<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998,
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
--- ---
As of August 13, 1998, the Registrant had 2,675,112 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Company at August 13, 1998 was $13,704,878.
Transitional small business disclosure format. Yes No X
--- ---
1
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Reference is made to the attached Unaudited Consolidated Condensed
Financial Statements for the first six months of the 1998 and 1997 calendar
years. These condensed financial statements are hereby incorporated by
reference. The information for the Company's first six months of calendar years
1998 and 1997 ended June 30, 1998 and 1997 is unaudited, but in the opinion of
management reflects all adjustments which are necessary for a fair presentation
of operations for such periods.
2
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
For the six months ended June 30, 1998, the Company generated total
revenues of $8,363,758 compared to total revenues of $6,045,561 in the prior six
month period ended June 30, 1997. Comparative period revenues increased
$2,318,197 or 38%, reflecting the largest revenues ever earned by the Company
during the first two quarters of any calendar year since the Company's
inception.
Overall, the Company experienced a net income of $3,233 for the first
two quarters of 1998 compared to a net loss of $433,144 for the first two
quarters of 1997, primarily due to the $580,000 sale of non-exclusive rights
to market Company products to an overseas supplier and increased sales of
$2,318,197 over the prior year. These increases were largely offset by the
one-time, non-cash recognition of warrant premium ($426,000) associated with
warrants issued to investors who purchased convertible debentures and the
non-cash recognition of a beneficial conversion premium of $166,667 during
the second quarter of 1998. Approximately another $122,500 will be
recognized in the third quarter relating to warrant premium on the final
issuance of convertible debentures to take place upon the effective
registration of the shares underlying the credit agreement as well as
approximately $400,000 of additional beneficial conversion premium expense as
non-cash expenses relative to the convertible debentures. The convertible
debentures and associated equity line of credit are described more fully in
the Liquidity and Capital Resources section below.
TELEPHONE ACCESSORIES:
For the two quarters ended June 30, 1998, there was an overall increase of
$379,542 (13%) in the revenues generated from the Telephone Accessory product
segment of the Company compared to total revenues for the same period in 1997.
Although the sales mix for various shoulder rests changed slightly, overall 1998
sales of shoulder rests increased by approximately $212,219 over 1997 sales.
The remainder of the increase was attributable to increased volume on sales of
other telephone accessory products.
HARDWARE/HOUSEWARES:
The Hardware/Housewares products segment produced an increase in revenues
during the six month period ended June 30, 1998 of $252,751 or 14% compared to
the period ended June 30, 1997. During the latter part of 1997, the Company
introduced several new drawer organizer products which have accounted for the
majority of the increase in the current year. Sales in this segment continue to
grow as the Company continues to aggressively market and expand the housewares
product lines.
MASS MARKET:
Sales in the Mass Market segment were down from $833,049 for the quarter
ended June 30, 1997 compared to $830,212 for the quarter ended June 30, 1997.
Virtually all of the sales in
3
<PAGE>
this segment were to Dolgencorp, Inc. Historically, products in this segment
have consisted of cameras, audio cassette tapes, crayons, three piece
flashlights, and disposable lighters.
FLASHLIGHTS:
Total sales in the Flashlight segment were $635,665 compared to $404,178
for the periods ended June 30, 1998 and 1997, respectively. The Company
continues the development of stronger relationships with overseas vendors to
ensure the timely delivery of reliable, high-quality flashlight products.
Earlier plans represented by a letter of intent to form a joint
venture/partnership with a flashlight supplier in Taiwan have been
determined to not be in the best interest of the Company.
TELECOMMUNICATIONS HEADSETS
Revenues in the Telecommunication Headset segment were $895,787 for the
six month period ending June 30, 1998 compared to $-0- for the same period in
1997. The Company has been aggressively developing a line of telecommunications
products to include wired and wireless telephone headsets, telephones,
conference speakers, and other products. In the first quarter of 1998, initial
orders for telephonic amplifiers and headsets were filled with Lucent
Technologies. The Company has been able to secure pages in several catalogues
of providers for various office products coming out during the second and third
quarters.
