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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Year Ended December 31, 1996,
Six-Month Transitional Period Ended December 31, 1995,
and Fiscal Year Ended June 30, 1995
Commission file number: 0-12806
DYNATEC INTERNATIONAL, INC.
(Name of small business issuer in its charter)
UTAH 87-0367267
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
3820 Great Lakes Drive
Salt Lake City, UT 84120
(Address of principal (Zip Code)
executive offices)
Issuer's telephone
number: (801) 973-9500
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock (Par Value $0.01 per share)
----------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Registrant's revenues for the calendar year ended December 31, 1996 were
$9,808,314.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the average bid asked price of the Common Stock on
April 8, 1997 as reported on the NASDAQ National Market System, was
approximately $9,461,406.
As of March 31, 1997 Registrant had outstanding 2,224,104 shares of Common
Stock.
Transitional Small Business Disclosure Format. Yes No X
--- ---
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TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 General Description of Business,
Marketing and Market Segment Information
1.2 Subsidiaries
1.3 Raw Materials and Suppliers
1.4 Trademarks and Patents
1.5 Seasonal Nature of Products
1.6 Inventory Load and Backlog Orders
1.7 Major Customers
1.8 Competitive Conditions in the Market
1.9 Environmental Regulation
1.10 Number of Persons Employed
ITEM 2 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 3 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 6
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART II
ITEM 5 MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . 6
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . 7
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA . . . . . . . . . 9
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . . . . 11
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PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE
ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 10 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . 13
ITEM 11 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . 15
ITEM 12 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . 17
PART IV
ITEM 13 EXHIBITS, FINANCIAL STATEMENTS AND
SCHEDULES AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 18
(a) Consolidated financial statements, financial schedules,
and supplemental information
(b) Reports on Form 8-K
(c) Exhibits Index
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 19
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PART I
ITEM 1. BUSINESS
1.1 GENERAL DESCRIPTION OF THE BUSINESS OF THE COMPANY - MARKETING AND
MARKET SEGMENT INFORMATION. Dynatec International, Inc., is engaged in the
manufacture and distribution of consumer products.
TELEPHONE ACCESSORIES.
Historically the telephone accessory products have been the principal
source of revenues for the Company. The telephone shoulder rest products are
currently distributed by the Company under the trade names of "Softalk" (R)
"Mini-Softalk" (TM) "Softalk II" and "Universal Phone Rest". Other telephone
accessory products include "Twisstop," "Twist Cord," "Value Pack" and Telephone
Accessory Packaging.
For the calendar year ended December 31, 1996, revenues from the telephone
accessory products accounted for 64.5% of the total revenues of the Company. In
the six month transitional period ended December 31, 1995, and the fiscal year
1995 the telephone accessories accounted for 62.7% and 61.2% respectively, of
revenues of the Company.
It is anticipated that this segment will account for a similar percentage
of Company revenues in calendar year 1997. Seven percent of the telephone
accessory products revenues and five percent of total Company revenues are
derived through sales to AT&T. United Stationers accounted for ten percent of
telephone accessory products revenues and seven percent of total company
revenues. Gemini Industries accounted for twelve percent of telephone
accessories revenue and eight percent of total company revenue. S.P. Richards
accounted for twelve percent of telephone accessory revenues and eight percent
of total company revenue. Ten percent of the telephone accessory products
revenue and seven percent of total company revenue were derived from sales to
Boise Cascade. Staples accounted for eight percent of telephone accessory
products revenues and five percent of total company revenues. These products
are additionally sold principally through Sears stores, various office products
stores and office products super stores.
HARDWARE/HOUSEWARES PRODUCTS.
For the calendar year ended December 31, 1996, the hardware/housewares
products of the Company accounted for 30.3% of the revenues of the Company. In
the six month transitional period ended December 31, 1995, and the fiscal year
1995 this segment accounted for 27% and 26.4% respectively, of the revenues of
the Company. The hardware products currently being sold by the Company include
the "Expand-A-Shelf", "Mini Expand-A-Shelf", "Mega Expand-A-Shelf", "Expandable
Book Shelf", "Sofstop", "Cover-Up", " Hide It", "Sofstop II", "The Wedge",
"Super Wedge", "Medicine Cabinet Organizer", "Drawer Organizer", and "Freedom
Hanger."
For the calendar year ended December 31, 1996, twenty percent of the
Hardware Products segment sales were made to National Hardware Manufacturing.
The sales to National represented six percent of total company revenues.
Fifteen and fourteen percent of segment sales were to Sams Club and Walmart
respectively. Sams Club and Walmart accounted for five and four percent of
total Company revenues.
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The hardware products are being sold directly to retail stores,
distributors and catalogs including National Manufacturing, Lechters, Container
Store, Sams Club, Walmart, Target, Bed Bath & Beyond and others.
BATTERY PRODUCT LINE.
In fiscal year 1993 the company signed a distribution agreement to
represent Fuji Novel Batteries in various domestic markets. In fiscal years
1994 and 1995 the company renewed the agreement and obtained the rights to
Mexico. For the calendar year ended December 31, 1996, sales were less than one
percent of total revenues as the product line was discontinued in early 1996.
MISCELLANEOUS PRODUCTS.
Miscellaneous products of the Company include the "Softalk Erasable Board"
a soft wipe erasable planning board for office and personal use, as well as
cassette tapes and disposable cameras. The tapes and cameras were specific buys
for a retailer and are not considered a new product segment.
The miscellaneous products segment accounted for five percent of total
Company revenues for the year ended December 31, 1996. In previous years,
sales of this segment accounted for less than one percent of Company revenues.
1.2 SUBSIDIARIES OF THE COMPANY. For the year ended December 31, 1996,
the Company conducted most of its operations through certain of its
subsidiaries. Softalk, Inc. is a wholly owned subsidiary engaged in the
manufacture and distribution of the telephone accessory products, hardware
products, battery products, and miscellaneous products of the Company.
The name of the subsidiary, the date of organization, date of acquisition
by the Company, and percentage owned by the Company are set out in chart form
below.
PERCENTAGE
DATE SHARES
NAME DATE ACQUIRED HELD
SUBSIDIARY ORGANIZED BY COMPANY BY COMPANY
- --------------------------------------------------------------------------
(1) Softalk, Inc. 7/15/82 4/18/83 100%
(2) Arnco Marketing, LTD 7/22/86 9/30/91 100%
(3) Nordic Technologies, Inc. 10/25/96 10/25/96 100%
(4) SofTalk Communications, Inc. 12/23/96 12/23/96 100%
- --------------------------------------------------------------------------
(1) Engaged in the manufacturing and distribution of the products of the
Company.
(2) Arnco Marketing imports and markets Twisstop to Softalk and others
under a license agreement with Recoton Inc.
(3) Involved in the research, development and marketing of flashlight
products.
(4) Engaged in the research and development of telecommunications
products.
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With regard to the other subsidiaries named above, the Company will employ
consolidated financial statements which include income and expenses for each of
the subsidiaries as part of a single financial statement.
1.3 RAW MATERIALS AND SUPPLIES. The Company uses a premixed plastisol to
manufacture the Softalk, Mini Softalk, Universal phone rest, Sofstop, and
Softalk II products. "Plastisol" is a generic term for the petroleum based raw
material from which the vinyl substance or product is formed.
The remainder of the Company's products are purchased in finished form and
packaged by the supplier or at the Company headquarters.
The Company, to date, has relied upon approximately fifteen primary
suppliers for plastic and other materials ordered to specification for its
assembly, manufacturing, and marketing processes. The Company has not
experienced any shortage of plastic products or of plastisol in the past year,
and does not anticipate any shortage in calendar year 1997. However, in
calendar year 1997 the Company expects increases in the price of plastics
products as well as freight and packaging increases.
1.4 TRADEMARKS AND PATENTS. The Company currently owns or has a contract
right in Federal Trademark and Patent Registry filed for the following products,
as well as certain Foreign Trademark and Patent Rights.
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TRADEMARKS
YEAR OF
TRADEMARK
TRADEMARK EXPIRATION
PRODUCT COUNTRY GRANTED/FILED OR RENEWAL
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(a) Softalk U.S.A. 8/10/90 Each 20 Years
Canada 2/05/81 Each 15 Years
(b) Mini-Softalk U.S.A. 8/10/90 Each 20 Years
(c) Flashlights U.S.A. 12/18/96 Each 20 years
8/19/96
- --------------------------------------------------------------------------
PATENTS
YEAR OF
PATENT
PATENT EXPIRATION
PRODUCT COUNTRY GRANTED/FILED OR RENEWAL
- --------------------------------------------------------------------------
(a) Universal Softalk U.S.A. 5/07/93 2007
(b) Softalk II U.S.A. 5/02/90 2004
(c) Flashlights U.S.A. 7/24/96 -----
11/14/89 1997
6/27/89 2000
5/7/91 1998
- --------------------------------------------------------------------------
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The principals of the Company think that the trademark protection afforded
by the described trademarks is important to each of the products identified
above.
1.5 SEASONAL NATURE OF PRODUCTS. The two principal segments generating
revenue for the Company are the telephone accessories, and the
hardware/housewares products. The telephone accessory products experience a
seasonal fluctuation with a significant portion of sales taking place in the
period July 1 to December 31 each year. No significant seasonal fluctuation has
been experienced with the hardware/housewares products of the Company.
