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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, 1997,
Commission file number: 0-12806
DYNATEC INTERNATIONAL, INC.
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(Name of small business issuer in its charter)
UTAH 87-0367267
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
3820 Great Lakes Drive
Salt Lake City, UT 84120
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone
number: (801) 973-9500
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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)
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(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
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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, 1997 were
$14,566,079.
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 14, 1998 as reported on the NASDAQ Stock Market, was approximately
$17,834,410.
As of April 14, 1998 Registrant had outstanding 2,780,112 shares of Common
Stock.
Transitional Small Business Disclosure Format. Yes No X
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TABLE OF CONTENTS
PART I
PAGE
ITEM 1 DESCRIPTION OF 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 DESCRIPTION OF PROPERTIES...................................... 6
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................................ 7
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS......................................... 7
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA..................... 10
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES........................... 12
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PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE
ACT........................................................... 13
ITEM 10 EXECUTIVE COMPENSATION........................................ 14
ITEM 11 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.............................. 16
ITEM 12 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.......................................... 18
PART IV
ITEM 13 EXHIBITS, FINANCIAL STATEMENTS AND
SCHEDULES AND REPORTS
ON FORM 8-K................................................... 20
(a) Consolidated financial statements, financial schedules,
and supplemental information
(b) Reports on Form 8-K
(c) Exhibits Index
SIGNATURES................................................. 21
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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 "Cord
Manager". For the calendar year ended December 31, 1997, revenues from the
telephone accessory products accounted for 41.6% of the total revenues of the
Company and 63.3% of revenues for the year ended December 31, 1996. Major
customers in this category include United Stationers, Lucent Technologies, Boise
Cascades, Radio Shack, Staples, and Gemini Industries.
HARDWARE/HOUSEWARES
For the calendar year ended December 31, 1997, the hardware/housewares
products of the Company accounted for 24.8% of the revenues of the Company
compared to 30.3% of Company revenues for the year ended December 31, 1996. 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", "The Wedge", "Super Wedge" , "Medicine Cabinet
Organizer", "Drawer Organizer", "Freedom Hanger", "Expand-A-Drawer", "Expanding-
Roll-Out", and "Easy Reach Roll-Out" shelves. 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.
MASS MARKET
The Company has been aggressively pursuing the marketing of commodity type
products to national mass-market merchandisers, such as Dolgencorp, Inc. Such
products included disposable cameras, audio cassette tapes, three piece
flashlights, and disposable lighters to Dolgencorp. Sales for these types of
products accounted for 26.7% and 3.3% of the Company's revenues for the years
ended December 31, 1997 and 1996, respectively.
FLASHLIGHT
The Company has been aggressively pursuing the establishment of
manufacturing sources in the Far East for a line of flashlight products. Sales
of flashlight products for the year ended December 31, 1997 amounted to $892,828
or 6.1% of the Company's total revenues. Flashlight sales in 1996 were
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nominal. Management believes that substantial savings will result from the
production of flashlights overseas. During July of 1997, assets previously
used for domestic production of flashlights were sold. The resulting
receivable on the sale was settled by the receipt of treasury stock.
TELECOMMUNICATION HEADSETS
The Company has invested significant capital in Research and Development
(R&D). The Company has been developing a new line of telephonic/computer
headset amplifiers and headset telephones during the years ended December 31,
1997 and 1996. Most of the $91,638 in revenues from sales of these new headset
lines for the year ended December 31, 1997 were generated from fourth quarter
sales. During the last quarter of 1997, the Company received initial orders
from Lucent Technologies to provide headsets to be delivered in 1998.
MISCELLANEOUS
Miscellaneous products of the Company include the "Softalk Erasable Board"
a soft wipe erasable planning board for office and personal use, as well as
product packaging for AT&T and the Fuji Novel Battery Line. The miscellaneous
products segment accounted for less than one percent of revenues for the year
ended December 31, 1997.
1.2 SUBSIDIARIES OF THE COMPANY. For the year ended December 31, 1997,
the Company conducted most of its operations through certain of its
subsidiaries. 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.
<TABLE>
<CAPTION>
Date Percentage
Acquired Shares
Date By held
Subsidiary Organized Company by Company
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(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%
- --------------------------------------------------------------------------------
</TABLE>
(1) Engaged in the manufacturing/sourcing and distribution of the
telephone accessory, hardware/housewares, and mass market 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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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 the future. However, the Company
anticipates increases in the price of plastics products, freight, and packaging
in calendar year 1998. Additionally, the Company purchases the majority of
products to be sold from a combination of various domestic and foreign
suppliers. Both domestic and foreign suppliers have demonstrated continued
dependability in supplying quality product in a timely manner.
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
<TABLE>
<CAPTION>
Year of
Trademark
Trademark Expiration
Product Country Granted/Filed or Renewal
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<S> <C> <C> <C>
(a) Softalk U.S.A. 08/10/90 Each 20 Years
Canada 02/05/81 Each 15 Years
(b) Mini-Softalk U.S.A. 08/10/90 Each 20 Years
(c) Sofstop U.S.A. 08/04/92 Each 10 Years
(d) The Wedge U.S.A. 10/20/92 Each 10 Years
(e) Wall Saver U.S.A. 07/15/97 Each 10 Years
(f) Expand-A-Shelf U.S.A. 09/24/95 ----
(g) Phoneworks U.S.A. 05/10/96 ----
(h) Audioworks U.S.A. 05/10/96 ----
(i) Videoworks & Design U.S.A. 05/10/96 ----
(j) Easy Reach U.S.A. 02/21/97 ----
(k) Tele Link U.S.A. 04/10/97 ----
(l) Computer Link U.S.A. 04/10/97 ----
(m) Power Link U.S.A. 04/10/97 ----
(n) Pace Setter U.S.A. 04/10/97 ----
(o) Power Phone U.S.A. 04/10/97 ----
(p) Smart Sound U.S.A. 04/10/97 ----
(q) Softalk Design U.S.A. 04/09/96 Each 10 Years
(r) Mini Softalk Design U.S.A. 05/21/96 Each 10 Years
(s) Cord Manager U.S.A. 09/16/97 Each 10 Years
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<S> <C> <C> <C>
Canada 10/27/97 Each 15 Years
European Community 05/31/96 ----
Japan 09/24/96 ----
(t) Home Organization U.S.A. 07/23/97 ----
(u) Nordic Lite U.S.A. 04/03/96 ----
(v) Nordic Helmet Design U.S.A. 07/05/97 Each 10 Years
(w) Smoke Cutter U.S.A. 12/23/97 Each 10 Years
(x) Nite-Site-Lite U.S.A. 12/18/90 Each 10 Years
(y) Zoom Switch U.S.A. 08/19/96 ----
- --------------------------------------------------------------------------------
</TABLE>
PATENTS
<TABLE>
<CAPTION>
Year of
Patent
Patent Expiration
Product Country Granted/Filed or Renewal
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) Universal Softalk U.S.A. 09/06/94 2011
(b) Softalk II U.S.A. 02/11/92 2009
(c) Expand-A-Drawer U.S.A. 08/09/96 ----
(d) Easy Reach Roll-Out U.S.A. 08/01/97 ----
(e) Expand-A-Shelf, Book Edition U.S.A. 06/25/96 2013
(f) Door Protector U.S.A. 01/10/95 2012
(g) Interchangeable Doorstop U.S.A. 02/18/97 2014
(h) Zoom Light U.S.A. 07/24/96 ----
PCT 11/10/97 ----
(i) Switch w/Spare Bulb Carrier U.S.A. 11/14/89 2007
(j) Flashlight w/Switch Assembly U.S.A. 06/27/89 2007
(k) Flashlight w/Nite-Site-Lite U.S.A. 05/07/91 2008
(l) Cord Manager U.S.A. 08/19/96 ----
Canada 06/25/97 ----
China 07/31/97 ----
Taiwan 08/15/97 ----
PCT 07/29/97 ----
(a) Medicine Cabinet Organizer U.S.A. 07/15/93 ----
(b) Spring Wedge U.S.A. 07/18/96 2008
(c) Hole-in-the-Wall U.S.A. 10/02/84 ----
- --------------------------------------------------------------------------------
</TABLE>
Management believes that the trademark protection afforded by the described
trademarks is important to each of the products identified above.