In the period ended March 31, 1998, the Company recognized revenue related
to an agreement with an overseas supplier whereby non-exclusive rights to market
Company products internationally were sold for $580,000. According to the
agreement, the purchase price was paid by the sale of Company stock owned by the
supplier.
EXPENSES
Overall gross margins of the Company, excluding the non-exclusive sale of
product rights for $580,000, for the six months ending June 30, 1998 and 1997
were 35% and 32% , respectively. This overall increase in gross margin is
largely attributable to increased sales of telephone accessory and headset
products which have gross margins ranging from 35% to 50%.
The Company spent $73,695 and $167,878 in research and development expenses
for the six months ending June 30, 1998 and 1997. Most of the research and
development expenses over these two periods was spent in developing the headset
and flashlight product lines. Research and development expenses have decreased
during 1998, as current year research and development efforts relate to product
enhancements as opposed to initial product development.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1998, the Company experienced a net decrease in its cash
position of $111,908 from December 31, 1997. The Company had a decrease in cash
from operations of
4
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$1,569,629. The majority of this decrease was caused by increases in
accounts receivable ($1,011,812) and inventory ($1,712,002) partially offset
by income from the first two quarters. The increase in inventories reflects
purchases made to prepare for catalogue sales of telephony headset products
and to fill mass merchandise orders received for the third and fourth
quarters. The Company experienced a net increase in cash position resulting
from financing activities reflecting the receipt of funds ($940,000) pursuant
to a future Regulation S stock offering, as authorized by the Board of
Directors in March of 1997, and the issuance of $1,500,000 pursuant to the
sale of convertible debentures (explained more fully below). A net use of
cash in investing activities reflects the capital expenditures of $356,232
during the first two quarters of 1998. The Company anticipates that the
inventory and related payables will increase throughout 1998 as sales
increase in the flashlight and telecommunication headset segments.
Current assets increased from $5,092,374 at December 31, 1997 to $7,224,092
at June 30, 1998. Of this increase, approximately $1,712,002 reflects
increases in inventory partially funded by increases under the line of credit
facility of $307,545 as the Company prepares for increased sales in calendar
year 1998. Additionally, accounts receivable also increased due to increased
first quarter sales of approximately $656,509 over fourth quarter 1998.
On May 22, 1998, the Company closed a transaction that has provided net
capital proceeds of $1,335,000. These funds have been raised pursuant to the
sale by the Company of a Convertible Debenture in the face amount of $1,500,000
to meet immediate cash needs under an equity line of credit. The debentures are
convertible into common stock of the Company at the lessor of: (i) seventy five
percent of the average of the three lowest closing bid prices of the Common
Stock during the ten day trading period immediately preceding the conversion
date or (ii) one hundred percent of the closing bid price on the trading day
immediately preceding the closing date of the agreement. The transaction has
been accomplished pursuant to a Convertible Debenture and Private Equity Line of
Credit Agreement (the "Credit Agreement") between the Company and a group of
five investors which have not previously been shareholders of the Company. In
addition, the Company can use a "put" mechanism to periodically draw down up to
$10,000,000. Under the terms of the Credit Agreement, a minimum of $1,000,000
must be drawn in increments of not less than $50,000 in exchange for common
stock of the Company issued at 80 percent of the average of the three lowest bid
prices during the six day valuation period consisting of three days prior to the
put and ending two days after the put date. The put mechanism cannot be
utilized until after the effective date of the registration statement for the
underlying stock of the Credit Agreement. Additionally, upon registration of
the underlying shares which may be purchased pursuant to the convertible
debentures, the Company will receive an additional $500,000 of gross sales
proceeds.