1.6 INVENTORY LOAD AND BACKLOG ORDERS. The Company has followed a
standard policy of shipping within forty-eight hours of receipt of payment on
orders, or within forty-eight hours of orders on approved credit lines with the
exception of large hardware/housewares orders. Such orders are filled within two
to four weeks. The Company has been able to ship within the foregoing guidelines
on almost all occasions. The Company, in order to meet the foregoing shipping
policy, keeps an inventory of approximately two months of all products.
1.7 MAJOR CUSTOMERS. For the calendar year ended December 31, 1996, 10%
of the telephone accessory products were distributed through sales to Boise
Cascade whose headquarters are at 800 West Bryn Mawr Road, Itasca, IL 60143
For the year ended December 31, 1996, 10% of the telephone accessory
products were distributed through sales to United Stationers Supply Company
whose headquarters are at 1900 South Des Plaines Ave., Forest Park, IL 60130.
For the year ended December 31, 1996, 12% of the telephone accessory
products were distributed to S.P. Richards whose headquarters are at P.O. Box
1266, Smyrna GA 30081.
For the year ended December 31, 1996, 12% of the telephone accessory
products were distributed through sales to Gemini Industries whose headquarters
are at 215 Eatin Road, Clifton NJ 07014.
For the year ended December 31, 1996, 20% of the hardware/housewares
products were distributed through sales to National Manufacturing whose
headquarters are at 1 First Avenue, Sterling, Illinois 61081.
For the year ended December 31, 1996, 15% of hardware/housewares products
were distributed to Sams Club whose headquarters are at 608 S.W. 8th Street,
Bentonville, AR, 72712.
For the year ended December 31, 1996, 14% of hardware/housewares products
were distributed to Walmart whose headquarters are at 702 S.W. 8th Street,
Bentonville, AR 72716.
The loss of the Boise Cascade, United Stationers, S. P. Richards, Gemini
Industries, National Manufacturing, Sams Club and Walmart as a customer for the
telephone accessory and hardware/housewares products would have a significant
adverse effect on their various segments. Such a loss may have material negative
impact on the Company as a whole. The Company and its predecessor have sold
telephone accessory products to Boise Cascade, United Stationers and S.P.
Richards since 1981 and it is anticipated that this business relationship will
continue. The Company has been marketing the
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Twisstop product to Gemini since 1991 and has been marketing to National
Manufacturing since 1990. The Company recently began housewares marketing
efforts with Sams Club and Walmart.
No other customer of the Company was the source of ten percent or more of
the revenues of the Company during the year period ended December 31, 1996. The
loss of a single customer of the other products of the Company would not have a
significant adverse effect on the Company.
1.8 COMPETITIVE CONDITIONS IN THE MARKET. The Company believes that it is
engaged in highly competitive market segments for each of its products produced.
The Company bases this conclusion on the fact that the generic design or
function of the telephone accessory products could probably be functionally
replicated without any great difficulty. Further, many of the other products of
the Company involve relatively easy assembly processes which would allow for
ease of entry into the marketplace by competitors. Not withstanding this fact,
the telephone accessory products of the Company have proven to be very
competitive products.
The doorstop products, as hardware items, experience significant
competition with numerous other doorstop products, but are substantially
different than traditional doorstops. Competition with this product is largely
on the basis of price, although it is believed that the Company's products are
competitively priced. The majority of the other products could be replicated
fairly easy although the mold costs for such products could be substantial. The
Company also has legal protection on various products.
1.9 ENVIRONMENTAL REGULATION. The Company believes that it is in
compliance with all environmental quality regulations pertaining to such matters
as emission, waste disposal, safety equipment, and like procedures. The Company
further believes that it is exempted from specific Environmental Protection
Agency (EPA) requirements or regulations as to its manufacturing and
distribution of products. The Company believes it is in compliance with all
state and local environmental statutes. The Company also believes that it is in
compliance with all Occupational, Safety, and Health Administration standards in
its work place.
1.10 NUMBER OF PERSONS EMPLOYED. The Company employs a full-time sales,
administrative and clerical staff of 16 people. The total average monthly
payroll for this 16 member staff is approximately $90,000. The Company has an
average monthly assembly, warehouse and distribution staff of approximately 45
people with an average monthly payroll of approximately $60,000. The number of
assembly, warehouse and distribution employees is subject to adjustment based
upon demand and has ranged, during the year ended December 31, 1996, from a high
of approximately 65 employees to a low of approximately 56 employees.
ITEM 2. PROPERTIES
For the seven month period ended July 31, 1996, the Company operated one
consolidated facility for its main administrative offices and assembly plant at
1820 South 3594 West Salt Lake City, Utah 84104. These facilities were leased.
The lease on the main facility provided for monthly rentals of $9,870.00
The lease on the 38,500 square foot plant located in Salt Lake City expired in
February, 1997.
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In addition to the base rental payment on the Salt Lake City facility, the
Company pays an annual maintenance fee based upon a percentage formula. The
amount of the maintenance fee varies on a calendar year basis. The Company pays
for its own electricity and heating.
In August 1996, the Company occupied a new facility that was built by the
Company. The facility has approximately 54,000 square feet of which
approximately 6,000 square feet (11%) is used for office and administrative
purposes, and 48,000 square feet (89%) is used for manufacturing, assembly and
storage area.
ITEM 3. LEGAL PROCEEDINGS
The company known as P.I.E. Nationwide, Inc. filed a chapter 7 bankruptcy
petition prior to June 1992. In June 1992, a complaint was filed against the
registrant and numerous other companies in the United States Bankruptcy Court,
Middle District of Florida, in Jacksonville, Florida by Olympia Holding
Corporation the trustee for P.I.E. trucking company. The trustee for Olympia
claims that the registrant was undercharged for several freight bills dating
back to 1989 through 1991. The action claims that P.I.E. improperly
undercharged the company for freight and claims the company owes P.I.E.
approximately $4,500. Management and legal counsel believe that the suit is
without merit, but regardless of the outcome it is not expected to have a
significant affect on the company financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 12, 1996. Routine
matters voted on by the shareholders included elections to the board of
directors and the appointment of auditors. The shareholders were also asked to
approve an employee incentive stock option plan whereby 300,000 shares of common
stock would be set aside to be granted as options at the discretion of the Chief
Executive Officer of the Company and to approve the amendment of the bylaws of
the corporation to allow for additional directors of the Company, up to a
maximum of nine. All proposals were approved by a majority of the shareholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The stock of the Company is sold over-the-counter primarily in the states
of California, Illinois, Florida, New York, Texas and Utah. The Company's stock
is listed on the NASD Automated Quotation System (NASDAQ), under the symbol
DYNX. As of the 31st day of December, 1996 there were 1,154 record holders of
the stock of the Company and 1,974,104 shares of the stock were issued and
outstanding.
The price range of the Company's stock for the two most recent fiscal years
is set forth on a quarterly basis in the Consolidated Financial Statements which
are a part of this report. The referenced
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quotations reflect inter-dealer prices without retail markup, markdown, or
commissions, and may not necessarily represent actual transactions.
The Company has paid no dividends on common stock and has no present intent
to pay dividends in calendar year 1997. The Company intends to retain earnings
for business expansion in the foreseeable future.
On December 12, 1996, the board of directors approved a stock split whereby
each shareholder of record received an additional one half share for each share
previously owned.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
The Consolidated Balance Sheets of the Company, as shown in the financial
statements attached hereto, reflect the financial position of the Company.
The Consolidated Statements of Operations of the Company, as shown in the
attached financial statements, reflect the Company's operations.
Results of Operations: For the year ended December 31, 1996, the Company
experienced total revenues of $9,808,314 compared to total revenues of
$8,979,939 in the prior fiscal year ended June 30, 1995. Revenues for the six
month period ended December 31, 1995 were $5,230,971. Comparative period
revenues increased $828,375 or 9%.
For the year ended December 31, 1996, there was an increase of $834,434
(15%) in the revenues generated from the telephone accessory product segment of
the Company compared to total revenues for the fiscal year ended June 30, 1995.
This overall increase was a result of several factors including a decrease in
the sales of Softalk of $384,147 (19%), a decrease in Mini Softalk sales of
$48,676 (12%) and a increase in Universal Softalk sales of $48,716 (12%). The
Softalk II experienced a sales increase of $612,874 (101%) over the prior twelve
month period ended June 30, 1995. The Value Pack product experienced sales of
$452,047 versus $1,108 for the fiscal year ended June 30, 1995. Collectively
the shoulder rest products had increased sales of $680,814. The increase is
mainly attributable to increased superstore sales and additional sales to
wholesalers. The Twisstop product revenues increased by $202,236 (13%). The
Twist Cord product experienced a sales increase of $137,355 (101%). The
Twisstop and Twist Cord products increased due to increased market penetration.
The Company began packaging product for AT&T in fiscal year 1995. The Company
packaged a line of cellular accessory products. Total packaging revenues
amounted to $125,478 for the year ended December 31, 1996. This represents a
decrease of $185,971 (60%) over the same period of the prior fiscal year. AT&T
has made the decision to discontinue product packaging.
The Hardware/Housewares products segment produced an increase in revenues
during the year ended December 31, 1996 of $598,434 or 25% compared to fiscal
year ended June 30, 1995.
