<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period: March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to .
-------- --------
Commission File Number: 0-12806
DYNATEC INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0367267
- --------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
3820 Great Lakes Drive
Salt Lake City, Utah 84120
- --------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
(801) 973-9500
------------------------------------
(Issuer's telephone number, including area code)
-------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--------- ---------
The Company had 3,391,627 shares of common stock outstanding at April 30, 1999.
The aggregate market value of voting stock held by non-affiliates of the Company
at April 30, 1999, was $7,825,119.
Transitional Small Business Disclosure Format (check one): Yes No X
------- -------
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999 and December
31, 1998.................................................................3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998, respectively..............................5
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998, respectively....................................6
Notes to Condensed Consolidated Financial Statements.....................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Analysis of Financial Condition and Results of Operations...........15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................21
Item 2(c).Recent Sales of Unregistered Securities.............................22
Item 6. Exhibits and Reports on Form 8-K....................................22
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 146,672 $ 2,268
Trade accounts receivable, net of allowance for doubtful accounts of
$30,848 and $30,190, respectively 1,953,973 2,229,157
Accounts receivable - other 1,340 110
Inventories (see Note 2) 4,112,082 4,857,241
Prepaid expenses and other 352,660 316,347
----------- ----------
Total current assets 6,566,727 7,405,123
----------- ----------
LAND, BUILDING AND EQUIPMENT, at cost:
Land 365,860 365,860
Building and improvements 2,214,144 2,214,144
Furniture, fixtures and equipment 3,595,625 3,554,045
----------- ----------
6,175,629 6,134,049
Less accumulated depreciation 2,428,301 2,336,427
----------- ----------
Net land, building and equipment 3,747,328 3,797,622
----------- ----------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated
amortization of $396,817 and $382,170, respectively - 190,455 205,102
----------- ----------
DEFERRED LOAN COSTS, net of accumulated amortization of $21,291 and
$14,903, respectively 55,355 61,743
----------- ----------
OTHER ASSETS 69,335 69,337
----------- ----------
$10,629,200 $11,538,927
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term note payable $ 1,599,548 $ 1,389,223
Convertible debentures 1,711,462 1,667,079
Current portion of long-term debt 206,155 246,855
Current portion of capital lease obligations 22,188 17,881
Accounts payable 1,370,259 1,518,316
Accounts payable - other 86,563 9,000
Accounts payable-related party - 98,403
Accrued expenses 530,574 637,051
Accrued advertising 25,000 320,000
Accrued royalties payable 71,397 70,246
------------ ------------
Total current liabilities 5,623,146 5,974,054
LONG-TERM DEBT, net of current portion 1,961,598 2,006,518
DEPOSIT FOR STOCK ISSUANCE - 1,000,000
CAPITAL LEASE OBLIGATIONS, net of current portion 40,258 28,654
------------ ------------
Total liabilities 7,625,002 9,009,226
------------ ------------
STOCKHOLDERS' EQUITY (see Note 3):
Common stock, $.01 par value; 100,000,000 shares authorized and
3,391,627 and 2,891,627 shares outstanding, respectively 33,916 28,916
Treasury stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 8,036,690 7,041,690
Accumulated deficit (4,151,258) (3,625,755)
------------ ------------
Total stockholders' equity 3,004,198 2,529,701
------------ ------------
$ 10,629,200 $ 11,538,927
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated balance sheets.
4
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
PRODUCT SALES $ 3,643,679 $ 3,647,786
COST OF SALES 2,208,371 2,073,613
----------- -------------
Gross Margin 1,435,308 1,574,173
----------- -------------
OPERATING COSTS AND EXPENSES:
Selling expenses 829,627 839,773
Research and development 26,012 10,180
General and administrative 831,314 495,667
----------- -------------
Total operating costs and expenses 1,686,953 1,345,620
----------- -------------
Income (loss) from operations (251,645) 228,553
----------- -------------
OTHER INCOME (EXPENSE), net:
Interest expense (see Note 4) (273,289) (107,009)
Interest income - 3,340
Other expense (625) (21,006)
Other income 3,056 -
----------- -------------
Total other income (expense), net (270,858) (124,675)
----------- -------------
Income (loss) before income tax provision (522,503) 103,878
INCOME TAX PROVISION 3,000 -
----------- -------------
Net income (loss) $ (525,503) $ 103,878
=========== =============
BASIC NET INCOME (LOSS) PER SHARE $ (.17) $ .04
============= =============
DILUTED NET INCOME (LOSS) PER SHARE
(see Notes 2 and 3) $ (.17) $ .03
============= =============
WEIGHTED AVERAGE SHARES - BASIC 3,111,223 2,779,982
============ =============
WEIGHTED AVERAGE SHARES - DILUTED 3,111,223 3,363,281
============ =============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (525,503) $ 103,878
Adjustments to reconcile net income(loss) to net
cash used in operating activities:
Depreciation and amortization 118,317 87,333
Amortization of deferred loan costs 6,387 15,942
Loss on sale of assets 625 21,006
Changes in assets and liabilities:
Trade accounts receivable 275,184 (598,513)
Accounts receivable - other (1,230) 372,611
Inventories 745,159 (465,297)
Prepaid expenses and other (36,311) 70,799
Trade accounts payable (148,057) 238,221
Accounts payable - other (20,840) (63,750)
Accrued expenses (80,094) (72,594)
Accrued advertising (295,000) (221,519)
Accrued royalties 1,151 73,519
Income tax payable 18,000 -
------------- -------------
Net cash provided by (used in)
operating activities 57,788 (438,364)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets 15,441 47,000
Purchase of property and equipment (69,441) (167,478)
------------- -------------
Net cash used in investing activities (54,000) (120,478)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 210,325 322,704
Principal payments on long-term debt (85,620) (352,728)
Net borrowings (payments) on capital lease obligations 15,911 (4,381)
Proceeds from deposit for stock issuance (see Note 3) - 940,000
------------- -------------
Net cash provided by financing activities 140,616 905,595
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 144,404 346,753
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,268 332,894
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 146,672 $ 679,647
============ =============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
6
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash paid for interest $ 205,447 $ 118,818
========= =========
Cash paid for income taxes $ - $ -
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated statements.