1.5 SEASONAL NATURE OF PRODUCTS. Because the Company sells several of the
telephone accessories and the hardware/housewares products to retailers,
seasonality is common for these segments. Historically, the retail market
performs better during third and fourth quarter of each calendar year.
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1.6 INVENTORY SUPPLY 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 keeps an inventory of approximately two
months of all products in order to meet the shipping policy.
1.7 MAJOR CUSTOMERS. For the calendar year ended December 31, 1997, 15%
of the telephone accessory products were distributed through sales to United
Stationers whose headquarters are at 1900 South Des Plaines Ave., Forest Park,
IL 60130. Another 13% of sales of the telephone accessory products were
distributed through S.P. Richards whose headquarters are at P.O. Box 1266,
Smyrna, GA 30081. Boise Cascade, whose headquarters are at 800 West Bryn Mawr
Road, Itasca, IL 60143, accounted for another 11% of sales in the telephone
accessory product category.
For the year ended December 31, 1997, 17% of the hardware/houseware
products were distributed through Walmart whose headquarters are at 702 S.W. 8th
Street, Bentonville, AR 72716. Another 12% of the hardware/houseware products
was to Target Stores whose headquarters are at P.O. Box 1392, Minneapolis,
MN55440-1392. National Manufacturing, whose headquarters are at 1 First Avenue,
Sterling IL 61081, accounted for another 11% of the distribution of the
hardware/houseware products.
Dolgencorp, Inc., whose headquarters are at 427 Beech Street, Scottsville,
KY 42164 accounted for virtually all of the Company's mass market revenues of
$3,900,000 for the year ended December 31, 1997.
Dolgencorp, Inc. was the only customer who accounted for more than 10% of
total Company revenues. The loss of a single customer in any of the other
product lines of the Company would not have a significant, adverse effect on the
Company as a whole.
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 with other 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 easily
replicated, although the mold costs for such products could be substantial. The
Company also has legal protection on various products in the forms of various
trademarks and patents.
The Company believes that both the flashlight and telephonic headset
markets are also very competitive. However, the Company feels that its
proprietary rights for both flashlights and headsets, as well as innovative
features, provide the Company with a strong ability to compete in each of these
markets.
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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 20 people. The Company also has an average
monthly assembly, warehouse and distribution staff of approximately 45 people.
The number of assembly, warehouse and distribution employees is subject to
adjustment based upon demand and has ranged, during the year ended December 31,
1997, from a high of approximately 70 employees to a low of approximately 56
employees.
1.11 YEAR 2000 COMPLIANCE. The company utilizes and is dependent upon
computer systems and software to conduct is business. In fourth quarter of
1997, the Company began implementing a new accounting and materials resource
planning integrated software system. The system was implemented to provide
better inventory tracking mechanisms and to lessen the time necessary for
financial reporting. The software system, Made2Manage, is also year 2000
compliant. All in-house systems and software are expected to be year 2000
compliant by third quarter of 1998. The expenditures made for implementing the
new software program have been capitalized for 1997, as the program was
implemented not only for year 2000 compliance, but also to provide better
inventory management and financial controls. Future expenditures incurred for
ensuring year 2000 compliance are expected to have a material impact on the
Company's consolidated financial statements.
ITEM 2. PROPERTIES
The Company owns and occupies one facility that was built upon real estate
purchased by the Company in 1996. 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 is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Other than routine Board of Director elections and auditor appointments,
the Company had no other matters brought to a vote of security holders.
Directors elected are presented in Part III, Item 9.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's stock is listed on the NASDAQ Stock Market under the symbol
DYNX. As of the 31st day of December, 1997 there were 1,277 share holders of the
stock of the Company and 2,859,940 shares of the stock were issued and 2,768,425
outstanding.
The price range of the Company's stock for the two most recent fiscal years
is set forth on a quarterly basis in Item 7, Financial Statements and
Supplemental Data. The referenced 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, at present, has no
intent to pay dividends in calendar year 1998. The Company intends to retain
earnings to facilitate business expansion in the foreseeable future.
On November 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. All references to shares outstanding and net income (loss)
have been restated on a retroactive basis to reflect this forward stock split.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the information set forth under item 7 (Financial Statements and Supplemental
Data), the consolidated financial statements and the notes thereto contained
elsewhere in this 10-KSB filing.
RESULTS OF OPERATIONS:
For the year ended December 31, 1997, the Company experienced total
revenues of $14,566,079 compared to total revenues of $9,808,314 in the prior
calendar year ended June 30, 1996. Comparative period revenues increased
$4,757,765 or 49%.
TELEPHONE ACCESSORIES:
For the year ended December 31, 1997, there was an overall decrease of
$150,856 (2.43%) in the revenues generated from the Telephone Accessory product
segment of the Company compared to total revenues for the year ended December
31, 1996. Although the sales mix for various shoulder rests changed slightly,
overall 1997 sales of shoulder rests remained fairly constant, increasing by
approximately $17,000 over 1996 sales. The majority of the decrease represents
reduced sales of Twisstops of approximately $224,000.
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HARDWARE/HOUSEWARES:
The Hardware/Housewares products segment produced an increase in revenues
during the year ended December 31, 1997 of $644,341 or 22% compared to the year
ended December 31, 1996. During 1997, the Company introduced several new drawer
organizer products which accounted for $439,630 of the change. Additionally,
sales decreases of approximately $130,000 in doorstop products were offset by
increases in sales of Expand-A-Shelf products of approximately $246,000. The
closet hanger introduced in 1996 also experienced an increase of sales of
approximately $88,000. Sales in this segment continue to grow as the Company
continues to aggressively market and expand the housewares product lines.
MASS MARKET:
The Company has been aggressively pursuing the marketing of commodity type
products to national mass market merchandisers. Sales in the Mass Market
segment increased $3,566,927 over 1996. Disposable camera sales accounted for
87% of the year-over-year increase. Virtually all of the sales in this segment
were to Dolgencorp, Inc. In addition to cameras, the Company also distributed
audio cassette tapes, three piece flashlights, and disposable lighters to
Dolgencorp, Inc.
FLASHLIGHTS:
On December 2, 1996, the Company acquired 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. Nordic Technologies sales 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. A value
of $1.60 per share was determined based upon subsequent sales of stock by
shareholders of Nordic Lights, Inc. In April 1997 an agreement was reached
whereby several third parties were to bought a number of shares back from Nordic
Lites, Inc.
Total sales in the flashlight segment were $892,828 compared to $54,266 for
the years ended December 31, 1997 and 1996, respectively. The Company is
pursuing an agreement to ensure adequate manufacturing capacity of flashlights
offshore.
TELECOMMUNICATIONS HEADSETS
The Company has been aggressively developing a line of telecommunications
products to include wired and wireless telephone headsets, telephones,
conference speakers, and other products. Significant research and development
expense has been dedicated to the development of this product line including the
hiring of two full time employees. Significant cash outlays have been made for
molds, engineering, and other development costs. By year-end 1997, the Company
had a full line of amplifier headsets available for resale. Although 1997 sales
for this segment were only $91,638, orders for 14,000 headsets have been
received and several catalogue commitments have been made with various office
products wholesalers.