The increase in the hardware products segment is partially a result of an
increase in sales of the shelf products. Expand-A-Shelf and Mini Expand-A-Shelf
increased sales by $373,649 (38%), and $9,343 (11%) respectively. The shelf
sales increases are due to an expanded customer base as well as the increased
market penetration of the Expand-A-Shelf and Mini Shelves. The Mega Expand-
A-Shelf
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experienced a sales decrease of $87,279 (18%) for the year ended December 31,
1996. The Coverup line had increased sales of $66,291 (17%), while the
Sofstop line showed an increase of $132,594 (66%). During fiscal year 1995
the company introduced the Hide It door bump product. This product
experienced sales of $6,475 during 1996.
The Wedge product line sales increased by $51,685 (42%) over the same
period for the fiscal year ended June 30, 1995.
Since fiscal year 1995, the Company has introduced several new products in
the hardware/houseware lines. The Medicine Cabinet Organizer and Drawer
Organizer experienced sales of $27,881 and $28,811 respectively. The Expandable
Bookshelf and Closet Hanger experienced sales of $70,055 and $8,639
respectively. The Company is in the process of aggressively expanding the
housewares line of products.
Miscellaneous products consisted of sales of Eraseable Boards of $10,601
for 1996 compared to $29,702 for fiscal year ended June 30, 1995.
The Company also had sales of disposable cameras, cassette tapes, and
flashlights. The sales of cameras and tapes were specific buy orders for a
large retailer. It is unknown at this time whether or not orders will be
repeated in these items.
On Monday, December 2, 1996, the Company effected the closing of the
acquisition of substantially all of the assets of Nordic Lights, Inc., a Texas
Corporation, doing business as Nordic Lites, Inc. This closing and acquisition
took place pursuant to an Asset Purchase Agreement which provided that its
effective date was December 1, 1996.
The assets described in the transition were transferred to a new wholly
owned subsidiary of the Company. The subsidiary is named, Nordic Technologies,
Inc. ("Nordic Technologies"), a Utah corporation. It is the intention of
Nordic Technologies to pursue the manufacture and sale of a broad range of
flashlight products and accessories under the trademark "Nordic Lites." These
products include aluminum and plastic light products.
The initial purchase of the assets of Nordic Lights, Inc. was accomplished
through the issuance of 550,000 shares of common stock of the Company. An audit
value of $1.60 per share has been determined to be a fair value for the assets
of Nordic Lights, Inc. The value has been set due to the thinly traded and
restricted nature of the shares. In April 1997 an agreement was reached whereby
several third parties were to buy a number of shares back from Nordic
Industries. The purchase price for said shares has been set at $1.60 per share.
Management of the Company is unsure of the future of the flashlight
business as several factors have changed since December 1996. The Company is
pursuing an agreement to manufacture flashlights off shore which would allow for
greater profit margins for the products.
TELECOMMUNICATIONS PRODUCTS
The Company has been agressively developing a line of telecommunications
products to include wired and wireless telephone headsets, telephones,
conference speakers, and other products. Significant time and cash has been
used in the development of this product line including the hiring of two full
time
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employees. Significant cash outlays have been made for molds, engineering,
and other development costs. Management believes that the Company will have a
line of telecommunications products to market in late 1997.
The battery product line experienced sales of $44,558 in the year
ended December 31, 1996, compared to sales of $1,031,900 for the fiscal year
ended June 30, 1995. This represents a decrease of $907,342 due to the decision
by the Company late in 1995 to discontinue the battery line as a business.
Net income declined from a net income of $4,632 for the fiscal year ended
June 30, 1995, to a net loss of $1,045,149 for the year ended December 31, 1996.
Liquidity and capital resources: During 1996, the company experienced a
decrease in its cash position of $78,778. The cash position decrease is a
function of a large amount of cash being used for the construction of a building
and expenditures for equipment, a net increase in cash from financing activities
(line of credit borrowings) and an increase in cash provided from operations.
Long-term liabilities increased from $968,929 at December 31, 1995 to
$2,482,650 at December 31, 1996. Current liabilities increased from $2,318,859
at December 31, 1995 to $3,088,908 at December 31, 1996. The increase is due to
increased debt, particularly the construction of a warehouse and office facility
and the debt incurred with that construction. Stockholders' equity decreased
from $2,782,641 at December 31, 1995 to $2,644,282 at December 31, 1996. The
decrease in Stockholders equity is mainly attributable to the net loss of the
Company but was somewhat offset by the issuance of stock for the purchase of
assets for use in the operations of the Company.
The ratio of total current assets to total current liabilities was .94 at
the end of 1996 compared to 1.39 at December 31, 1995.
Impact of Inflation and Changing Prices: There was some impact on the
Company by reason of inflation during the past year. Freight carriers used by
the Company increased their rates in calendar year 1996. Also, prices increased
for raw materials used in injection and blow molded products as well as for
packaging. These price increases were not passed along to customers in 1996.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Reference is made to the consolidated balance sheets and operations of the
company which are incorporated as part of this form 10KSB and which contain the
Consolidated Balance Sheets for fiscal year 1995 and the six month transitional
period ended December 31, 1995, and for the calendar year 1996. Reference is
also made to "Impact of Inflation and Changing Prices" set forth above.
The Consolidated Balance Sheets of the Company, as shown in the Financial
Statements, reflect the financial position of the Company.
The Consolidated Statements of Operations of the Company, as shown in the
Financial Statements, reflect the Company's operations.
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SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in connection
with, and is limited by, the more complete information in the attached
Consolidated Financial Statements and notes thereto.
<TABLE>
Transition
Year Ended Period Fiscal Year Ended
12/31/96 Ended 12/31/95 1995 1994 1993
----------- -------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Telephone accessories 6,330,000 3,278,000 5,495,000 5,659,000 5,763,000
Hardware Products 2,973,000 1,415,000 2,375,000 2,100,000 1,673,000
Batteries 45,000 524,000 1,032,000 1,187,000 -
Other 460,000 14,000 78,000 75,000 98,000
--------- --------- --------- --------- ---------
Total Revenues 9,808,000 5,231,000 8,980,000 9,021,000 7,534,000
Income (loss) from
continuing operations
before taxes (557,000) 110,000 (28,000) 346,000 511,000
Income tax expense
(benefit) (5,000) 46,000 33,000 55,000 3,000
Income (loss) from
continuing operations (552,000) 64,000 5,000 291,000 508,000
Extraordinary Items (493,000) - - - -
Net Income (loss) (1,045,000) 64,000 5,000 291,000 508,000
Total assets 8,216,000 6,070,000 4,844,000 4,279,000 3,598,000
Stockholder's equity 2,664,000 2,783,000 2,698,000 2,678,000 2,008,000
Long term debt 2,483,000 969,000 444,000 419,000 560,000
Shares outstanding 1,974,000 1,412,000 1,403,000 1,311,000 1,151,000
Earnings (loss) per
share (1):
Continuing operations (.28) .05 .00 .22 .44
Extraordinary items (.25) - - - -
--------- --------- --------- --------- ---------
Net Earnings (loss) per
share (.53) .05 .00 .22 .44
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(1) Earnings per share calculations reflect 10-for-1 reverse stock split in
June, 1990 and 5-for-1 reverse split in November 1992, and 1/2 for 1 stock split
in 1996.
10
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company has no disagreement with its accountants on the accounting and
financial disclosures contained in this Form 10-KSB. In late 1995 the audit
partner from the accounting firm of Kartchner & Hunt left the firm to become a
partner elsewhere. The decision was made in late 1996 to change accountants to
the firm of Jones, Jensen & Company. This decision was mainly attributable to
the fact that Jones, Jensen & Company has considerable expertise in public
company reporting and the audit partner from the prior firm is now a partner
with Jones, Jensen & Company. The former accounting firm is being used as a
consultant by the Company.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During the year ended December 31, 1996, or portions thereof, the following
have served in the capacities indicated for the Company or have been nominated
to serve until the next annual meeting of shareholders. As of the date of this
report, the five members serving on the board are Mr. Wood, Mr. Jack, Mr.
Newbold, Mr. Volcansek and Mr. White.
NAME AND OFFICE PRINCIPAL OCCUPATION DURING
HELD IN THE THE PAST FIVE YEARS AND OTHER
CORPORATION AGE DIRECTORSHIPS
- ---------------- --- --------------------------------------
Donald M. Wood 51 Chief Executive Officer of the Company
Chief Executive Officer since November 1995; President and CEO
Director and from 1982 until November 1995, officer
Director Nominee and director of Softalk, Inc. Since
July, 1982; prior to 1982, employed by
Bank of America, N.T. & S.A. serving
as Vice President and head of the Sao
Paulo, Brazil Office.
Fredrick R. Jack 53 President of Dynatec since November
President 1995. Executive Vice-President of
Director and Dynatec since December of 1994.
Director Nominee Vice-President of Marketing of Dynatec
since April, 1983 and Secretary of
Dynatec since April, 1985. Mr. Jack also
serves as President and a Director of
Softalk, Inc., a wholly owned subsidiary
of Dynatec. Prior to April, 1983, Mr.
Jack served as the Vice President of
Marketing for Softalk, Inc.
Reed Newbold 51 Independent financial planner and
Director and consultant, Mr. Newbold served as an
assistant
11
<PAGE>
Director Nominee Vice-President of Tracy Collins Bank &
Trust in 1987. He was also employed as
a mortgage loan officer with Salt Lake
Mortgage in 1985 & 1986, and as the
Executive V.P. of Heritage Bank from
1981 to 1985.