In connection with the Credit Agreement, the investors and placement agent
were issued warrants. These warrants have been issued as Series A and Series B
as follows:
<TABLE>
<CAPTION>
Placement Exercise
Investors Agent Price
--------- --------- --------
<S> <C> <C> <C>
Series A Warrants 150,000 150,000 $6.50
Series B Warrants 150,000 300,000 $7.15
</TABLE>
5
<PAGE>
The Company is to issue an additional 50,000 Series A warrants each to both
the placement agent and the investors upon receipt of the additional $500,000
of gross sales proceeds. The market value for the Series A warrants issued to
the investors has been written off as a one-time, non-cash debt issuance cost
of $426,000 as the warrants are immediately exercisable. The market value of
the Series A warrants issued to the placement agent have been capitalized and
will be written off by the Company over the 36 month life of the debentures.
Although these debt issuance costs are non-cash items, current GAAP requires
disclosure for the market value of warrants issued along with convertible
debentures. In addition, because the debentures are convertible at a 25
percent discount from the market value, an additional $500,000 (the intrinsic
value of the beneficial conversion premium) of the proceeds received were
established as a contra-debt account and $166,667 of this premium was written
off as a non-cash expense for the second quarter of 1998. These non-cash
amortization and write-off of the market value of warrants issued is included
with interest expense in the income statement. Upon the effective date of the
registration statement, the market value of the warrants issued to the
investors in connection with the $500,000 of convertible debentures will also
be written off (estimated to be an additional third quarter non-cash expense
of $121,500) and the remaining beneficial conversion premium will be written
off as a third quarter, non-cash item. The Series B warrants which have been
issued have no current impact to the Company financial statements, as they
were issued in connection with the equity line of credit.
On May 27, 1998, the Company obtained a new, revolving line-of-credit from
a financing institution up to $5,000,000 bearing interest at a rate of prime
plus one percent with interest payable monthly. The line is secured by both
accounts receivable and inventories. The note is due May 26, 2001. Under the
terms of the agreement, the Company is required to maintain certain covenants
and ratios including book net worth, net income, and debt service coverage.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On June 16, 1998, Canaccord Capital Corporation ("Canaccord"), a Canadian
broker/dealer, filed an action against the Company in the U.S. District Court
in Salt Lake City, Utah. The action seeks an order compelling the issuance of
125,000 shares of Dynatec stock. Canaccord and the Company agree that the
Company, or its transfer agent, had erroneously over-issued shares of stock to
Canaccord in early 1997. In September 1997, Canaccord tendered certificates
for other shares in acknowledgment of a separate over-issuance. Management of
the Company believed that an additional 125,000 shares had been over issued.
The disputed certificate was subsequently returned to the transfer agent and
cancelled under the direction of the Board of Directors of the Company. This
action was taken by the Company based upon the understanding of management
that the entity believed by the Company based upon the understanding of
management that the entity believed by the Company to be holding the
beneficial interest in the certificate had not paid for the shares, and was
not a holder in due course or a "protected person" under applicable Uniform
Commercial Code provisions. On August 3, 1998, the Court entered an order
granting the preliminary injunction in favor of Canaccord and compelling the
issuance of a stock certificate to Canaccord's designee for the disputed
125,000 shares of stock. If one of the other entities now named in the
litigation should subsequently establish a right to the issuance of 125,000
shares of the stock of the Company, Dynatec may be required to issue
additional shares. Dynatec intends to continue to pursue its claim for
damages and declaratory relief in this litigation.