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EXPENSES
Overall gross margins of the Company for the years ending December 31, 1997
and 1996 were 30 percent and 39 percent, respectively. This overall decrease in
gross margin is largely attributable to increased sales of miscellaneous mass
market products including disposable cameras, plastic flashlights, and audio
cassettes which the Company sourced to Dolgencorp, Inc.
Additionally, the Company spent $508,314 and $627,583 in research and
development expenses for the years ending December 31, 1997 and 1996. Most of
the research and development expenses for both years was spent in developing the
headset and flashlight product lines. However, management believes that future
research and development expenses will be less during 1998, as enhancements to
existing products should be less expensive to develop.
Interest expense for the years ending December 31, 1997 and 1996 were
$427,392 and $269,292, respectively. The increase in interest expense reflects
interest paid on the long-term notes payable which were used to obtain the
Company's plant in late 1996.
Overall Company net loss decreased from a net loss of $1,045,149 for the
year ended December 31, 1996 to a net loss of $409,172 for the year ended
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES:
At December 31, 1997, the company experienced a net increase in its cash
position of $93,000. The Company had a decrease in cash from operations of
approximately $1.2 million. The majority of this decrease was caused by the a
$1.3 million increase in inventory from the year ended December 31, 1997 over
the year ended December 31, 1996. This increase in inventories was offset by a
corresponding increase in accounts payable of $537,000 for the same period. The
Company experienced a net increase in cash position resulting from the issuance
of Regulation S stock ($2 million) offset by capital expenditures ($590,000).
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 $3 million at December 31, 1996 to $5.1
million at December 31, 1997. Of this increase, approximately $1.3 million
reflects increases in inventory which is offset by increases in accounts payable
and line of credit of $646,000 as the company prepares for increased sales in
calendar year 1998. Additionally, accounts receivable also increased year-over-
year to due increased fourth quarter sales of approximately $190,000.
Additionally, the December sale of 3.23 acres of real estate property owned by
the Company led to a decrease in fixed assets and an increase in the current
portion of long-term debt for the portion of the long-term debt to be paid off
in 1998 relative to sold property.
Under the terms of the line-of credit agreement with a bank, 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, 1997 the Company was not in
compliance with the provisions requiring a minimum current ratio of 1.5 to 1.
The ratio of total current assets to total current liabilities was 1.26 at the
end of 1997 compared to .96 at December 31, 1996.
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Management is currently negotiating with other lenders to obtain a new,
larger line-of-credit to pay off the current short-term note payable and to fund
future operations. In addition, the Board of Directors approved the terms of an
engagement letter with a financial services firm which provides for the
placement of $1,500,000 in convertible debentures and up to $10,000,000 in
common stock in the form of an equity line-of-credit.
On December 11, 1997, the Company entered into an agreement with an
overseas supplier whereby non-exclusive rights to market Company products
internationally were sold for $590,000. According to the agreement, the
purchase price will be paid by the sale of Company stock owned by the supplier.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act f 1933, as amended, and Section 21E of the
Securities Exchange Act of 1936, as amended, which are intended to be covered by
the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, and any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements will prove to be
accurate. Factors that could cause actual results to differ from results
discussed in forward-looking statements include, but are not limited to,
potential increases in inventory costs, competition, and the Company's ability
to obtain additional working capital to fund future growth.
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 1997. 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 1997.
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 10-KSB and which contain the
Consolidated Balance Sheets for the calendar years ended December 31, 1997 and
1996.
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.
10
<PAGE>
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 the accompanying notes.
<TABLE>
<CAPTION>
Transition
Period
Year Ended Year Ended Ended Fiscal Year Ended June 30,
12/31/97 12/31/96 12/31/95 1995 1994 1993
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Telephone
accessories 6,054,000 6,204,000 3,278,000 5,495,000 5,659,000 5,763,000
Hardware products 3,618,000 2,973,000 1,415,000 2,375,000 2,100,000 1,673,000
Mass market 3,893,000 326,000 -- -- -- --
Flashlights 892,000 54,000 -- -- -- --
Headsets 92,000 -- -- -- -- --
Batteries -- 45,000 524,000 1,032,000 1,187,000 --
Other 17,000 206,000 14,000 78,000 75,000 98,000
------------------------------------------------------------------------------
Total revenues 14,566,000 9,808,000 5,231,000 8,980,000 9,021,000 7,534,000
Income (loss)
from
continuing
operations
before taxes (348,000) (1,053,000) 110,000 (28,000) 346,000 511,000
Income tax expense
(benefit) 61,000 (8,000) 46,000 (33,000) 55,000 3,000
Net income (loss) (409,000) (1,045,000) 64,000 5,000 291,000 508,000
Total assets 9,409,000 8,216,000 6,070,000 4,844,000 4,279,000 3,598,000
Stockholder's
equity 3,330,000 2,664,000 2,783,000 2,698,000 2,678,000 2,008,000
Long term
liabilities 2,045,000 2,483,000 969,000 444,000 419,000 560,000
Shares
outstanding 2,768,000 1,974,000 1,412,000 1,403,000 1,311,000 1,151,000
</TABLE>
11
<PAGE>
PERIODIC CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
1997 INFORMATION: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
Ended 3-31 Ended 6-30 Ended 9-30 Ended 12-31 Ended 12-31
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenue $2,554,618 $3,490,943 $5,041,055 $3,479,463 $14,566,079
Gross profit 774,835 1,146,292 1,448,527 1,022,220 4,391,874
Net income (loss) (511,864) 78,720 240,926 (216,954) (409,172)
Basic income
(loss) per share (0.23) 0.04 0.11 (0.09) (0.18)
Market Price
-High 5.75 11.00 10.69 8.81 11.00
-Low 2.63 5.75 4.00 4.50 2.63
<CAPTION>
1996 INFORMATION: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
Ended 3-31 Ended 6-30 Ended 9-30 Ended 12-31 Ended 12-31
----------- ----------- ----------- ----------- -----------
<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 3,613,565
Net income (loss) (112,316) 201,565 5,418 (1,139,816) (1,045,149)
Basic income
(loss) 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
- -------------------------------------------------------------------------------------------
</TABLE>
(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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
In late 1997, the Company decided to engage a larger, international
auditing firm. During a regularly scheduled Board of Director meeting, the
audit committee presented the motion that management pursue the engagement of a
"Big 6" auditing firm. In December 1997, KPMG Peat Marwick LLP became engaged
as the Company's new auditing firm.
12
<PAGE>
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, 1997, 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 four members serving on the board as directors are Mr. Wood, Mr.
Jack, Mr. Newbold, and Mr. Volcansek. Information regarding these directors and
the Secretary to the Board of Directors is as follows:
<TABLE>
<CAPTION>
Name and Office Principal Occupation During the
Held in the Corporation Age Past Five Years
----------------------- --- --------------------------------
<S> <C> <C>
Donald M. Wood 53 Officer and Director for the Company
Chief Executive Officer, since 1982. Prior to 1982, Vice
Chairman of the Board, President and Head of Sao Paulo
Director and Director Nominee Brazil office for Bank of America,
N.T. & S.A. Received Masters of
Business Administration from Brigham
Young University in 1972.
Fredrick R. Jack 55 Officer and Director of the Company
President, since 1981. Prior experience as
Chief Operating Officer, District Manager, AT&T, US West, and
Director and Pacific Telephone. Received B.S.
Director Nominee degree from University of Utah in
1967.
