,934) 483,126 (1,347,348)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (payments)
under line of credit
agreements 621,295 300,000 249,080 400,000
Net (payments) borrowings
under capital lease
obligations (5,976) 29,384 (12,784) 24,676
Net (payments) borrowings
on long-term debt (54,378) (50,312) 285,433 (46,201)
Net borrowings (payments)
on construction obligations - 368,638 - 669,335
--------- --------- --------- -----------
NET CASH (USED) BY
FINANCING ACTIVITIES 560,941 647,710 521,729 1,047,810
NET INCREASE (DECREASE)
IN CASH 48,856 (78,262) (129,801) (59,445)
CASH AT BEGINNING OF
PERIOD 61,488 337,740 240,145 318,923
CASH AT END OF PERIOD $ 110,344 $ 259,478 $ 110,344 $ 259,478
--------- --------- --------- -----------
--------- --------- --------- -----------
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital acquisitions financed by:
Accounts payable 44,594 109,358 132,293 138,210
Capital lease obligations - 33,873 - 33,873
Receipt of stock in exchange
For debt 180,000 - 180,000 -
</TABLE>
8
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 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
six months ended June 30, 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 $20,030 and $29,000 at June 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.
9
<PAGE>
DYNATEC INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
10
<PAGE>
DYNATEC INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 1997, 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 June 30, 1997 and December 31, 1996 is summarized as
follows:
June 30 December 31
1997 1996
---------- -----------
Raw $ 864,024 $ 583,138
Finished 796,406 673,302
---------- -----------
$1,660,430 $ 1,256,440
---------- -----------
---------- -----------
Valued at lower of cost or market:
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 June 30, 1997.
11
<PAGE>
DYNATEC INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1997 and December 31, 1996 are
detailed in the following summary:
June 30 December 31
1997 1996
---------- -----------
Equipment $3,050,623 $ 2,977,130
Office equipment 312,209 301,114
Signs and show booths 24,466 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
---------- -----------
$6,375,540 $ 6,293,184
Less accumulated depreciation $1,793,648 $ 1,619,185
---------- -----------
NET PROPERTY & EQUIPMENT $4,581,892 $ 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 six
months ended June 30, 1997 amounted to $ 221,220 ($ 150,283 for June
30, 1996).
12
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 and 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 six months ended June
30, 1997 amounted to $32,134 ($50,884 for 1996).
NOTE 5 - SHORT-TERM NOTES PAYABLE
Short-term notes payable as of June 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 August 31, 1997. As of June 30, 1997 and December 31,
1996, the outstanding balance of this revolving line-of-credit note
payable was $1,471,802 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 June 30, 1997
the Company had a ration of current assets to current liabilities of
.98 to 1 which is not in compliance with the provisions requiring a
ratio of no less that 1.5 to 1.
Pertinent data regarding aggregate short-term borrowings as of June
30, 2997 and December 31, 1996 is as follows:
June 30 June 30
1997 1996
---- ----
Maximum outstanding $1,471,802 $1,453,340
Average outstanding 1,162,051 1,038,877
Weighted average interest rate 9.38% 9.27%
13
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 and 1996
NOTE 6 - LONG-TERM DEBT
Long-term notes payable as of June 30, 1997 and December 31, 1996,
are detailed in the following summary:
June 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. 972,173 620,552
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. 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. 19,869 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. 75,440 82,400
14
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 and 1996
NOTE 6 - LONG-TERM DEBT (CONTINUED)
June 30 December 31
1997 1996
--------- -----------
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. 1,189,645 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. 978,093 989,679
Total long-term debt 3,473,900 3,188,467
Less: current portion (1,107,603) (795,415)
----------- ----------
Total long-term debt excluding
current portion $ 2,366,297 $2,393,052
----------- ----------
----------- ----------
Aggregate maturities are as follows:
Year ending March 31, 1998 $1,107,603
1999 139,190
2000 143,034
2001 67,648
2002 68,929
Later 1,947,496
----------
Total long-term debt $3,473,900
----------
----------
15
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995
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 June
30, 1997 and December 31, 1996.
June 30 December 31
1997 1996
-------- -----------
Equipment $ 82,357 $ 91,857
Less: Accumulated depreciation (12,261) (5,211)
-------- ---------
Net property under capital lease $ 70,096 $ 86,646
-------- ---------
-------- ---------
At June 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 June 30:
1998 $ 30,477 $ 19,738
1999 30,477 9,892
2000 16,704 756
2001 14,918 -
2002 8,951 -
Later years - -
--------- --------
Total minimum lease payments $ 101,527 $ 30,386
--------
--------
Less: Interest (15,752)
---------
Present value of net minimum
lease payments $ 85,775
Less: Current portion (22,761)
---------
Capital lease obligations
payable long-term $ 63,014
---------
---------
16
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 and 1996
NOTE 8 - INCOME TAX EXPENSE
The provisions for taxes on earnings from continuing operations
consisted of the following:
06-30-97 06-30-96
-------- --------
Current
Federal - $28,174
State 500 6,180
----- ------
500 34,354
----- ------
----- ------
NOTE 9 - MAJOR CUSTOMERS
Sales to major customers for the six months ended June 30, 1997 are
summarized as follows:
Percent of
Sales Company Wide
Customer Dollars Revenues
-------- --------- ------------
Dolgencorp $ 833,049 14%
United Stationers 465,653 8%
NOTE 10 - COMMON STOCK
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. 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.