Frederick W. Volcansek 51 Mr. Volcansek is an International
Director and Market Development Consultant who
Director Nominee provides services to Fortune 500
companies. Mr. Volcansek was U.S.
Deputy Under Secretary of Commerce in
Washington from 1988 until 1992.
David J. White 39 Secretary of the Company since November
Executive Vice-President, 1995. Executive Vice-President of
Secretary Dynatec since December 1994. Vice-
Director and President of Finance of Dynatec since
Director Nominee December 1987, Controller of Dynatec
from February 1985 until December 1987,
Mr. White is a licensed Certified Public
Accountant in the State of Utah.
Mr. Wood was first elected to the Board of Directors of the corporation at
the Company's Annual Meeting of Shareholders in April, 1983. Mr. Jack was
elected to the Board of Directors by Board action in April 1987. Mr. Newbold,
and Mr. Volcansek were elected to the Board of Directors at the Company's Annual
Meeting of Shareholders in December 1988. Mr. White was elected to the Board of
Directors by Board action in November 1991. The members of the Board currently
serving are director nominees to be elected at the Annual Meeting of
Shareholders and serve until the Annual Meeting in 1997.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During the year ended December 31, 1996, all officers and directors
prepared and filed all Forms 3,4 and 5 required by Section 16(a) of the
Exchange Act. All such forms were filed in a timely manner.
OTHER INFORMATION REGARDING THE BOARD
The Board of Directors of the Company held four meetings in the year ended
December 31, 1996. None of the directors participated in less than 75% of the
meetings held during the period. During the year ended December 31, 1996, each
Board member was paid $2,000 for each meeting attended.
None of the directors, officers or five percent owners of the stock of the
Company is involved in any significant legal proceedings adverse to the Company
or has a material interest adverse to the Company. The directors, officers and
five percent owners of the stock of the Company do not believe that their
interests are, in fact, adverse to the Company.
12
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The table set forth below contains information about the remuneration
received and accrued during the last calendar year and prior two calendar years
from the Company and its subsidiaries by each of the most highly compensated
executive officers of the Corporation whose remuneration for that year exceeded
$100,000.
Dynatec International, Inc
Summary Compensation Table
<TABLE>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Year Annual Restricted (3) All other
Ended (2) Compen- Stock Options/ LTIP Compen-
Name and Decem. Salary Bonus sation Award(s) SARs Payouts sation
Principal Position 31 ($) ($) ($) (1) ($) (#) ($) ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald M. Wood 1996 194,640 1,421 8,000 9,000 - -
- - Chief Executive 1995 194,330 1,421 12,000 - - -
Officer 1994 159,421 21,600 5,000 - - -
F. Randy Jack 1996 142,440 1,522 8,000 8,000 - -
- - President 1995 142,215 1,522 12,000 - - -
1994 122,722 15,840 5,000 - - -
David J. White 1996 94,500 1,218 8,000 7,000 - -
- - Executive 1995 94,312 1,218 10,000 - - -
Vice President 1994 80,850 10,368 5,000 - - -
</TABLE>
(1) Total cash compensation shown above does not include the value of company
leased or owned vehicles and insurance payments made on behalf of officers.
Such items are included on the individual officers W-2's. The amounts
shown as other annual compensation are directors fees received during the
fiscal year. Mr. Wood has voluntarily reduced his pay by $100,000 annually
beginning in January 1997. Mr. Jack has voluntarily reduced his pay by
$25,000 annually beginning in April 1997.
(2) Bonus compensation includes time in service bonus and merit bonus at
discretion of the Board of Directors.
(3) A stock option plan was implemented in November 1996. Options were granted
as approved by the Board of Directors on December 30, 1996.
13
<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
- -----------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Percent of Total
Options/SARs
Options/ Granted to
SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
<S> <C> <C> <C> <C>
Donald M. Wood 9,000 8.7 $2.75 11/12/06
- -----------------------------------------------------------------------------------------
F. Randy Jack 8,000 7.7 2.50 11/12/06
David J. White 7,000 6.7 2.50 11/12/06
</TABLE>
(4) Mr. Wood, Mr. Jack and Mr. White have employment contracts with the
Company. The contracts call for annual renewals. The contracts may be
terminated by the Company with written notice prior to year-end and
severance would be equal to six months base salary. Compensation to be
paid under the contracts is equal to current base salary as well as
vacation, health insurance, and vehicle privileges. In the event of a
merger, acquisition or transfer of assets the contract must then be honored
by the surviving entity.
In September 1986, the Company's stockholders approved an Incentive Stock
Option Plan (the "1986 Plan"), for the benefit of the officers and employees of
the Company, and of its subsidiaries. No formal criteria have been established
to determine the amount of benefits to be granted pursuant to the 1986 Plan.
Also, in March, 1990, the Company's stockholders approved an additional
Incentive Stock Option Plan (the "1989 Plan") for the benefit of the officers
and managers of the Company. Formal criteria tied to profitability have been
established to determine the benefits to be granted under the 1989 Plan. In
November 1996, the Company stockholders approved an Incentive Stock Option plan
for the benefit of the officers and employees of the Company. No formal criteria
have been established to determine the amount of benefits to be granted pursuant
to the 1996 plan. The Plans provide that options are granted at exercise prices
equal to the market value as of the date the option is granted. The board of
directors approved the issuance of shares to be granted in 1996. On December 30,
1996, the board of directors approved the issuance of 104,000 shares of stock
pursuant to the 1996 incentive stock option plan. Further description of the
Plan and the exercise prices are provided in the attached Consolidated Financial
Statements.
In fiscal year 1996 the Company provided a medical and health insurance
program for all salaried and office employees. All full-time salaried and
office employees of the Company were entitled to the payment by the Company
of health insurance premiums after certain mandatory waiting periods.
14
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The only persons known by the Board of Directors to be the beneficial
owners of more than five percent of the outstanding shares of the Common
Stock of the Company, as of April 10, 1997 are indicated in the following
table:
Amount and Percent
Nature of of Class
Name and Address of Beneficial as of
Beneficial Owner Ownership 4/11/97
- ------------------- ---------- --------
Ditta LLC 158,831 (1) 7.1%
1819 E. Southern Avenue
Mesa, AZ 85204
Chegamos Inc. 215,000 (2) 9.7%
1 East 1st Street
Reno, NV 89501
Donald M. Wood 256,894 (3) 11.6%
3078 American Saddler Drive
Park City, UT 84060
Cornerstone Capital Group LLC 245,000 11.0%
810 Boston Building
9 Exchange Place
Salt Lake City, UT 84111
Muito Bem, LTD 171,525 (4) 7.7%
3078 American Saddler Drive
Park City, UT 84060
Boa Sorte Limited Partnership 171,525 (5) 7.7%
1819 East Southern Avenue
Mesa, AZ 85204
- -------------------
The above table reflects the actual Beneficial Ownership as of April 11,
1997. It does not take into account shares available under the incentive stock
option plans. A total of 2,224,104 shares were outstanding at April 11, 1997.
(1) Ditta LLC is an Arizona limited liability company.
(2) Chegamos Inc. is a Nevada corporation.
(3) This reflects the 168,707 shares owned by Annalee G. Wood, wife of
Donald M. Wood, the 30,000 shares held by the children of Mr. Wood,
and the 58,187 shares held by Mr. Wood. Mr. Wood is also deemed the
beneficial owner of the 171,525 shares owned by Muito Bem LTD.
(4) Muito Bem LTD is a Utah partnership of which Mr. Donald M. Wood is a
general partner.
(5) Boa Sorte is an Arizona limited partnership.
15
<PAGE>
During 1996, the board of directors authorized the granting of non-qualified
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 and the company must be profitable three out of four years
commencing January 1, 1998.
The board of directors also authorized 537,500 shares to Muito Bem Ltd. At $1.25
per share in 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.
SECURITY OWNERSHIP OF MANAGEMENT
Amount of Nature of
Beneficial Ownership
of Common Stock by
Management as of Percent
April 11, 1997 of class
-------------------- --------
Donald M. Wood 428,419 (1)(3) 19.3%
Fredrick R. Jack 24,009 1.1%
David J. White 21,000 1.0%
Reed D. Newbold 3,300 (2)
All directors and officers
as a group (5 persons) 476,728 21.4%
(1) This reflects the 168,707 shares owned by Annalee G. Wood, wife of
Donald M. Wood, the 30,000 shares held by children of Mr. Wood, the
58,187 shares held by Mr. Wood and the 171,525 shares held by Muito
Bem LTD of which Donald M. Wood is deemed the beneficial owner.
(2) Ownership is less than 1% of the outstanding shares of the Company.
(3) Includes the Muito Bem shares deemed to be beneficially owned by Mr.
Wood.
16
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's subsidiary Softalk, Inc., maintains a royalty agreement for
patent and trade-mark rights on telephone accessories from WAC Research Inc., a
Utah corporation. Donald M. Wood, CEO and director of the Company is the
beneficial owner of one-half of WAC Research. In August 1986, WAC Research,
Inc. purchased a 10% royalty right from the inventor of Softalk and related
products in a private transaction. This involved both cash and stock in a
transaction valued between one and two million dollars being paid to Practical
Innovations, Inc. At that time, WAC determined in conjunction with the Board of
Directors of Dynatec that the 10% royalty was onerous and not sustainable;
therefore, WAC agreed to lower the royalty to 5%.