6
<PAGE>
As disclosed in the Form SB-2 registration statement of the Company filed
with the SEC on June 26, 1998, the Company has received a telephonic contact
from the SEC indicating that the SEC anticipates filing an administrative
proceeding in the later part of calendar year 1998 against various individuals
and entities which had engaged in business transaction with a British Columbia
corporation and/or a non-U.S. business trust. The SEC representative
indicated that the Company and its chief executive officer may be named in
such agency action. The Company has submitted a Wells Submission to the SEC
to clarify its position as to why it and its CEO should not be named in the
administrative proceeding. The Company did enter into two 1994 subscription
agreements with the British Columbia corporation and two simultaneous
subscription agreements with the business trust in early 1995. However, none
of the transactions were fully consummated and the Company received no
consideration with regard to the transactions. The Company believes that its
actions involving the four referenced subscription agreements are
significantly different from the transactions engaged in with such entities by
other public companies. In this regard, the Company insisted on the use of a
different restrictive legend on its stock certificates which were to be held
in escrow pursuant to the proposed transactions. Further, the Company made a
press release on the day following the first such transaction, and mailed Form
8-K reports to the SEC no later than the day following each of the
transactions. Such actions were intended to immediately put all third parties,
and the investigating public, on notice of the unpaid nature of the
subscriptions. Although the SEC is not bound by comments of its staff members,
the SEC representative which communicated with the Company has stated that the
sole remedy which might be pursued against the Company would be a cease and
desist order precluding the Company from engaging in transactions of this
nature. The Company has not pursued any such transaction since early 1995 and
has no intention of doing so. The SEC representative has also indicated that
the staff is not recommending any monetary penalties against the Company. The
SEC Representative further acknowledges that, unlike other companies under
investigation in the matter, the Company had received no funds in the
transactions and that no disgorgement of proceeds would be sought. Based upon
this information, the Company does not presently anticipate any material
financial statement impact as a result of the referenced investigation.
ITEM 5 - OTHER INFORMATION
For a period of approximately one year, the NASD has requested from the Company
through several letters certain documents related to the foregoing litigation,
stock transactions and related matters. The Company is traded on the Nasdaq
SmallCap market and has a contractual obligation to provide such requested
information. The Company has cooperated in providing such documentation.
The Board of Directors of the Company has unanimously approved an
investigation of the matters referred to in the Legal Proceedings Section
above. The Company's relationship and practices with the Company's transfer
agent, certain related party transactions and other issues which were the
subject of a recent preliminary inquiry conducted by certain members of the
Board of Directors, the actions of officers of the Company with regard to such
matters, and other related and unrelated corporate activities to assure that
proper safeguards and policies are in place or are implemented which will
assist the Board of Directors in monitoring the business activities of the
Company. The Board is to be assisted in this review by independent outside
counsel who will coordinate his efforts with current corporate counsel.
7
<PAGE>
ITEM 6 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM -8K
(a.) Exhibit List.
Exhibit 27-SDS
(b.) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on the August 16,1998
DYNATEC INTERNATIONAL, INC.
-------------------------------------
Donald M. Wood
Chief Executive Officer--Chairman
-------------------------------------
Jerry R. Andersen
Chief Financial Officer--Vice President
8
<PAGE>
EXHIBIT 1
DYNATEC INTERNATIONAL, INC.
CONDENSED FINANCIAL STATEMENTS
June 30, 1998 and 1997
1
<PAGE>
C O N T E N T S
Page
CONDENSED BALANCE SHEETS 3
CONDENSED STATEMENTS OF OPERATIONS 5
CONDENSED STATEMENTS OF CASH FLOWS 6
NOTES TO CONDENSED FINANCIAL STATEMENTS 8
2
<PAGE>
DYNATEC INTERNATIONAL, INC.