Reed Newbold 52 Outside Director of the Company
Outside Director and since 1988. Currently is a
Director Nominee Financial Planner and Mortgage
Broker. Owner of Newbold Financial
Services. Prior experience as Vice
President of Tracy Collins Bank &
Trust. Graduated with B.S. degree
from University of Utah in 1974.
Frederick W. Volcansek 53 Outside Director of Company since 1988.
Outside Director and Currently Vice President of Mosbacker
Director Nominee Companies, Houston, Texas. Prior
experience as U.S. Deputy
Undersecretary of Commerce in
Washington, D.C. Graduated with
B.S. degree from Texas Tech
University in 1967
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
Jerry R. Andersen 32 Secretary and Officer of the Company
Chief Financial Officer since 1997. Prior experience as
Secretary Manager of Financial Reporting at
CIGNA Corporation and auditing
experience with Coopers & Lybrand,
LLP. Received Masters of
Accountancy from Brigham Young
University in 1992.
</TABLE>
Mr. Wood was first elected to the Board of Directors 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. The members of the Board currently serving are
director nominees to be elected at the 1998 Annual Meeting of Shareholders.
Each board member receives $2,000 for each board meeting held during the year.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During the year ended December 31, 1997, all officers and directors
prepared and filed all Forms 3,4 and 5 required by Section 16 (a) of the
Exchange Act. Mr. Wood and Mr. Jack had a technical obligation to file a Form 4
within ten days of the end of July 1997 by reason of a purchase and sale of
stock taking place in the month of July. Because the net effect of this
transaction reflected no change in ownership, these transactions were not
reported until Form 5s were filed on April 24, 1998.
OTHER INFORMATION REGARDING THE BOARD
The Board of Directors of the Company held seven meetings in the year ended
December 31, 1997. None of the directors participated in less than 75% of the
meetings held during the period. During the year ended December 31, 1997, 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 are 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.
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
$100,000.
14
<PAGE>
Dynatec International, Inc
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
(1)
Other
Year Annual Restricted (3) All other
Ended (2) Compen- Stock Options/ LTIP Compen-
Name and Decem. Salary Bonus sation Award(s) SARs Payouts sation
Principal Position 31 ($) ($) ($) ($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald M. Wood 1997 94,433 3,249 14,000 14,000 - -
- - Chief Executive 1996 194,640 1,421 8,000 10,000 - -
Officer 1995 194,330 1,421 12,000 - - -
F. Randy Jack 1997 129,142 3,465 14,000 10,000 - -
- - President 1996 142,440 1,522 8,000 9,000 - -
1995 142,215 1,522 12,000 - - -
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Total cash compensation shown above does not include the value of company
leased or owned vehicles and insurance payments made on behalf of officers.
Such items are included on the individual officers W-2's. The amounts
shown as other annual compensation are directors fees received during the
fiscal year.
(2) Bonus compensation includes time in service bonus and merit bonus at
discretion of the Board of Directors.
(3) An incentive stock option plan was implemented in November 1996. Options
were granted as approved by the Board of Directors on December 30, 1996 and
again on January 2, 1997.
15
<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Percent of Total
Options/SARs Market
Options/ Granted to Value on
SARs Employees in Exercise or Base Date of Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Grant Date
---- ----------- ----------------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Donald M. Wood 14,000 13.3 $ 2.50 $2.50 1/02/06
400,000 (1) 50.0 $ 2.00 $2.50 See Note
F. Randy Jack 10,000 9.5 $ 2.50 $2.50 1/02/06
100,000 (1) 12.1 $ 2.00 $2.50 See Note
</TABLE>
(1) These options represent non-qualified stock options which were granted to
nine employees and two board members. To be able to exercise these options,
employment must continue for six years, and the Company must be profitable
three out of six years.
Mr. Wood and Mr. Jack 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 November 1996, the Company shareholders 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 Plan provides that options are granted at
exercise prices equal to the market value as of the date the option is granted.
On January 2, 1997 and December 30, 1996, the Board of Directors approved the
issuance of 105,000 and 95,000 options to purchase 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 1997 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.
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 14, 1998 are indicated in the following table:
16
<PAGE>
<TABLE>
<CAPTION>
Amount and Percent
Nature of of Class
Name and Address of Beneficial as of
Beneficial Owner Ownership 4/14/98
- ------------------- ----------- --------
<S> <C> <C>
Boa Sorte Limited Partnership 162,000 5.8%
1819 East Southern Avenue
Mesa, AZ 85204
CEDE & Co. 427,759 (1) 15.4%
P.O. Box 222
Bowling Green Station
New York, NY 10274
Chegamos Inc. 215,000 7.7%
1 East 1st Street
Reno, NV 89501
Muito Bem, LTD 162,000 (2) 5.8%
3078 American Saddler Drive
Park City, UT 84060
</TABLE>
- ------------------
The above table reflects the actual Beneficial Ownership as of April 14,
1998. It does not take into account shares available under the incentive stock
option plans. A total of 2,780,112 shares were outstanding at April 14, 1998.
(1) CEDE & Co. is the nominee for the Depository Trust Company and
its participants.
(2) Muito Bem LTD is a limited partnership for which Mr. Donald M.
Wood is a limited partner and the president of the corporate general
partner. Mr. Wood is deemed to be a beneficial owner of these shares.
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 $2.00 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. Another 800,000 non-qualified stock options, with similar
terms, was authorized by the board and granted on January 2, 1997. Employment
must continue through the year 2002 and the company must be profitable three out
of five years commencing January 1, 1998.
In 1996, the board of directors also authorized and granted 537,500 non-
qualified stock options for to Muito Bem Ltd. at a strike price of $2.50 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 by the chief executive officer.
In addition, WAC Research, Inc. was authorized and granted 200,000 options for
restricted shares of the Company's stock
17
<PAGE>
under similar terms. These options are non-exercisable until December 30,
2000. Subsequent to the issuance of these shares, the strike price was
adjusted from $2.00 to $2.50 per share to reflect the market value on the
date of grant.
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
Amount of Nature of
Beneficial Ownership
of Common Stock by
Management as of Percent
April 14, 1998 of class
--------------------- --------
<S> <C> <C>
Donald M. Wood 188,007 (1) 6.7%
Fredrick R. Jack 39,009 (2) 1.4%
Reed D. Newbold 2,000 (3)
All directors and
officers as a
group (5 persons) 229,016 8.1%
</TABLE>
(1) This reflects the 2,007 shares owned by Annalee G. Wood, wife of
Donald M. Wood; 162,000 shares held by Muito Bem LTD of which
Donald M. Wood is deemed a beneficial owner; and 24,000 shares
subject to options exercisable under the incentive stock option plan.
(2) This number includes 19,000 shares subject to options exercisable
under the incentive stock option plan.
(3) Ownership is less than 1% of the outstanding shares of the Company.
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 Research and the Board of Directors of the
Company determined that the 10% royalty was onerous and non-sustainable.
Therefore, WAC Research agreed to lower the royalty to 5%. In addition, the
agreement also states that the payment of royalties for third and fourth quarter
is contingent upon the Company obtain a certain level of earnings for each
calendar year.
18
<PAGE>
It is anticipated that approximately $200,000 of royalties will be accrued
or paid to WAC Research in calendar year 1998. During 1997 Softalk Inc. paid
$120,000 to WAC Research in payment of royalties.