It is anticipated that approximately $200,000 of royalties will be accrued
or paid to WAC Research in calendar year 1997. During 1996 Softalk Inc. paid
$190,000 to WAC Research in payment of royalties.
Mr. Wood, the CEO and a Director of the Company, has guaranteed certain
bank lines of credit and an equipment loan of the Company. The balances owing on
the bank lines and loans at December 31, 1996 were $1,843,274. During 1996 the
highest amount of the bank lines and equipment notes was $2,112,455. During
1996 the Company completed construction of a manufacturing, assembly and office
facility. The facility was subsequently financed with a local bank and the SBA.
Mr. Wood is a guarantor on the real estate loans. During 1996, the highest
amount owed on said loans was $2,200,000. The balance due at December 31, 1996,
was $2,184,281.
Mr. Wood, the CEO and a Director of the Company is the beneficial owner of
rental property in Park City, Utah which the Company leases on an annual basis.
The Company uses the property for travel, promotional work, lodging and
entertainment for customers, suppliers and employees. The total amount paid by
the Company for operating, maintenance and general care of the property for 1996
was $84,000.
During the fiscal year 1995, the Company sold all rights and interest in
various products to WAC Research for $150,000 in the form of a demand note
bearing 8% interest. As part of the transaction, inventory and molds were also
sold at cost to WAC. During calendar years 1996 and 1995, WAC assumed
responsibility for various travel and other expenses related to Dynatec.
The royalty reduction, purchase of molds, rights, and products, as well as
the assumption of expenses as explained above were done in an effort to
increase the profitability and/or cash flows of the Company. Management is
currently negotiating with WAC Research in regards to the disposition of these
items. Management is confident that a solution beneficial to the Company can
be reached with WAC.
During 1996, the Board of Directors authorized the granting of options to buy
1,577,500 shares of stock at a strike price of $1.25 to various employees,
management and related entities of the Company. Such issuances are more fully
described under Item 11, Security ownership of certain beneficial owners and
management in this Form 10KSB.
17
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8K
(a) FINANCIAL STATEMENTS
See the Consolidated Financial Statements which are attached
to this report and are herein incorporated by this reference.
(b) REPORTS ON FORM 8-KSB
Reports on Form 8-KSB were filed on February 27, 1996, and December 2,
1996. Said reports are hereby incorporated by this reference.
(c) EXHIBITS
Exhibit 27 - FDS.
18
<PAGE>
S I G N A T U R E S
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT
DYNATEC INTERNATIONAL, INC.,
Date: April 15, 1997 By: /s/ DONALD M. WOOD
-----------------------------------
DONALD M. WOOD, Chairman and
Chief Executive Officer
Date: April 15, 1997 By: /s/ DAVID J. WHITE
-----------------------------------
DAVID J. WHITE, Vice-President
Chief Financial & Accounting Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the date indicated.
Date: April 15, 1997 By: /s/ DONALD M. WOOD
-----------------------------------
DONALD M. WOOD, Director
Date: April 15, 1997 By: /s/ FREDRICK R. JACK
-----------------------------------
FREDRICK R. JACK, Director
Date: April 15, 1997 By: /s/ REED D. NEWBOLD
-----------------------------------
REED D. NEWBOLD, Director
Date: April 15, 1997 By: /s/ DAVID J. WHITE
-----------------------------------
DAVID J. WHITE, Director
Date: April 15, 1997 By: /s/ FREDERICK W. VOLCANSEK
-----------------------------------
FREDERICK W. VOLCANSEK, Director
19
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<PAGE>
C O N T E N T S
Independent Auditors' Report...................................... 3
Consolidated Balance Sheets....................................... 4
Consolidated Statements of Operations............................. 6
Consolidated Statements of Changes in Stockholders' Equity........ 7
Consolidated Statements of Cash Flows............................. 8
Notes to Consolidated Financial Statements........................ 10
Supplementary Schedules -
Consolidated Cost of Sales (Schedule 1)......................... 23
Consolidated Selling Expenses (Schedule 2)...................... 24
Consolidated General and Administrative Expenses (Schedule 3)... 24
Consolidated Periodic Financial Information (Unaudited)
(Schedule 4)................................................... 25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dynatec International, Inc.
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Dynatec
International, Inc. and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Dynatec International, Inc. and
subsidiaries, as of December 31, 1995, and June 30, 1995, were audited by other
auditors whose report dated February 9, 1996, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dynatec
International, Inc. and subsidiaries as of December 31, 1996 and the results of
their operations, changes in their stockholders' equity, and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The additional information
contained in Schedules 1, 2 and 3 are presented for the purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
Jones, Jensen & Company
March 27, 1997
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
December 31,
------------------------
1996 1995
---------- ----------
CURRENT ASSETS
Cash $ 240,145 $ 318,923
Trade accounts receivable, net 1,125,750 1,318,792
Employee advances - 3,838
Receivables - related parties (Note 10) 145,419 83,781
Inventory (Note 2) 1,256,440 1,257,180
Prepaids 133,997 213,228
Prepaid income taxes 46,160 -
Unamortized debt issue costs 3,906 8,594
Trade show deposits 15,617 15,793
---------- ----------
Total Current Assets 2,967,434 3,220,129
---------- ----------
PROPERTY AND EQUIPMENT, NET (Note 4) 4,673,999 2,123,671
---------- ----------
OTHER ASSETS
Deposits 22,355 14,032
Deferred tax assets (Note 8) 69,960 57,181
Note receivable - related party (Note 10) 150,000 150,000
Prepaid royalties - related party (Note 10) - 71,555
Licenses and agreements, net (Note 3) 332,092 433,861
---------- ----------
Total Other Assets 574,407 726,629
---------- ----------
TOTAL ASSETS $8,215,840 $6,070,429
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements
4
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
CURRENT LIABILITIES
Accounts payable $ 523,668 $ 457,286
Accrued expenses 489,552 300,803
Accrued royalties payable - related parties
(Note 10) 34,688 -
Short-term note payable (Note 5) 1,222,722 688,899
Current portion of long-term debt (Note 6) 795,415 810,628
Current portion of capital lease obligations
(Note 7) 22,363 31,514
Income taxes payable 500 29,729
---------- ----------
Total Current Liabilities 3,088,908 2,318,859
---------- ----------
LONG-TERM LIABILITIES
Capital lease obligations (Note 7) 76,196 89,203
Long-term debt (Note 6) 2,393,052 868,481
Deferred income taxes (Note 8) 13,402 11,245
---------- ----------
Total Long-Term Liabilities 2,482,650 968,929
---------- ----------
TOTAL LIABILITIES 5,571,558 3,287,788
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 7 and 12)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value (Note 9) authorized
100,000,000 shares; issued 1,974,104 and
1,411,829 shares at December 31, 1996 and 1995,
respectively 19,741 14,118
Additional paid-in capital 3,595,699 2,694,532
Retained earnings (deficit) (971,158) 73,991
---------- ----------
Total Stockholders' Equity 2,644,282 2,782,641
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,215,840 $6,070,429
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE SIX MONTHS ENDED DECEMBER 31, 1995, AND
THE YEAR ENDED JUNE 30, 1995
<TABLE>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1995 1995
----------- ---------- ----------
(12 MONTHS) (6 MONTHS) (12 MONTHS)
<S> <C> <C> <C>
SALES $ 9,808,314 $5,230,971 $8,979,939
COST OF SALES (Schedule 1) 5,958,629 3,287,453 5,736,040
----------- ---------- ----------
GROSS PROFIT ON SALES 3,849,685 1,943,518 3,243,899
----------- ---------- ----------
OPERATING EXPENSES
Selling expenses (Schedule 2) 2,207,285 961,302 1,881,630
Research and development expenses 624,800 3,876 14,774
General & administrative (Schedule 3) 1,564,663 768,519 1,410,098
----------- ---------- ----------
TOTAL OPERATING EXPENSES (4,396,748) 1,733,697 3,306,502
----------- ---------- ----------
OPERATING INCOME (LOSS) (547,063) 209,821 (62,603)
----------- ---------- ----------
OTHER INCOME (EXPENSES)
Interest income 29,373 16,449 5,306
Interest expense (Note 4) (269,292) (75,204) (123,426)
Gain (loss) on disposal of assets (3,826) - 21,428
Loss on impairment of assets - (33,760) -
Bad debts (23,000) (7,000) (18,500)
Gain on sale of product rights - - 150,000
----------- ---------- ----------
NET OTHER INCOME (EXPENSES) (266,745) (99,515) 34,808
----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEMS (813,808) 110,306 (27,795)
INCOME TAX (EXPENSE) BENEFIT (NOTE 8) 4,779 (46,123) 32,427
----------- ---------- ----------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (809,029) 64,183 4,632
EXTRAORDINARY ITEMS
Purchase contract settlement (Note 13) (236,120) - -
----------- ---------- ----------
TOTAL EXTRAORDINARY ITEMS (236,120) - -
----------- ---------- ----------
NET INCOME (LOSS) $(1,045,149) $ 64,183 $ 4,632
=========== ========== ==========
NET INCOME (LOSS) PER SHARE
Income (loss) before extraordinary items $ (0.55) $ 0.05 $ 0.01
Extraordinary items (0.16) - -
----------- ---------- ----------
NET INCOME (LOSS) $ (0.71) $ 0.05 $ 0.01