Condensed Balance Sheets
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
(Unaudited) (Audited)
--------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 220,986 $ 332,894
Trade accounts receivable, net of allowance for doubtful
accounts of $31,257 in 1998 and $29,684 in 1997 2,551,700 1,549,888
Related party and other receivables 43,728 426,131
Inventories (Note 2) 4,234,151 2,522,149
Prepaid expenses 151,997 234,120
Other 21,530 27,192
--------------- ------------
TOTAL CURRENT ASSETS 7,224,092 5,092,374
PROPERTY, PLANT AND EQUIPMENT, NET 4,014,377 3,941,587
OTHER ASSETS
Deposits 69,425 107,631
Debt issue costs (Note 9) 682,150 -
Intangible assets, net 236,834 267,825
--------------- ------------
TOTAL OTHER ASSETS 988,409 375,456
--------------- ------------
TOTAL ASSETS $12,226,878 $9,409,417
--------------- ------------
--------------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS (CONTINUED)
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
(Unaudited) (Audited)
--------------- ------------
<S> <C> <C>
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term note payable $ 1,638,714 $ 1,331,169
Current portion of long-term debt 174,673 1,003,477
Current portion of capital lease obligations 15,892 15,699
Accounts payable 947,216 992,632
Accounts payable-other (Note 7) 1,232,375 85,000
Accrued expenses 205,110 238,121
Accrued advertising 191,595 350,000
Accrued royalties payable 38,235 17,882
Accrued income taxes - -
--------------- ------------
TOTAL CURRENT LIABILITIES 4,443,810 4,033,980
LONG-TERM LIABILITIES
Long-term debt 2,118,937 1,994,355
Capital lease obligations 37,507 46,086
Deferred income taxes 5,036 5,036
Convertible debentures 1,186,393 5,036
--------------- ------------
TOTAL LIABILITIES 7,791,683 6,084,493
STOCKHOLDERS' EQUITY (Note 7)
Common stock, $.01 par value, authorized 100,000,000 shares
2,766,627 issued at June 30, 1998 and
2,859,940 issued at December 31, 1997 27,667 28,599
Treasury stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 6,699,774 5,596,840
Accumulated deficit (1,377,096) (1,380,329)
--------------- ------------
TOTAL STOCKHOLDERS' EQUITY 4,435,195 3,329,960
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $12,226,878 $ 9,414,453
--------------- ------------
--------------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE AND PRODUCT RIGHTS (Note 10) $4,135,972 $3,490,943 $8,363,758 $6,045,561
COST OF SALES 2,746,298 2,344,651 5,027,349 4,124,434
-------------- -------------- ------------- -------------
GROSS PROFIT 1,389,674 1,146,292 3,336,409 1,921,127
EXPENSES
Selling expenses 721,364 531,829 1,387,131 1,119,578
Research and development 40,495 31,724 73,695 167,878
General and administration expenses 510,755 468,030 949,970 925,594
Provision for losses on accounts receivable 10,000 8,500 10,000 13,500
-------------- -------------- ------------- -------------
TOTAL EXPENSES 1,282,614 1,040,083 2,420,796 2,226,550
-------------- -------------- ------------- -------------
OPERATING GAIN (LOSS) 107,060 106,209 915,613 (305,423)
OTHER INCOME/(EXPENSE)
Interest income - 2,033 3,340 6,015
Interest expense (Note 9) (787,379) (120,058) (894,388) (223,772)
Loss on sale of asset (326) - (21,332) -
Miscellaneous - 90,536 - 90,536
-------------- -------------- ------------- -------------
TOTAL OTHER EXPENSE (787,705) (27,489) (912,380) (127,221)
-------------- -------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (680,645) 78,720 3,233 (432,644)
INCOME TAX EXPENSE (Note 6) - - - (500)
-------------- -------------- ------------- -------------
NET INCOME (LOSS) $ (680,645) $ 78,720 $ 3,233 $ (433,144)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
BASIC NET INCOME (LOSS) PER SHARE $ (0.24) $ 0.04 $ 0.00 $ (0.20)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
DILUTED NET INCOME (LOSS) PER SHARE (Note 3) $ (0.24) $ 0.03 $ 0.00 $ (0.20)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended June 30, Ended June 30,
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,233 $ (433,144)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 203,198 224,220
Amortization 30,741 32,134
Interest expense on convertible debentures (Note 9) 624,226 -
Loss on sale of assets 21,332 -
Provision for losses on accounts receivable 10,000 13,500
Changes in operating assets and liabilities:
Trade accounts receivable (1,011,812) (617,979)
Related party and other accounts receivable 382,403 (410)
Inventories (1,712,002) (403,990)
Prepaid expenses 82,123 (173,531)
Other 5,662 (87,492)
Deposits 38,206 (96,032)
Accounts payable (45,416) 107,174
Accounts payable-other (42,625) -
Accrued expenses (20,846) 289,439
Accrued advertising (158,405) -
Accrued royalties payable 20,353 11,555
Income tax payable - (100)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES $(1,569,629) $(1,134,656)
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
6
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets $ 47,000 $ -
Receivable from related parties - 115,419