During 1995, the Company sold all rights and interest in various
discontinued products to WAC Research for $150,000 in the form of a demand note
bearing 8% interest. As part of the transaction, inventory and molds were also
sold at cost to WAC. In June 1997, the Company received 18,000 shares of
Dynatec International, Inc. common stock from WAC as payment in full of all
outstanding balances. Such shares were valued at the market price of $10.00 per
share, which represented the current market value of the stock. In addition,
WAC Research, Inc. was authorized and granted 200,000 options for restricted
shares of the Company's stock under similar terms. These options are non-
exercisable until December 30, 2000.
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, 1997 were $1,900,000. During 1997 the
highest outstanding balance on the bank lines and equipment notes was
$2,360,000. During 1996 the Company completed construction of a manufacturing,
assembly and office facility. The facility was subsequently financed with a
local bank and the Small Business Administration. Mr. Wood is a guarantor on
the real estate loans. The balance due at December 31, 1997, was $2,150,000.
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 1997
was $84,000. The Company is terminating the contract in 1998.
During 1997 and 1996 the Board of Directors authorized the granting of
various options under both non-qualified and incentive stock options plans.
These options are described in detail in the note to the consolidated financial
statement sections included with this 10-KSB filing. The non-qualified plans
included 537,500 options granted to Muito Bem Ltd. at a strike price of $2.50
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 by the chief executive officer.
19
<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
A report on Form 8-KSB was filed on January 23, 1998. That report is
hereby incorporated by this reference.
(c) EXHIBITS
Exhibit 27 -- FDS
20
<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 21, 1997 By: /s/ DONALD M. WOOD
-------------------------------------
DONALD M. WOOD, Chairman and
Chief Executive Officer
Date: April 21, 1997 By: /s/ JERRY R. ANDERSEN
-------------------------------------
JERRY R. ANDERSEN, Vice-President
Chief Financial 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 21, 1997 By: /s/ DONALD M. WOOD
-------------------------------------
DONALD M. WOOD, Director
Date: April 21, 1997 By: /s/ FREDRICK R. JACK
-------------------------------------
FREDRICK R. JACK, Director
Date: April 21, 1997 By: /s/ REED D. NEWBOLD
-------------------------------------
REED D. NEWBOLD, Director
Date: April 21, 1997 By: /s/ FREDERICK W. VOLCANSEK
-------------------------------------
FREDERICK W. VOLCANSEK, Director
Date: April 21, 1997 By: /s/ JERRY R. ANDERSEN
-------------------------------------
JERRY R. ANDERSEN, Secretary
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dynatec International, Inc.:
We have audited the accompanying balance sheet of Dynatec International, Inc.
as of December 31, 1997, 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.
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 financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 financial position of Dynatec
International, Inc. as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick L.L.P.
Salt Lake City, Utah
April 10, 1998
<PAGE>
[LETTERHEAD]
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.
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.
/s/ JONES, JENSEN & COMPANY
Jones, Jensen & Company
March 27, 1997
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
1
<PAGE>
C O N T E N T S
Page
----
CONSOLIDATED BALANCE SHEETS................................................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS...................................... 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY................. 6
CONSOLIDATED STATEMENTS OF CASH FLOWS...................................... 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. 9
2
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 332,894 $ 240,145
Trade accounts receivable, net of allowance for doubtful
accounts of $29,684 in 1997 and $29,000 in 1996 1,549,888 1,125,750
Related party and other receivables (Note 11) 426,131 145,419
Inventories (Note 3) 2,522,149 1,256,440
Prepaid expenses 234,120 180,157
Other 27,192 19,523
---------- ----------
TOTAL CURRENT ASSETS 5,092,374 2,967,434
PROPERTY, PLANT AND EQUIPMENT, NET (Note 4) 3,941,587 4,673,999
OTHER ASSETS
Deposits 107,631 22,355
Deferred tax asset (Note 9) -- 69,960
Note receivable-related party (Note 11) -- 150,000
Intangible assets, net (Note 5) 267,825 332,092
---------- ----------
TOTAL OTHER ASSETS 375,456 574,407
---------- ----------
TOTAL ASSETS $9,409,417 $8,215,840
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term note payable (Note 6) $ 1,331,169 $1,222,722
Current portion of long-term debt (Note 7) 1,003,477 795,415
Current portion of capital lease obligations (Note 8) 15,699 22,363
Accounts payable 1,077,632 523,668
Accrued expenses 238,121 153,533
Accrued advertising 350,000 304,500
Accrued royalties payable 17,882 66,207
Income taxes payable -- 500
----------- ----------
TOTAL CURRENT LIABILITIES 4,033,980 3,088,908
LONG-TERM LIABILITIES
Long-term debt, excluding current portion (Note 7) 1,994,355 2,393,052
Capital lease obligations, excluding current portion (Note 8) 46,086 76,196
Deferred income taxes (Note 9) 5,036 13,402
----------- ----------
TOTAL LIABILITIES 6,079,457 5,571,558
STOCKHOLDERS' EQUITY (NOTE 10)
Common stock, $.01 par value, authorized 100,000,000 shares,
2,859,940 issued at December 31, 1997 and 1,974,104 issued
and outstanding at December 31, 1996 28,599 19,741
Treasury stock at cost, 91,515 shares (915,150) --
Additional paid-in capital 5,596,840 3,595,699
Accumulated deficit (1,380,329) (971,158)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,329,960 2,644,282
----------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 9,409,417 $8,215,840
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
------------- ------------
<S> <C> <C>
REVENUE $ 14,566,079 $ 9,808,314
COST OF SALES 10,174,205 6,194,749
------------- ------------
GROSS PROFIT 4,391,874 3,613,565
EXPENSES
Selling expenses 2,378,547 2,207,285
Research and development 508,314 627,583
General and administration expenses 1,689,481 1,564,663
Provision for losses on accounts receivable 40,158 23,000
------------- ------------
TOTAL EXPENSES 4,616,500 4,422,531
------------- ------------
OPERATING LOSS (224,626) ( 808,966)
------------- ------------
OTHER INCOME/(EXPENSE)
Interest income 9,417 29,373
Interest expense (427,392) (269,292)
Gain (loss) on sale of asset 90,829 (3,826)
Other income 204,194 - -
------------- ------------
TOTAL OTHER EXPENSE (122,952) (243,745)
------------- ------------
LOSS FROM CONTINUING OPERATIONS (347,578) (1,052,711)
INCOME TAX BENEFIT (EXPENSE) (Note 9) (61,594) 7,562
------------- ------------
NET LOSS $ (409,172) $ (1,045,149)
------------- ------------
------------- ------------
BASIC & DILUTED NET LOSS PER SHARE $ (0.18) $ (0.71)
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
Common Stock
---------------------- Treasury Additional
Number Stock Paid-In Accumulated
of Shares Amount Amount Capital Deficit
--------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 1,411,829 $ 14,118 $ - - $ 2,694,532 $ 73,991
Shares issued for rights & non-compete 12,275 123 - - 26,667 - -
Shares issued for acquisition of assets 550,000 5,500 - - 874,500 - -
Net loss - - - - - - - - (1,045,149)
--------- --------- ---------- ----------- ------------
BALANCE DECEMBER 31, 1996 1,974,104 19,741 - - 3,595,699 (971,157)
Shares issued pursuant to Regulation S
Stock offerings 881,836 8,818 - - 1,991,181 - -
Treasury stock (18,000 shares) received
to satisfy related-party receivable - - - - (180,000) - - - -
Treasury stock (73,515 shares) received
in exchange for assets - - - - (735,150) - - - -
Shares issued pursuant to stock option
plans 4,000 40 - - 9,960 - -
Net loss - - - - - - - - (409,172)
--------- --------- ---------- ----------- ------------
BALANCE DECEMBER 31, 1997 2,859,940 $ 28,599 $ (915,150) $ 5,596,840 $ (1,380,329)
--------- --------- ---------- ----------- ------------
--------- --------- ---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
6
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (409,172) $ (1,045,149)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 396,964 435,937
Amortization 64,267 24,267
Loss (gain)on sale of assets (90,829) 3,826
Provision for losses on accounts receivable 40,158 23,000
Changes in operating assets and liabilities:
Trade accounts receivable (464,296) 170,042
Related party and other accounts receivable 80,325 (1,918)
Inventories (1,337,963) 189,769
Prepaid expenses (53,963) 33,071
Other (11,575) - -
Deposits (85,276) (8,147)