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE SIX MONTHS ENDED DECEMBER 31, 1995, AND
THE YEAR ENDED JUNE 30, 1995
<TABLE>
COMMON STOCK ADDITIONAL RETAINED
-------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
--------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 1,311,417 $13,114 $2,659,732 $ 5,176
Stock options exercised 117,000 1,170 (1,076) -
Shares relinquished (29,207) (292) 292 -
Shares issued for non-complete
agreement 3,158 32 15,591 -
Net income June 30, 1995 - - - 4,632
--------- ------- ---------- -----------
Balance, June 30, 1995 1,402,368 14,024 2,674,539 9,808
--------- ------- ---------- -----------
Shares issued for non-complete
agreement 9,461 94 19,993 -
Net income December 31, 1995 - - - 64,183
--------- ------- ---------- -----------
Balance, December 31, 1995 1,411,829 14,118 2,694,532 73,991
--------- ------- ---------- -----------
Shares issued for non-complete
agreement 12,275 123 26,667 -
Shares issued for acquisition
of assets 550,000 5,500 874,500 -
Net loss December 31, 1996 - - - (1,045,149)
--------- ------- ---------- -----------
Balance, December 31, 1996 1,974,104 $19,741 $3,595,699 $ (971,158)
========= ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
7
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE SIX MONTHS ENDED DECEMBER 31, 1995, AND
THE YEAR ENDED JUNE 30, 1995
<TABLE>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1995 1995
----------- ----------- ---------
(12 MONTHS) (6 MONTHS) (12 MONTHS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $(1,045,149) $ 64,183 $ 4,632
Adjustments to reconcile net income
to cash provides by operating activities:
Depreciation and amortization 435,937 227,871 332,185
(Gain) loss on sale of assets 3,826 - (21,428)
Gain on sale of product rights - - (150,000)
Loss on impairment of assets - 33,760 -
Amortization of prepaid royalties -
related party 15,673 - 54,932
Amortization of debt issue costs 8,594 3,281 14,313
Bad debt expense 23,000 7,000 18,500
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 170,042 (294,918) 182,768
Decrease (increase) in employee advances 3,838 (3,838) 1,963
Decrease (increase) in receivables - related
parties (5,756) (13,370) 9,492
Decrease (increase) in inventory 189,769 165,297 (358,396)
Decrease (increase) in prepaids 79,231 (74,460) (17,815)
Decrease (increase) in prepaid income taxes (46,160) 18,595 (18,595)
Decrease (increase) in debt issuance costs (3,906) (9,375) (7,500)
Decrease (increase) in deposits (8,147) (15,792) 1,252
Decrease (increase) in deferred tax assets (12,779) 3,331 (60,512)
Increase (decrease) in accounts payable 66,382 15,383 211,767
Increase (decrease) in accrued expenses 188,749 71,681 16,839
Increase (decrease) in accrued royalties
payable - related parties 34,688 (4,679) (40,177)
Increase (decrease) in income taxes payable (29,229) 29,729 (25,026)
Increase (decrease) in deferred income
taxes 2,157 (5,532) 16,777
----------- ----------- ---------
Cash Provided (Used) by Operating
Activities 70,760 218,147 165,971
----------- ----------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of assets 53,620 - 15,560
Payment on note receivable - related party - - (43,500)
Proceeds from note receivable - related
party - 43,500 -
Proceeds from non-competition agreement - - 12,500
Expenditures for property and equipment (2,144,649) (1,317,448) (379,782)
----------- ----------- ---------
Cash Provided (Used) by Investing
Activities $(2,091,029) $(1,273,948) $(395,222)
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
8
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE SIX MONTHS ENDED DECEMBER 31, 1995, AND
THE YEAR ENDED JUNE 30, 1995
<TABLE>
December 31, December 31, June 30,
1996 1995 1995
------------ ------------ ----------
(12 months) (6 months) (12 months)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short and long-term
debt and capital lease obligations $2,423,697 $1,220,118 $ 3,742,380
Principal payments on short and long-
term debt and capital lease obligations (482,206) (110,956) (3,588,870)
Proceeds from issuance of common stock - - 94
---------- ---------- -----------
Cash Provided (Used) by Financing
Activities 1,941,491 1,109,162 153,604
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH (78,778) 53,361 (75,647)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 318,923 265,562 341,209
---------- ---------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 240,145 $ 318,923 $ 265,562
---------- ---------- -----------
---------- ---------- -----------
CASH PAID FOR:
Interest $ 346,648 $ 97,918 $ 94,955
Income taxes $ 500 $ 46,123 $ -
NON-CASH FINANCING ACTIVITIES
Issuance of common stock for acquisition
of inventory $ 130,000 $ - $ -
Issuance of common stock for acquisition
of net property and equipment $ 750,000 $ - $ -
Issuance of common stock for non-compete
agreement $ 26,790 $ 20,087 $ 15,623
Acquisition of property and equipment
financed by accounts payable $ - $ 17,445 $ -
Purchase of inventory by issuance of
long-term debt $ - $ 15,460 $ -
Sale of inventory through accounts
receivable $ - $ 38,441 $ -
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
9
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1995
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 December 31, 1996, this subsidiary
has incurred $142,192 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.
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.
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
twelve months ended December 31, 1996, the six months ended December
31, 1995 and the twelve months ended June 30, 1995.
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.
10
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTS RECEIVABLE
Accounts receivable are reflected net of allowance for doubtful
accounts in the accompanying consolidated financial statements. These
amounts were determined to be $29,000 and $12,629 at December 31, 1996
and 1995, 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. (See Note 8).
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.
(See Note 8).
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.
11
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and cash on deposit with banks.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis when goods are shipped to a
customer.
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 December 31, 1996 and 1995, the Company
had bank deposits in excess of federally insured limits by
approximately $180,000 and $225,000, respectively.
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 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
As of December 31, 1996 and 1995, inventory is summarized as follows:
1996 1995
---------- ----------
Raw materials $ 583,138 $ 390,490
Finished goods 673,302 866,690
---------- ----------
Total inventory $1,256,440 $1,257,180
---------- ----------
---------- ----------
12
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1995
NOTE 2 - INVENTORY (Continued)
The Company's inventories are stated at the lower of cost or market,
using the last-in, first-out (LIFO) method. The current replacement
cost of LIFO inventories exceeds the carrying amount by approximately
$2,000 and $30,000 at December 31, 1996 and December 31, 1995,
respectively.
NOTE 3 - LICENSES AND AGREEMENTS
Licenses and agreements represent amounts paid for the rights to
manufacture and market various products. The majority of such costs are
associated with agreements for the telephone accessory product lines.
These costs are being amortized over the shorter of their legal or
useful lives using the straight-line method.
In March 1995, the Company purchased the rights and customer list for
the doorstep product line from an unrelated entity for $100,000. In
addition, a five year non-competition agreement was entered into with
that entity and its shareholder for $150,000. Such costs are amortized
using the straight-line method in amounts sufficient to write off the
costs over their estimated useful lives.
At December 31, 1995, management had discontinued sales and
distribution of certain products. Two non-compete agreements
associated with sales of those products with a net unamortized book
value of $33,760 were written-off as of December 31, 1995.
Amortization of licenses and agreements for the year ended December
31, 1996, for the six months ended December 31, 1995 and the year
ended June 30, 1995 amounted to $101,768, $94,497, and $102,725,
respectively.
NOTE 4 - PROPERTY AND EQUIPMENT
As of December 31, 1996 and 1995, property and equipment is summarized
as follows:
1996 1995
----------- -----------
Land $ 626,153 $ 624,949
Capital leases 91,857 148,405
Machinery and equipment 2,977,130 1,997,817
Leasehold improvements - 132,919
Office equipment and fixtures 301,114 240,475
Signs and show booths 17,198 8,187
Vehicles 65,588 68,355
Building and improvements 2,214,144 592,810
----------- -----------
6,293,184 3,813,917
Less: Accumulated Depreciation (1,619,185) (1,690,246)
----------- -----------
Net property and equipment $ 4,673,999 $ 2,123,671
----------- -----------
----------- -----------
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 expense for
the year ended December 31, 1996, the six months ended December 31,
1995 and the year ended June 30, 1995 amounted to $334,169, $133,374,
and $229,460, respectively.
13
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1995
NOTE 4 - PROPERTY AND EQUIPMENT (Continued)
In August 1996, the Company completed construction of an office,
warehouse and distribution facility. The total cost of the building
and related improvements was $2,214,144 as of December 31, 1996 which
includes capitalization of construction period interest of $77,356.