17
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 and 1996
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
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 June 30, 1997,
200,000 options have been granted pursuant to this plan.
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.
18
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 and 1996
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 537,500 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.
19
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED COST OF SALES
For the Three and Six Month periods ended June 30, 1997 and 1996
Schedule 1
<TABLE>
<CAPTION>
June 30 June 30 June 30 June 30
1997 1996 1997 1996
---------- ---------- ---------- ----------
(3 months) (3 months) (6 months) (6 months)
<S> <C> <C> <C> <C>
COST OF GOODS MANUFACTURED
Beginning inventory - raw materials 771,822 379,950 583,138 390,490
Raw materials purchased 1,835,748 1,050,255 3,088,215 2,065,388
Freight 112,067 50,912 177,165 112,119
Depreciation 86,400 52,041 173,413 99,110
Labor 247,853 170,649 514,086 308,474
Repairs and maintenance 2,120 5,473 6,685 12,467
Miscellaneous direct 20,333 26,632 45,627 42,230
Engineering, other 24,056 - 53,040 -
Less: ending inventory - raw materials (864,024) (372,761) (864,024) (372,761)
---------- ---------- ---------- ----------
TOTAL COSTS OF
GOODS MANUFACTURED $2,236,375 $1,363,151 $3,777,345 $2,657,517
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
COST OF FINISHED GOODS
Beginning inventory - finished goods 636,125 907,512 673,302 866,690
Purchases 185,482 - 301,110 -
Amortization 15,942 25,317 31,884 50,634
Less: ending inventory - finished goods (796,406) (784,228) (796,406) (784,228)
---------- ---------- ---------- ----------
TOTAL COST OF
FINISHED GOODS $ 41,143 $ 148,601 $ 209,890 $ 133,096
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
ROYALTIES 67,133 68,415 137,199 125,308
---------- ---------- ---------- ----------
TOTAL COST OF SALES $2,344,651 $1,580,167 $4,124,434 $2,915,921
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
20
<PAGE>
DYNATEC INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED SELLING EXPENSES
For the Three and Six Month periods ended June 30, 1997 and 1996
Schedule 2
<TABLE>
<CAPTION>
June 30 June 30 June 30 June 30
1997 1996 1997 1996
---------- ---------- ---------- ---------
(3 months) (3 months) (6 months) (6 months)
<S> <C> <C> <C> <C>
Advertising $ 92,032 $ 40,046 $ 179,574 $ 74,940
Commissions 135,946 125,971 262,074 259,364
Depreciation - selling 4,796 17,738 9,386 29,969
Freight 90,679 89,925 193,200 179,161
Miscellaneous 10,097 4,190 14,662 5,398
Promotions & Literature 28,627 25,030 90,495 66,414
Salaries - sales 133,366 139,957 260,313 255,103
Travel & Entertainment 36,286 31,712 109,874 77,007
-------- -------- ---------- --------
TOTAL SELLING EXPENSES $531,829 $474,569 $1,119,578 $947,356
-------- -------- ---------- --------
-------- -------- ---------- --------
</TABLE>
================================================================================
UNAUDITED CONSOLIDATED GENERAL AND ADMINISTRATIVE EXPENSES
Schedule 3
<TABLE>
<CAPTION>
June 30 June 30 June 30 June 30
1997 1996 1997 1996
---------- ---------- ---------- ---------
(3 months) (3 months) (6 months) (6 months)
<S> <C> <C> <C> <C>
Amortization 125 125 250 250
Automobile 913 983 988 983
Bank Charges 6,245 2,221 10,374 4,172
Consulting 3,400 - 16,089 -
Corporate expense 84,470 31,934 148,237 78,310
Depreciation - office 22,938 10,794 42,005 21,204
Dues and subscriptions 1,648 413 3,014 638
Insurance 63,178 45,965 131,276 92,746
Janitorial 1,747 1,250 3,524 2,477
Legal & accounting 63,597 17,316 96,373 52,623
Miscellaneous 3,675 594 58,77 1,078
Office expense 25,071 31,888 59,806 52,796
Payroll taxes 35,742 28,396 89,201 73,553
Rent 3,525 46,969 23,426 82,134
Repairs and maintenance 14,969 1,953 17,425 4,850
Salaries - office 92,937 129,839 190,295 230,130
Taxes 6,237 8,765 14,627 11,666
Telephone 23,143 16,808 45,212 29,422
Utilities 14,470 11,710 27,595 24,480
-------- -------- -------- --------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES $468,030 $387,923 $925,594 $763,512
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 110,344
<SECURITIES> 0
<RECEIVABLES> 1,730,229
<ALLOWANCES> 0
<INVENTORY> 1,660,430
<CURRENT-ASSETS> 3,961,084
<PP&E> 4,581,892
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,032,493
<CURRENT-LIABILITIES> 4,058,642
<BONDS> 0
0
0
<COMMON> 22,241
<OTHER-SE> 2,508,897
<TOTAL-LIABILITY-AND-EQUITY> 9,032,493
<SALES> 6,045,561
<TOTAL-REVENUES> 0
<CGS> 4,124,434
<TOTAL-COSTS> 2,343,050
<OTHER-EXPENSES> 10,721
<LOSS-PROVISION> 13,500
<INTEREST-EXPENSE> 223,772
<INCOME-PRETAX> 432,644
<INCOME-TAX> 500
<INCOME-CONTINUING> 432,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433,144
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