Deferred income taxes 61,594 (10,622)
Accounts payable 537,488 66,382
Accrued expenses 84,588 188,749
Accrued advertising 45,500 - -
Accrued royalties payable (48,325) 34,688
Income tax payable (500) (29,229)
------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (1,191,015) 74,666
------------- ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
7
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
<TABLE>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets $ 6,007 $ 53,620
Receivable from related parties (30,000) - -
Capital expenditures (587,187) (2,144,649)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (611,180) (2,091,029)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreements 108,447 533,823
Decrease (increase) in debt issuance costs 3,906 (3,906)
Net borrowings (payments) on long-term debt (190,635) 1,429,826
Net payments on capital lease obligations (36,774) (22,158)
Issuance of Stock pursuant to Regulation S offerings 2,000,000 - -
Issuance of Stock pursuant to Incentive Stock Option Plan 10,000 - -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,894,944 1,937,585
------------ ------------
INCREASE (DECREASE) IN CASH 92,749 (78,778)
CASH AT BEGINNING OF YEAR 240,145 318,923
------------ ------------
CASH AT END OF YEAR $ 332,894 $ 240,145
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 418,241 $ 346,648
Cash paid for income taxes - - 500
Issuance of common stock for:
Inventory - - 130,000
Property and equipment 750,000
Non-compete agreement - - 26,790
Treasury stock received for:
Related party receivable 180,000 - -
Sale of Nordic assets 735,150 - -
Capital acquisitions financed by accounts payable 16,476 - -
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
8
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - DESCRIPTION OF BUSINESS
Dynatec International, Inc. and subsidiaries (the Company) was
incorporated in the State of Utah on January 29, 1981. The Company
is principally engaged in the manufacture, assembly, and distribution
of consumer products consisting primarily of telephone accessories,
hardware/housewares, mass market products, flashlights, and
telecommunication headsets.
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. (Nordic). All significant inter-company accounts
and transactions have been eliminated.
Effective December 1, 1996, 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. The acquisition has been accounted for
using the purchase method. The assets and liabilities were placed
into Nordic and valuated at the estimated fair market or replacement
value of the acquired assets, net of the assumed liabilities. These
assets were subsequently sold (Note 10), as flashlights are now being
manufactured overseas at significantly lower costs.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories consisting principally of telephone accessory,
hardware/houseware, flashlights, telecommunication headsets, and other
miscellaneous products sold to mass market merchandisers are stated at
the lower of cost or market value as determined by the last-in, first-
out method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Property
and equipment under captial leases are stated at the present value
of minimum lease payments. Depreciation on property, plant, and
equipment is computed on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Building and Improvements 7-39 years
Capital Leases 5-7 years
Equipment 5-10 years
Office Equipment & Fixtures 5-7 years
Vehicles 5 years
Signs 5-7 years
</TABLE>
Equipment held under capital leases and leasehold improvements
are amortized on straight line over the shorter of the lease term or
estimated useful life of the asset.
9
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be settled or recovered. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized on the income statement in the period that includes the
enactment date.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the provisions of
Financial Accounting Standard (FAS) No. 123, Accounting for Stock-
Based Compensation. As permitted by FAS No. 123, the Company
continues to use the intrinsic value method prescribed by Accounting
Principles Board (APB) Opinion No. 25 when accounting for its employee
stock compensation plans. As such, compensation expense is recorded
on the date of grant only if the current market price of the stock
exceeds the exercise price. Pro-forma net income and earnings per
share information, including compensation expense which would have
been recognized for stock options granted based on the fair market
value method prescribed by FAS No. 123, are presented in Note 14.
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, and accordingly performs ongoing credit
evaluations and maintains allowances for potential credit losses.
Concentrations of credit risk with respect to trade receivables are
limited due to the Company's large number of customers and their
dispersion across many geographic areas.
For the year ended December 31, 1997, one customer accounted for
28% and no other customer accounted for more than 10% of of the
Company's total revenues. No customer accounted for more than 10%
of Company revenues for the year ended December 31, 1996.
10
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NET LOSS 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. Potentially dilutive shares have
not been included in the computation of EPS for the years ending
December 31, 1997 and 1996 as they would be anti-dilutive.
The basic weighted average number of shares used for calculating
EPS for the years ending December 31, 1997 and 1996 are as follows:
<TABLE>
1997 1996
--------- ---------
<S> <C> <C>
Basic Weighted Average Shares 2,290,847 1,463,877
</TABLE>
USE OF 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, the disclosure of contingent assets and liabilities,
and the reported amounts of revenue and expense for the period being
reported. Actual results could differ from those estimates.
YEAR 2000
In mid-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.
NEW ACCOUNTING PRONOUNCEMENTS
FAS No. 130, Reporting Comprehensive Income, was issued by the
Financial Accounting Standards Board (FASB) in June 1997. This
Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company will adopt FAS
No. 130 beginning January 1, 1998.
11
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, was issued by FASB in June 1997. This Statement
establishes standards for reporting of selected information about
operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt FAS No.
131 beginning December 31, 1998.
NOTE 3 - INVENTORIES
Inventories as of December 31, 1997 and 1996 are summarized as follows:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Raw $ 831,483 $ 583,138
Finished 1,690,666 673,302
---------- ----------
$2,522,149 $1,256,440
---------- ----------
---------- ----------
</TABLE>
The estimated replacement cost of inventories exceeded the LIFO
inventory cost by $34,869 and $2,000 at December 31, 1997 and 1996,
respectively.
NOTE 4 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at
December 31, 1997 and 1996:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 365,860 $ 626,153
Building and improvements 2,214,144 2,214,144
Capital lease assets 82,356 91,857
Equipment 2,722,477 2,977,130
Office equipment & fixtures 358,788 301,114
Vehicles 104,000 65,588
Signs and show booths 22,275 17,198
---------- ----------
5,869,890 6,293,184
Less accumulated depreciation 1,928,303 1,619,185
---------- ----------
Net Property, Plant, and Equipment $3,941,587 $4,673,999
---------- ----------
---------- ----------
</TABLE>
12
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5 - INTANGIBLE ASSETS
Intangible assets include purchased patents, product licenses, and
other agreements allowing the Company non-exclusive rights to manufacture,
produce, and sell various products. Such costs are amortized on a straight-
line basis over their estimated useful lives of 5 to 40 years. Accumulated
amortization totaled $324,446 and $260,179 at December 31, 1997 and 1996,
respectively.
NOTE 6 - SHORT-TERM NOTE PAYABLE
The short-term note payable consists of a revolving line-of-credit
with a bank up to $2,100,000 bearing interest at a rate of prime plus one
percent 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 May 1, 1998. As of December 31, 1997 and 1996, direct borrowings under
the agreement totaled $1,331,169 and $1,222,722, respectively.
Maximum and average borrowings as well as weighted average interest
rate for the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Maximum Outstanding $1,471,802 $1,453,340
Average Outstanding 1,127,635 1,038,877
Weighted average interest rate 9.91% 9.27%
</TABLE>
Under the terms of the agreement, 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, 1997 the Company was not in compliance
with the provisions requiring a minimum current ratio of 1.5 to 1. The
current ratio at December 31, 1997 was 1.26 to 1.