NOTE 5 - SHORT-TERM NOTE PAYABLE
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 December 31, 1996 and 1995, the
outstanding balance of this revolving line-of-credit note payable was
$1,222,722 and $1,103,340, respectively. Of the balance outstanding
at December 31, 1995, $414,441 related to funds used for construction-
in-progress on the Company's new building for which subsequent long-
term financing was obtained in 1996. Accordingly, that portion has
been classified as long-term in the accompanying consolidated financial
statements at December 31, 1995. (See Note 6)
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 December 31,
1996 the Company had a ratio of current assets to current liabilities
of .94 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 December
31, 1996 and 1995 is as follows:
1996 1995
----------- -----------
Maximum outstanding $ 1,453,340 $1,103,340
Average outstanding 1,038,877 897,022
Weighted average interest rate 9.27% 10.15%
NOTE 6 - LONG-TERM DEBT
As of December 31, 1996 and 1995, long-term debt is summarized as
follows:
1996 1995
---------- ----------
Note payable to a financing
company due in monthly
installments of $588 through
December 1997 with interest
at 8.5%; secured by a vehicle. $ - $ 12,915
---------- ----------
Balance forward $ - $ 12,915
---------- ----------
14
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1995
NOTE 6 - LONG-TERM DEBT (Continued)
1996 1995
---------- ----------
Balance forward $ - $ 12,915
Revolving line-of-credit up to
$1,000,000 to a bank; advances
to be amortized over a period of 60
months due in monthly installments
of principal plus interest at 1% over
prime until April 30, 1997; secured
by machinery and equipment. 620,552 692,085
Note payable to a company; due in
quarterly installments of $15,908 through
December 22, 1996 with interest at 8%;
unsecured. 15,596 60,575
Note payable to a company; due upon
gross sales derived from the payee's
key customer list or March 22, 1997,
whichever is earlier, with interest
at 8%; unsecured. 25,000 25,000
Note payable to an individual; payable
by quarterly issuance of common stock
of the Company through December 22,
1996; non-interest bearing; unsecured. - 26,790
Note payable to a company; due in annual
installments of $79,560 plus interest
at 7% beginning December 31, 1997;
unsecured. (See Note 13) 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. 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 and equipment. 82,400 -
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 chief executive officer who
is also a director. 1,194,602 -
---------- ----------
Balance forward $2,198,788 $ 817,365
---------- ----------
15
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND JUNE 30, 1995
NOTE 6 - LONG-TERM DEBT (Continued)
1996 1995
---------- ----------
Balance forward $2,198,788 $ 817,365
Construction-in-progress debt (see below) - 861,744
Note payable to the Small Business
Administration; due in monthly
installments of $8,541 for 240 months
with interest at 7.317% through August
2016; secured by an office and warehouse
building and related land and personal
guarantees of the Company's chief
executive officer who is also a director. 989,679 -
---------- ----------
Total long-term debt 3,188,467 1,679,109
Less: Current portion 795,415 (810,628)
---------- ----------
Long-term debt $2,393,052 $ 868,481
---------- ----------
---------- ----------
Aggregate annual maturities of long-term debt are as follows:
Year ending December 31, 1997 $ 795,415
1998 137,368
1999 141,072
2000 65,521
2001 69,417
Thereafter 1,979,674
----------
Total long-term debt $3,188,467
----------
----------
Included in long-term debt at December 31, 1995 is the $6,737 long-term
portion of notes payable along with the $414,441 of the short-term note
payable discussed in Note 5 and an additional $447,303 of accounts
payable that relate to construction-in-progress obligations associated
with the construction of the Company's new building which was financed
on a long-term basis subsequent to December 31, 1995.
16
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995, AND JUNE 30, 1995
NOTE 7 - LEASES
All non-cancelable leases with an initial term greater than one year
have been categorized as capital or operating leases.
Property and equipment under capital leases as of December 31, 1996 and
1995, is summarized as follows:
1996 1995
------- --------
Property and equipment $91,857 $148,405
Less: Accumulated
depreciation (5,211) (54,416)
------- --------
Net property and equipment
under capital lease $86,646 $ 93,989
------- --------
------- --------
At December 31, 1996, the Company is liable under the terms of non-
cancelable leases for the following minimum lease commitments:
Capital Operating
Leases Lease
-------- ---------
Year Ended December 31:
1997 $ 30,477 $24,784
1998 30,477 -
1999 26,439 -
2000 16,874 -
2001 16,410 -
-------- -------
Total minimum lease payments 120,677 $24,784
-------
Less: Interest (22,118) -------
--------
Present value of net minimum
lease payments 98,559
Less: Current portion (22,363)
--------
Capital lease obligations
payable long-term $ 76,196
--------
--------
Prior to moving into its newly constructed building in August 1996, the
Company leased office and manufacturing facilities. That lease expires
on February 28, 1997 and has minimum monthly lease rental payments of
$12,392 including additional assessments. For the year ended December
31, 1996, the Company paid a total of $157,234 in lease rental payments
for that facility which represents an increase over prior periods due to
annual adjustments provided for in the lease agreement. In September
1996, the Company subleased a portion of those leased facilities to
unrelated entities and derived a total of $23,389 sublease rental income
through December 31, 1996. This sublease rental income has been netted
against the lease rental paid by the Company with the difference of
$133,845 included in general and administrative expenses for the year
ended December 31, 1996. Lease rental expense for the six months ended
December 31, 1995 and the year ended June 30, 1996 was $70,273 and
$141,107, respectively.
17
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995, AND JUNE 30, 1995
NOTE 8 - INCOME TAXES
Income tax (expense) benefit for the periods ending December 1996 and
1995, and June 30, 1995 consisted of the following:
December 31, December 31, June 30,
1996 1995 1995
------------ ------------ -----------
(12 months) (6 months) (12 months)
Current
Federal $ - $(19,047) $ (9,155)
State (500) (29,277) (2,153)
------- -------- --------
(500) (48,324) (11,308)
Deferred
Federal 11,324 1,919 38,128
State 702 282 5,607
------- -------- --------
10,622 2,201 43,735
------- -------- --------
Income tax (expense) benefit $10,122 $(46,123) $ 32,427
------- -------- --------
------- -------- --------
A reconciliation between the actual income tax expense (benefit) and
income taxes computed by applying the statutory federal income tax
rates to income (loss) before income taxes for the periods ending
December 31, 1996 and 1995, and June 30, 1995 is as follows:
<TABLE>
December 31, December 31, June 30,
1996 1995 1995
------------ ------------ -----------
(12 months) (6 months) (12 months)
<S> <C> <C> <C>
Federal income taxes $ - $(28,149) $ 4,169
State income taxes (500) (7,455) 1,405
Other, net - - -
NOL carryforwards - - -
Income tax audit adjustment - (24,475) -
Continuing operations 5,279 (11,755) 16,882
Extraordinary items 5,343 - -
Deferred taxes - 2,201 43,735
------- -------- -------
Net income tax (expense) benefit $10,122 $(46,123) $32,427
------- -------- -------
------- -------- -------
</TABLE>
Deferred tax assets and liabilities as of December 31, 1996 and 1995
are as follows:
1996 1995
-------- --------
Deferred tax asset $ 69,960 $ 57,181
Deferred tax liability (13,402) (11,245)
-------- --------
Net deferred taxes $ 56,558 $ 45,936
-------- --------
-------- --------
18
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995, AND JUNE 30, 1995
NOTE 8 - INCOME TAXES (Continued)
The Company and its subsidiaries have incurred a net operating loss
during the year ended December 31, 1996 of approximately $1,040,000
which may be used to reduce taxable income and income taxes in future
years. The use of this loss to reduce future income taxes will depend
on the generation of sufficient taxable income prior to the expiration
of the net operating loss carryforward in the year 2011. The potential
tax benefits of the net operating loss carryforward has been offset by
a valuation allowance of the same amount.
NOTE 9 - COMMON STOCK
On March 22, 1995, the Company entered into a noncompete agreement with
an unrelated individual, agreeing to issue a total of 24,894 shares of
common stock in quarterly increments for two years beginning March 22,
1995. At December 31, 1996, all of these shares had been issued
satisfying the obligation. A liability was recorded at the market
value of the stock at the time of the transaction.
As discussed in Note 1, effective December 1, 1996, the Company
acquired certain assets and assumed related liabilities by issuing
550,000 shares of common stock. The acquisition has been valued at
$880,000 or $1.60 per share which approximates the fair value of the
common stock issued and the approximate fair market or replacement
value of the net assets purchased on the date of the transaction.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company's subsidiary, Softalk, Inc., maintains a royalty agreement
related to patent and trademark rights on telephone accessories with an
entity beneficially owned by the chief executive officer of the Company
who is also a director of the Company.
The chief executive officer of the Company is an owner of rental
property in Park City, Utah which the Company leases on an annual
basis. The Company uses the rental property for travel, promotional
work, lodging and entertainment for customers, suppliers and employees.
The Company decided that the promotional value of the property and its
use as a sales incentive with independent sales representatives was
less than alternative promotional and travel costs which might be
expended by the Company. The total amount paid by the Company for the
year ended December 31, 1996, the six months ended December 31, 1995
and the year ended June 30, 1995 was $84,000, $66,000, and $132,000,
respectively. This cost covered operating, maintenance and general
care of the property.
The Company paid the personal credit card bills for members of the
board of directors on a month to month basis. The amount is generally
paid back to the Company the following month. At December 31, 1996 and
1995, and June 30, 1995 the amounts owed to the Company were $11,485,
$24,888, and $7,741, respectively.
19
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995, AND JUNE 30, 1995
NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)
During the fiscal year ended June 30, 1995, the Company sold all rights
and interests in various products to the related entity for $150,000 in
the form of a demand note bearing interest at 8%. As part of the
transaction, inventory was sold at cost for $38,441. Sales of these
products and purchases of additional inventory by the related entity
are performed through the Company and the outstanding receivable is
adjusted as required. The outstanding receivable due from this related
entity at December 31, 1996 is $24,690.