Capital expenditures (356,232) (132,293)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (309,232) (16,874)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreements 307,545 249,080
Increase in debt issuance costs (267,983) -
Net borrowings (payments) on long-term debt (704,222) 285,433
Net borrowings (payments) on capital lease obligations (8,387) (12,784)
Net borrowings under convertible debentures (Note 9) 1,500,000
Cash received for future Regulation S offerings (Note 7) 940,000 -
Issuance of Stock pursuant to Regulation S offerings - 500,000
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,766,953 1,021,729
---------------- ----------------
DECREASE IN CASH (111,908) (129,801)
CASH AT BEGINNING OF PERIOD 332,894 240,145
---------------- ----------------
CASH AT END OF PERIOD $ 220,986 $ 110,344
---------------- ----------------
---------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 118,818 $ 93,587
Cash paid for income taxes -- 400
Share certificate cancelled (Note 7) 250,000
Debt issuance cost attributable to warrants to placement agent 426,000
Convertible debt discount associated with warrants to investors 426,000
Beneficial conversion premium on debentures 166,667
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
7
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited, condensed financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and
therefore, do not include all information and footnotes necessary for
a complete presentation of the results of operations, the financial
position, and cash flows, in conformity with generally accepted
accounting principles. This report on Form 10-QSB for the six months
ended June 30, 1998 should be read in conjunction with the Company's
annual report on form 10-KSB for the year ended December 31, 1997.
The accompanying unaudited condensed consolidated financial balance
sheets, statements of operations and cash flows reflect all normal
recurring adjustments which are, in management's opinion, necessary
for a fair presentation of the Company's financial position, results
of operation, and cash flows. The results of operations for the
interim period ended June 30, 1998 are not necessarily indicative of
the results to be expected for the full year.
NOTE 2 - INVENTORIES
Effective January 31, 1998, the Company changed its method of
determining the cost of inventory from last-in, first-out (LIFO)
to first-in, first-out (FIFO). Historically, the difference
between the LIFO and current costs of inventories has been
immaterial.
Inventories, consisting principally of telephone accessory,
hardware/houseware, flashlights, telecommunication headsets, and
other miscellaneous products sold to mass market merchandisers as
of June 30, 1998 and December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
----------- -----------
<S> <C> <C>
Raw $1,382,766 $ 831,483
Finished 2,851,385 1,690,666
----------- -----------
$4,234,151 $2,522,149
----------- -----------
----------- -----------
</TABLE>
NOTE 3 - NET EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of FAS No.
128, Earnings Per Share. FAS 128 requires the presentation of both
basic and diluted earnings per share (EPS). Basic EPS is the amount
of net income or loss divided by the weighted average number of shares
of common stock outstanding. Diluted EPS is the amount of income or
loss for the period divided by the weighted average number of shares
plus all potentially dilutive common shares.
In calculating EPS, the earnings were the same for both the basic and
diluted calculation. The effect of common stock options is not
included in the 1997 calculation as such options would
8
<PAGE>
be anti-dilutive. A reconciliation between the basic and diluted
weighted-average number of shares outstanding as of June 30, 1998
and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Basic weighted-average number of shares 2,786,799 2,160,913
Weighted-average number of shares of potential common stock 658,517 150,336
----------- ----------
Diluted weighted-average number of shares 3,445,316 2,311,249
----------- ----------
</TABLE>
NOTE 4 - YEAR 2000
During 1997, the Company developed a plan to deal with the Year 2000
problem and began converting its computer systems to be Year 2000
compliant. During the fourth quarter of 1997 and the first quarter of
1998, the Company began converting to a new accounting and materials
resource planning software program. The Year 2000 problem is the
result of the computer programs being written using two digits rather
than four to define the applicable year. The Company is capitalizing
costs associated with the new software as the new software is being
implemented to provide better inventory tracking and accounting
controls. All other system changes are being expensed as incurred.
The Company does not anticipate any year 2000 compliance problems.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, effective January 1, 1998. SFAS 130
establishes standards for reporting and displaying comprehensive
earnings and its components in financial statements. As of March 31,
1998, the Company has no items to report as components of
comprehensive income.