Management is currently negotiating with other lenders to obtain a
new, larger line-of-credit to pay off the current short-term note payable
and to fund future operations. In addition, the Board of Directors
approved the terms of an engagement letter with a financial services firm
which provides for the placement of $1,500,000 in convertible debentures
and up to $10,000,000 in common stock in the form of an equity line-of-
credit.
On December 11, 1997, the Company entered into an agreement with an
overseas supplier whereby non-exclusive rights to market Company products
internationally were sold for $590,000, as amended. According to the
agreement, the purchase price will be paid by the sale of Company stock
owned by the supplier.
Funds received from these various financing activities will be
utilized to fund the Company's ongoing operations. The consolidated
financial statements do not include any adjustments that might result if
the Company is unsuccessful in obtaining new financing.
13
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Revolving line-of-credit up to $1,000,000
payable to a bank, interest at prime plus
1.0% due May 1, 1998; secured by
equipment $ 564,816 $ 620,552
Note payable to a company due in
quarterly installments of $15,908
with interest at 8.0% due December 1996 -- 15,596
Note payable to a company due in
a lump sum of $25,000; due March
1997 based on product sales with
interest at 8%; unsecured -- 25,000
Note payable to a company; due in
annual installments of $79,560
plus interest at 7%; unsecured 195,991 238,680
Note payable to a financial
institution; due in monthly
installments of $455 with interest
at 8.75%; secured by a vehicle 17,992 21,958
Note payable to a company; due
in monthly installments of
$1,160 plus accrued interest
with interest at 7.9%; secured
by equipment 70,800 82,400
Note payable to a bank; due in
monthly installments of $10,234
with interest at 9.5%; secured by land
and building as well as personal guarantees
and assets of an officer of the Company 1,182,158 1,194,602
</TABLE>
14
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 7 - LONG-TERM DEBT (Continued)
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Note payable to the Small Business
Administration; due in monthly
installments of $8,541 with interest at
7.32%; secured by land and building
as well as personal guarantees and assets
of an officer of the Company 966,075 989,679
---------- ----------
Total long-term debt 2,997,833 3,188,467
Less current portion 1,003,477 795,415
---------- ----------
Total long-term debt excluding
current portion $1,994,355 $2,393,052
---------- ----------
---------- ----------
</TABLE>
Aggregate maturities for each of the five years subsequent to December 31, 1997,
are as follows:
<TABLE>
<S> <C> <C>
1998 $1,003,477
1999 135,433
2000 59,364
2001 62,699
2002 60,413
Later 1,676,447
----------
Total long-term debt $2,997,833
----------
----------
</TABLE>
NOTE 8 - LEASES
The following represents assets under capital lease at December 31,
1997 and 1996.
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Equipment $82,357 $91,857
Less accumulated depreciation 19,409 5,211
------- -------
Net property under capital lease $62,948 $86,646
------- -------
------- -------
</TABLE>
Amortization of assets held under capital lease is included with
depreciation expense. Rental expense for operating leases during the years
ended December 31, 1997 and 1996 was $28,007 and $29,286, respectively.
At December 31, 1997, the Company is liable under the terms of
noncancelable leases for the following minimum lease commitments:
15
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8 - LEASES (CONTINUED)
<TABLE>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
Year ended December 31: 1998 $15,699 $13,590
1999 17,432 6,142
2000 12,958 3,115
2001 15,965 2,077
------- -------
Total minimum lease payments $61,784 $23,238
-------
-------
Less interest 5,628
-------
Present value of net minimum
lease payments $61,785
Less current portion 15,699
-------
Capital lease obligations
excluding current portion $46,086
-------
-------
</TABLE>
NOTE 9 - INCOME TAXES
Income tax expense (benefit) attributable to income from continuing
operations consists of:
<TABLE>
Current Deferred Total
------- -------- --------
<S> <C> <C> <C>
Year ended December 31, 1997
Federal $ -- $ 53,694 $ 53,694
State -- 7,900 7,900
------ -------- --------
$ -- $ 61,594 $ 61,594
------ -------- --------
------ -------- --------
Year ended December 31, 1996
Federal $ -- $(11,324) $(11,324)
State 3,060 702 3,762
------ -------- --------
$3,060 $(10,622) $ (7,562)
------ -------- --------
------ -------- --------
</TABLE>
Income tax expense (benefit) from continuing operations differed from
the amounts computed by applying the U.S. federal income tax rate of 34
percent to pretax loss from continuing operations as a result of the
following:
16
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 9 - INCOME TAXES (CONTINUED)
<TABLE>
1997 1996
------------ -----------
<S> <C> <C>
Computed "expected" tax benefit $ (118,177) $ (277,641)
Change in the valuation allowance for
deferred tax assets allocated to income
tax expense 177,961 308,320
State taxes, net of income tax benefit - - 793
Other 1,810 (39,034)
------------ -----------
$ 61,594 $ (7,562)
------------ -----------
------------ -----------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996, are presented below.
1997 1996
------------ -----------
Deferred tax assets:
Inventory capitalization $ 165,343 $ 34,043
Allowance for bad debts 11,072 6,167
Compensated absences accrued for financial
reporting purposes 14,377 - -
Net operating loss carryforward 290,216 338,070
Intangibles, principally due to differences
in amortization 5,273 - -
------------ -----------
Total gross deferred tax assets 486,281 378,280
Less valuation allowance 486,281 308,320
------------ -----------
Total deferred tax assets 0 69,960
------------ -----------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation (5,036) (1,365)
Intangibles, principally due to differences
in amortization - - (12,037)
------------ -----------
Total gross deferred tax liabilities (5,036) (13,402)
------------ -----------
Net deferred tax assets (liabilities) $ (5,036) $ 56,558
------------ -----------
------------ -----------
</TABLE>
17
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 9 - INCOME TAXES (CONTINUED)
The valuation allowance for deferred tax assets as of January 1, 1996
was -0-. The net change in the total valuation allowance for the years
ended December 31, 1997 and 1996 was $177,961 and $308,320 respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
On March 11, 1997, the Board of Directors approved Regulation S
offerings of its common stock to raise between three to five million
dollars in working capital. The stock was made available to foreign
investors at a price of approximately 50 percent of market value which was
$3.88 on March 11, 1997. Regulation S stock is routinely offered at a
discount from the bid price because of its temporarily restrictive nature.
During June 1997, the Company received 18,000 shares of stock in
exchange for debts owed to the Company. These shares were recorded as
treasury stock at the fair market value of $10.00 per share. In July 1997,
the Company received an additional 73,515 shares of stock in exchange for
assets sold by the Company. The shares received in exchange for these
assets were recorded as treasury stock at the fair market value of $10.00
per share. In addition, four thousand shares were exercised under the 1996
incentive stock option plan.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company's subsidiary, Softalk, Inc., maintains a royalty agreement
for patent and trademark rights on telephone accessories from WAC Research
(WAC), a Utah corporation. The Chief Executive Officer (CEO) and director
of the Company, is the beneficial owner of 50 percent of WAC. WAC has at
various times been involved in assisting the Company financially. During
the years ended December 31, 1997 and 1996, the Company paid WAC $120,312
and $222,313, respectively in royalties.
During 1995, the Company sold all rights and interest in various
discontinued products products to WAC for $193,000 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 June 1997, the Company
received 18,000 shares of its common stock from WAC as payment in full of
all outstanding balances. Such shares were valued at the market price of
$10.00 per share, which represented the current market value of the stock.