Product molds were also sold for $43,500 in the form of a note bearing
8% interest due June 30, 1996. The chief executive officer and
director of the Company also sold a vehicle to the Company for $24,000.
A vehicle owned by the Company was also sold to the same individual and
a gain on the sale of the vehicle of $7,500 was recognized.
The Company pays various travel expenses for the related entity
previously discussed. At December 31, 1996 and 1995, and June 30, 1995
amounts owed to the Company were $12,329, $24,229 and $39,224,
respectively.
NOTE 11 - STOCK OPTION PLAN
In 1986 and 1992, the Company's 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.
On 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 for 1 stock split, at a price equal to market value as of the
date the option is granted, unless the option is granted to a 10% or
more shareholder, then the exercise prices are equal 100% of market
value on 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.
NOTE 12 - 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 Untied States Bankruptcy Court
Middle District of Florida, Jacksonville Division against the Company.
The plaintiff claims that P.I.E. improperly undercharged the Company
for freight and therefore, claims the Company owes P.I.E. approximately
$4,500. The trustee has filed several thousand similar claims against
various companies. At present the Company is defending itself and
expects to prevail.
20
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995, AND JUNE 30, 1995
NOTE 13 - EXTRAORDINARY ITEMS
In January 1993, the Company and one of its subsidiaries entered into
an agreement with one of its major suppliers to purchase a minimum
quantity of a new product annually through the year 2001. The
agreement provides that if the Company does not purchase the minimum
annual quantity of the product, a $.10 per unit penalty would be
charged for any shortfall. Through December 31, 1996, the Company did
not meet any of the annual purchase commitment levels resulting in an
accumulated penalty which has been charged to the Company totaling
$238,680. As indicated, this agreement is effective through the year
2001 and if the Company does not meet the annual purchase commitment,
additional penalty charges will be incurred in the future.
According to the terms of the agreement, the maximum penalty that can
be incurred in any single year is $85,000. The penalty incurred and
charged through December 31, 1996 has been expensed as an extraordinary
item in the accompanying consolidated financial statements, net of the
related income tax benefit of $2,560.
On April 7, 1997, the Company entered into a supplemental agreement
wherein the Company agreed to repay the $238,680 in three equal
installments, together with interest at 7%, beginning December 31,
1997. The agreement provides for payment to be made throughout the
year at a rate of $.40 per "Twistop" unit sold to a major customer of
Softalk, Inc., applied first to interest, and then to unpaid principal.
As a result of these subsequent payment arrangements, the obligation
has been classified as long-term debt in the accompanying consolidated
financial statements with the principal amount due by December 31,
1997, $79,560, reflected as due currently.
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.
21
<PAGE>
SUPPLEMENTARY SCHEDULES
22
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE SIX MONTHS ENDED DECEMBER 31, 1995, AND
THE YEAR ENDED JUNE 30, 1995
SCHEDULE 1
CONSOLIDATED COST OF SALES
<TABLE>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1995 1995
---------- ---------- -----------
(12 MONTHS) (6 MONTHS) (12 MONTHS)
<S> <C> <C> <C>
COST OF GOODS MANUFACTURED
Beginning inventory - raw materials $ 390,490 $ 329,795 $ 228,371
Raw materials purchased 3,802,097 1,865,598 4,093,452
Freight 206,538 123,509 212,630
Depreciation 229,543 92,921 154,262
Labor 716,491 497,542 753,919
Repairs and maintenance 15,378 11,811 13,233
Miscellaneous direct 88,044 49,433 78,038
Supplies 6,091 - 4,809
Less: ending inventory - raw materials (583,138) (390,490) (329,795)
---------- ---------- -----------
TOTAL COST OF GOODS
MANUFACTURED 4,871,534 2,580,119 5,208,919
---------- ---------- -----------
COST OF FINISHED GOODS
Beginning inventory - finished goods 866,690 1,092,682 858,691
Purchases 508,939 263,586 389,142
Amortization 101,268 60,488 102,225
Less: ending inventory - finished goods (673,302) (866,690) (1,092,682)
---------- ---------- -----------
TOTAL COST OF FINISHED GOODS 803,595 550,066 257,376
---------- ---------- -----------
ROYALTIES 283,500 157,268 269,745
---------- ---------- -----------
TOTAL COST OF SALES $5,958,629 $3,287,453 $ 5,736,040
========== ========== ===========
</TABLE>
23
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE SIX MONTHS ENDED DECEMBER 31, 1995, AND
THE YEAR ENDED JUNE 30, 1995
SCHEDULE 2
CONSOLIDATED SELLING EXPENSES
December 31, December 31, June 30,
1996 1995 1995
------------ ------------ -----------
(12 months) (6 months) (12 months)
Advertising $ 448,832 $101,677 $ 133,161
Commissions 519,719 235,572 478,912
Depreciation - selling 34,912 29,235 46,236
Freight 362,654 208,033 399,523
Miscellaneous 11,000 1,988 26,944
Promotions 151,353 45,185 155,189
Salaries - sales 503,596 245,489 408,425
Travel and entertainment 175,219 94,123 233,240
---------- -------- ----------
TOTAL SELLING EXPENSES $2,207,285 $961,302 $1,881,630
---------- -------- ----------
---------- -------- ----------
CONSOLIDATED GENERAL AND ADMINISTRATIVE EXPENSES
SCHEDULE 3
Amortization $ 500 $ 250 $ 500
Automobile 7,589 1,084 757
Bank charges 5,987 5,707 4,674
Corporate expense 212,003 122,605 156,538
Depreciation - office 39,091 18,745 29,022
Dues and subscriptions 2,748 114 770
Insurance 208,787 91,486 209,070
Janitorial 5,918 2,642 5,274
Legal and accounting 146,134 55,018 88,453
Miscellaneous 3,375 (1,568) (16,419)
Office expense 118,001 46,465 96,455
Payroll taxes 152,577 72,201 145,813
Rent 138,846 69,517 141,107
Repairs and maintenance 16,383 122 1,850
Salaries - office 355,010 224,853 423,273
Taxes 28,782 12,460 22,597
Telephone 66,737 27,165 54,983
Utilities 56,195 19,653 45,381
---------- -------- ----------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES $1,564,663 $768,519 $1,410,098
---------- -------- ----------
---------- -------- ----------
24
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE SIX MONTHS ENDED DECEMBER 31, 1995, AND
THE YEAR ENDED JUNE 30, 1995
PERIODIC CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
SCHEDULE 4
<TABLE>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
Ended Ended Ended Ended Ended
3-31-96 6-30-96 9-30-96 12-31-96 12-31-96
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenue $2,164,791 $2,694,419 $2,605,008 $ 2,344,096 $ 9,808,314
Gross profit 829,038 1,114,252 1,074,326 832,069 3,849,685
Net income (loss) (112,316) 201,565 5,418 (1,139,816) (1,045,149)
Earnings per share (0.08) 0.14 0.01 (0.78) (0.71)
Market price
- high 5.75 4.13 4.00 (A) 3.00 (A) 3.00
- low 4.00 3.88 3.38 (A) 2.25 (A) 2.25
1st Quarter 2nd Quarter Total
Ended Ended Six Months
9-30-95 12-31-95 12-31-95
----------- ----------- -----------
Total revenues $2,437,809 $2,793,162 $ 5,230,971
Gross profit 833,372 1,110,146 1,943,518
Net income (loss) 54,761 9,422 64,183
Earnings per share .04 .01 .05
Market price
- high 7.75 6.50 7.75
- low 6.50 6.25 6.25
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
Ended Ended Ended Ended Ended
9-30-94 12-31-94 3-31-95 6-30-95 6-30-95
----------- ----------- ----------- ----------- -----------
Total revenues $2,188,614 $2,688,036 $2,127,018 $1,976,271 $8,979,939
Gross profit 872,445 1,029,174 781,528 560,752 3,243,899
Net income (loss) 16,664 4,237 (89,525) 73,256 4,632
Earnings per share .02 - (.07) .06 .01
Market price
- high 7.00 7.38 7.50 7.38 7.50
- low 6.25 6.75 7.00 7.00 6.25
</TABLE>
The gross profit for each quarter for the year ended June 30, 1995 has been
adjusted to reflect the reclassification of freight expenses for sales as a
selling expense rather than cost of goods sold.
(A) The market prices for the quarter and year ended December 31, 1996 reflect
the 1 1/2 for 1 stock split occurring during that quarter.
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 240
<SECURITIES> 0
<RECEIVABLES> 1126
<ALLOWANCES> 0
<INVENTORY> 1256
<CURRENT-ASSETS> 2967
<PP&E> 4674
<DEPRECIATION> 0
<TOTAL-ASSETS> 8216
<CURRENT-LIABILITIES> 3089
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 2624
<TOTAL-LIABILITY-AND-EQUITY> 8216
<SALES> 9808
<TOTAL-REVENUES> 9808
<CGS> 5959
<TOTAL-COSTS> 4397
<OTHER-EXPENSES> 267
<LOSS-PROVISION> 23
<INTEREST-EXPENSE> 269
<INCOME-PRETAX> (814)
<INCOME-TAX> (5)
<INCOME-CONTINUING> (547)
<DISCONTINUED> 0
<EXTRAORDINARY> 236
<CHANGES> 0
<NET-INCOME> 1045
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.71)
</TABLE>