NOTE 6 - INCOME TAXES
The Company has net operating loss carryforwards from prior years
which will exceed the income generated for the first two quarters of
1998. The deferred tax asset related to these carryforwards was fully
reserved for as of December 31, 1997. The income tax expense
reflected in the second quarter of 1998 reflects anticipated
alternative minimum tax.
NOTE 7 - STOCKHOLDERS' EQUITY
As of June 30, 1998, $940,000 in funds, which is included in accounts
payable-other in the accompanying condensed balance sheet, has been
received in anticipation of future Regulation S common stock offerings
as approved by the Board of Directors in March 1997. The terms and
agreements for these stock offerings are still under negotiation.
Regulation S stock is typically sold at a significant discount from
market value because of its restricted nature.
On June 16, 1998, Canaccord Capital Corporation ("Canaccord"), a
Canadian broker/dealer, filed
9
<PAGE>
an action against the Company in the U.S. District Court in Salt
Lake City, Utah. The action seeks an order compelling the issuance
of 125,000 shares of Dynatec stock. Canaccord and the Company agree
that the Company, or its transfer agent, had erroneously
over-issued shares of stock to Canaccord in early 1997. In
September 1997, Canaccord tendered certificates for other shares in
acknowledgment of a separate over-issuance. Management of the
Company believed that an additional 125,000 shares had been over
issued. The disputed certificate was subsequently returned to the
transfer agent and cancelled under the direction of the Board of
Directors of the Company. This action was taken by the Company
based upon the understanding of management that the entity believed
by the Company based upon the understanding of management that the
entity believed by the Company to be holding the beneficial interest
in the certificate had not paid for the shares, and was not a holder
in due course or a "protected person" under applicable Uniform
Commercial Code provisions. On August 3, 1998, the Court entered an
order granting the preliminary injunction in favor of Canaccord and
compelling the issuance of a stock certificate to Canaccord's
designee for the disputed 125,000 shares of stock. If one of the
other entities now named in the litigation should subsequently
establish a right to the issuance of 125,000 shares of the stock of
the Company, Dynatec may be required to issue additional shares.
Dynatec intends to continue to pursue its claim for damages and
declaratory relief in this litigation.
NOTE 8 - STOCK OPTIONS
A summary of stock options is as follows for the period ended June 30,
1998:
FIXED OPTIONS:
<TABLE>
<CAPTION>
Shares Exercise
(000) Price
-------- ---------
<S> <C> <C>
Outstanding at December 31, 1997 934 $2.50
Granted 100 $6.50
Exercised (12) $2.50
------
Outstanding at June 30, 1998 1,022 Various
------
------
Options exercisable at June 30, 1998 284 $2.50
------
------
Weighted average fair value of
options granted during first quarter $3.69
Weighted average remaining
contractual life for exercisable
options at June 30, 1998 3.55 years
</TABLE>
10
<PAGE>
VARIABLE OPTIONS:
<TABLE>
<CAPTION>
Shares Exercise
(000) Price
-------- ---------
<S> <C> <C>
Outstanding at December 31, 1997 945 $2.50
Granted 840 $6.50
--------
Outstanding at June 30, 1998 1,785 Various
--------
--------
Weighted average fair value of
options granted during first quarter $5.58
</TABLE>
NOTE 9 - CONVERTIBLE DEBENTURES
On May 22, 1998, the Company closed a transaction that has provided
net capital proceeds of $1,335,000. These funds have been raised
pursuant to the sale by the Company of a Convertible Debenture in
the face amount of $1,500,000. The debentures are convertible into
common stock of the Company at the lessor of: (i) seventy five
percent of the average of the three lowest closing bid prices of
the Common Stock during the ten day trading period immediately
preceding the conversion date or (ii) one hundred percent of the
closing bid price on the trading day immediately preceding the
closing date of the agreement. The transaction has been
accomplished pursuant to a Convertible Debenture and Private Equity
Line of Credit Agreement (the "Credit Agreement") between the
Company and a group of five investors which have not previously
been shareholders of the Company. In addition, the Company can use
a "put" mechanism to periodically draw down up to $10,000,000.