The treasury stock was used to pay off $154,000 on the note and accrued
interet and $26,000 of other WAC related receivables.
The CEO and director 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 paid
$84,000 for each of the years ending December 31, 1997 and 1996. This cost
covered operating, maintenance, and general care of the property.
18
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 11 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company pays credit card bills for members of the Board of
Directors on a month-to-month basis. The amounts are generally paid back
to the Company in the following month. At December 31, 1997 and 1996, the
amounts owed to the Company were $5,094 and $11,485, respectively. These
amounts are included in other receivables in the accompanying consolidated
balance sheets. Also included in other receivables are related party
receivables of $60,000 and $145,419 for the years ending December 31, 1997
and 1996.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
On December 1, 1996, Nordic purchased the assets of Nordic Lights,
Inc. including equipment, inventory, and product rights related to the
flashlight industry. As part of the purchase agreement, restricted common
stock warrants were to be issued if the following conditions were met.
1.) Upon Nordic Technologies achieving $5,000,000 in gross sales
on or before December 31, 1999, a warrant to purchase an
additional 50,000 shares at $1.00 per share would be earned by
Nordic Lights, Inc.;
2.) Upon achieving $7,500,000 in gross sales on or before December
31, 2000, Nordic Lights was to receive a warrant to purchase
an additional 50,000 at $1.00 per share;
3.) Upon achieving $10,000,000 in gross sales on or before December
31, 2001, a warrant for an additional 50,000 shares to be purchased
at $1.00 per share was to be issued to Nordic Lights, Inc.;
4.) Upon achieving $15,000,000 in gross sales on or before December
31, 2002, a warrant for an additional 50,000 shares to be purchased
at $1.00 per share was to be issued to Nordic Lights, Inc.;
5.) Upon achieving $20,000,000 in gross sales on or before December
31, 2003, a warrant for a final 50,000 shares to be purchased at
$1.00 per share was to be issued to Nordic Lights, Inc.;
Additionally, options for 250,000 shares may be granted to Nordic
employees if determined to be key contributors to the success of the
Company as determined by the Company's Board of Directors. However, such
options may be granted only in fiscal years in which Nordic shall
experience not less than $2,500,000 in gross sales. In addition, only
100,000 shares may be granted in each year meeting this sales criteria.
Such options shall be exercisable at $.50 per share.
In connection with issuances of Regulation S stock during 1997,
management believed that 125,000 shares were issued in error. The
certificate relating to these shares was canceled upon approval by the
Board of Directors. Subsequent to cancellation, demand has been made for
the re-issuance of these shares. Management of the Company is currently
investigating this demand and will reissue any shares, if appropriate, to
any entity which may be entitled to such shares.
19
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations, or liquidity.
NOTE 13 - STOCK OPTIONS
The Company has established two stock option plans under which it is
authorized to grant both non-qualified and incentive stock options to
employees, board members, and certain related entities. The Non-Qualified
Stock Option Plan (Non-Qualified Plan) provides for the granting of options
to acquire a maximum of 2,377,500 shares of common stock of the Company,
while the 1996 Incentive Option Plan (1996 Plan) provides options to
acquire a maximum of 200,000 shares of common stock.
Under the Non-Qualified Plan, options issued to employees to acquire
up to 1,640,000 shares become exercisable upon continued employment with
the Company for six years and the achievement of profitable operations for
three out of the six years. Such options expire sixteen years from the
date of the grant. Options to acquire 737,500 become exercisable four
years from the date of grant and expire in the year 2010.
Options granted under the 1996 Plan become exercisable as of the date
of grant and expire five years from the date of grant, or three months
following termination, or 24 months following death of the employee.
A summary of stock options is as follows for the years ended December 31:
<TABLE>
FIXED OPTIONS:
1997 1996
------------------------- -----------------------
Exercise Exercise
Shares (000) Price Shares (000) Price
------------ -------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 833 $2.50 - - - -
Granted 105 $2.50 833 $2.50
Exercised (4) $2.50 - - - -
--- ---
Outstanding at end of year 934 $2.50 833 $2.50
--- ---
--- ---
Options exercisable at year-end 196 $2.50 95 $2.50
--- ---
--- ---
Weighted average fair value of
options granted during the year $1.42 $2.00
Weighted average remaining contractual
life for exercisable options at
year-end 3.5 years 4 Years
</TABLE>
20
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 13 - STOCK OPTIONS (CONTINUED)
<TABLE>
VARIABLE OPTIONS: 1997 1996
----------------------- -----------------------
Exercise Exercise
Shares (000) Price Shares (000) Price
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 840 $2.00 - - - -
Granted 800 $2.00 840 $2.00
----- -----
Outstanding at end of year 1,640 $2.00 840 $2.00
----- -----
----- -----
Weighted average fair value of
options granted during the year $2.22 $2.19
</TABLE>
The Company applies the intrinsic value method under APB No. 25 in
accounting for stock-based employee compensation arrangements. Had
compensation cost for the Company's stock options plans been
determined pursuant to the fair value method under SFAS No. 123,
the Company's net loss and net loss per share would have increased
accordingly. The fair value of options granted under the Company's
stock option plans has been estimated using the Black-Scholes
option pricing model with the following weighted average
assumptions: dividend yield of 0%, risk free interest rate of 5.5%,
expected volatility of 60.3% and expected lives of 16 years for
options granted under the Non-Qualified Plan and 10 years for
options granted under the 1996 Plan.
<TABLE>
1997 1996
----------- -----------
<S> <C> <C> <C>
Net loss As Reported $ (409,172) $(1,045,149)
Pro forma $(2,333,753) $(4,550,164)
Basic and diluted loss per share As Reported $(0.18) $(0.71)
Pro forma $(1.02) $(3.11)
</TABLE>
NOTE 15 - SUBSEQUENT EVENTS
In February of 1998, Nordic signed a letter of intent setting
forth terms and conditions to form the basis of a joint
venture/partnership with a flashlight supplier in Taiwan.
According to terms of this letter of intent, Nordic and the
supplier would each own 50% of the new company with Nordic
occupying four of the seven Board of Director seats of the new
company. Other terms of the agreement are still under negotiation.
On April 2, 1998, the Board of Directors approved the terms of an
engagement letter with a financial services firm which provides for
the placement of $1,500,000 of Company convertible debentures and
up to $10,000,000 in common stock in the form of an equity line of
credit.
21
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between
willing parties. Financial instruments are included in the
consolidated balances sheets at carrying cost.
The carrying amounts approximate fair value for cash, trade
accounts receivable, related party and other receivables, prepaid
expenses, other assets, trade accounts payable, and accrued
expenses because of the short maturity of these instruments.
Because the blended interest rate of long-term debt approximates
the current interest rates available, the carrying value of
long-term debt instruments also approximates fair market value.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1998
<CASH> 332,894
<SECURITIES> 0
<RECEIVABLES> 1,549,888
<ALLOWANCES> 0
<INVENTORY> 2,522,149
<CURRENT-ASSETS> 5,092,374
<PP&E> 3,941,587
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,409,417
<CURRENT-LIABILITIES> 4,033,980
<BONDS> 1,994,355
0
0
<COMMON> 28,599
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,409,417
<SALES> 14,566,079
<TOTAL-REVENUES> 14,566,079
<CGS> 10,174,205
<TOTAL-COSTS> 14,790,705
<OTHER-EXPENSES> 122,952
<LOSS-PROVISION> 40,158
<INTEREST-EXPENSE> 427,392
<INCOME-PRETAX> 347,578
<INCOME-TAX> 61,594
<INCOME-CONTINUING> 409,172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409,172
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