Under the terms of the Credit Agreement, a minimum of $1,000,000
must be drawn in increments of not less than $50,000 in exchange
for common stock of the Company issued at 80 percent of the average
of the three lowest bid prices during the six day valuation period
consisting of three days prior to the put and ending two days after
the put date. The put mechanism cannot be utilized until after the
effective date of the registration statement for the underlying
stock of the Credit Agreement. Additionally, upon registration of
the underlying shares which may be purchased pursuant to the
convertible debentures, the Company will receive an additional
$500,000 of gross sales proceeds.
In connection with the Credit Agreement, the investors and placement
agent were issued warrants. These warrants have been issued as
Series A and Series B as follows:
<TABLE>
<CAPTION>
Placement Exercise
Investors Agent Price
---------- --------- ---------
<S> <C> <C> <C>
Series A Warrants 150,000 150,000 $6.50
Series B Warrants 150,000 300,000 $7.15
</TABLE>
The Company is to issue an additional 50,000 Series A warrants each to
both the placement agent and the investors upon receipt of the
additional $500,000 of gross sales proceeds. The
11
<PAGE>
market value for the Series A warrants issued to the investors
has been written off as a one-time, non-cash debt issuance cost of
$426,000 as the warrants are immediately exercisable. The market
value of the Series A warrants issued to the placement agent have
been capitalized and will be written off by the Company over the 36
month life of the debentures. Although these debt issuance costs
are non-cash items, current GAAP requires disclosure for the market
value of warrants issued along with convertible debentures. In
addition, because the debentures are convertible at a 25 percent
discount from the market value, an additional $500,000 (the
intrinsic value of the beneficial conversion premium) of the
proceeds received were established as a contra-debt account and
$166,667 of this premium was written off as a non-cash expense for
the second quarter of 1998. These non-cash amortization and
write-off of the market value of warrants issued is included with
interest expense in the income statement. Upon the effective date
of the registration statement, the market value of the warrants
issued to the investors in connection with the $500,000 of
convertible debentures will also be written off (estimated to be an
additional third quarter non-cash expense of $121,500) and the
remaining beneficial conversion premium will be written off as a
third quarter, non-cash item. The Series B warrants which have been
issued have no current impact to the Company financial statements,
as they were issued in connection with the equity line of credit.
NOTE 10 - OTHER
In the period ended March 31, 1998, the Company recognized revenue
related to an agreement with an overseas supplier whereby
non-exclusive rights to market Company products internationally were
sold for $580,000. According to the agreement, the purchase price was
paid by the sale of Company stock owned by the supplier.
The Board of Directors of the Company has unanimously approved an
investigation of the matters referred to in the Legal Proceedings
Section above. The Company's relationship and practices with the
Company's transfer agent, certain related party transactions and
other issues which were the subject of a recent preliminary inquiry
conducted by certain members of the Board of Directors, the actions
of officers of the Company with regard to such matters, and other
related and unrelated corporate activities to assure that proper
safeguards and policies are in place or are implemented which will
assist the Board of Directors in monitoring the business activities
of the Company. The Board is to be assisted in this review by
independent outside counsel who will coordinate his efforts with
current corporate counsel.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 220,986
<SECURITIES> 0
<RECEIVABLES> 2,551,700
<ALLOWANCES> 0
<INVENTORY> 4,234,151
<CURRENT-ASSETS> 7,224,092
<PP&E> 4,014,377
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,226,878
<CURRENT-LIABILITIES> 4,443,810
<BONDS> 1,186,393
0
0
<COMMON> 27,667
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,226,878
<SALES> 7,783,758
<TOTAL-REVENUES> 8,363,758
<CGS> 5,027,349
<TOTAL-COSTS> 7,448,145
<OTHER-EXPENSES> 912,380
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 894,388
<INCOME-PRETAX> 13,233
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,233
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>