7
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Dynatec International, Inc., a Utah corporation ("Dynatec" or the
"Company"), is a manufacturer and distributor of consumer products comprising
the following major product lines: telecommunication headsets and amplifiers and
telephone accessories, home storage and organization, flashlights and other
miscellaneous products sold to mass market merchandisers. Dynatec is located in
Salt Lake City, Utah. The Company conducts most of its operations through four
wholly owned subsidiaries: Softalk, Inc., Arnco Marketing, Inc., Nordic
Technologies, Inc. and SofTalk Communications, Inc. Unless specified to the
contrary herein, references to Dynatec or to the Company refer to the Company
and its subsidiaries on a consolidated basis.
The Company's business follows seasonal trends. As a result the Company
experiences its highest revenues in the fourth quarter. Because the Company
sells its products primarily to major retailers, the Company's sales performance
is significantly dependent on the performance of those retailers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission for Form 10-QSB, and accordingly, do
not include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, these unaudited condensed
consolidated financial statements reflect all adjustments, which consist only of
normal recurring adjustments, which are necessary to present fairly the
Company's financial position, results of operations and cash flows as of March
31, 1999 and for the periods presented herein. These unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on form 10-KSB for the year ended December 31, 1998.
The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the remainder
of the year ending December 31, 1999.
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories, consisting principally of telecommunication headsets and
amplifiers and telephone accessories, home storage and organization,
flashlights, and other miscellaneous products sold to mass market merchandisers
as of March 31, 1999 and December 31, 1998, respectively, are summarized as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials............... $ 1,050,308 $ 902,703
Work-in-Process............. 187,603 309,815
Finished Goods.............. 2,874,171 3,644,723
------------ -----------
$ 4,112,082 $ 4,857,241
============ ===========
</TABLE>
8
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 in
the period that includes the enactment date.
Basic and Diluted Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated based upon the
weighted average number of common shares outstanding during the periods
presented. Diluted net income (loss) per common share is calculated based upon
the weighted average number of common shares outstanding plus the assumed
exercise of all dilutive securities using the treasury stock method and the "if
converted" method for convertible securities.
A reconciliation between the basic and diluted weighted-average number of
shares outstanding as of March 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------
1999 1998
----------- ---------
<S> <C> <C>
Basic weighted average number of common shares 3,111,223 2,779,982
Weighted average number of common stock options - 583,299
--------- -------
Diluted weighted average number of shares 3,111,223 3,363,281
========= =========
</TABLE>
In calculating net loss per share for the three months ended March 31,
1999, there were warrants and options to purchase 1,150,000 potential common
shares that were not included in the computation of diluted net loss per common
shares as their effect would have been anti-dilutive, thereby decreasing the net
loss per common share.
Reclassifications
Certain reclassifications have been made in the prior periods'
consolidated financial statements to conform with the current year presentation.
New Accounting Pronouncements
The Company adopted Statement of Position 98-1 (SOP 98-1), Accounting for
Costs of Computer Software Developed or Obtained for Internal Use, effective
January 1, 1999. SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use. As of March 31, 1999,
the Company has incurred no costs associated with developing computer software
for internal use.
(3)STOCKHOLDERS' EQUITY
On February 4, 1999, the Company entered into a deposit payable conversion
agreement, whereby a $1,000,000 deposit received by the Company in early 1998
and recorded as a liability in the accompanying balance sheet as of December 31,
1998 was cancelled, in return for which the Company issued 500,000 shares of
restricted common stock under Regulation D to the depositor.
9
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) STOCKHOLDERS' EQUITY-(CONTINUED)
The Company is a party to pending litigation with a Canadian brokerage
firm captioned as Canaccord Capital Corporation ("Canaccord") vs. Dynatec
International, Inc., Civil No. 2:98-cv-420C, and filed in the United States
District Court for the District of Utah. Canaccord initially sued seeking
injunctive relief and money damages stemming from the Company's allegedly
wrongful cancellation of 125,000 shares of the Company's common stock in January
1998. Canaccord claimed that it suffered damage from a market shortage and
deficiency to various accounts which had previously been sold by Canaccord as a
result of the allegedly wrongful cancellation of shares. On July 17, 1998 the
District Court entered a preliminary injunction requiring the Company to reissue
125,000 shares in the name of CEDE & Company, as the market clearing house, to
replace the alleged market shortage. The court preserved Canaccord's remaining
claims for money damages and the return of an additional block of shares alleged
to have been wrongfully cancelled, which are still pending. The Company has
named various third party defendants to whom it believes the shares may have
been improperly issued and is seeking either recovery of the shares or the
recovery of damages. At present, the Company is engaged in negotiations with
representatives of various of the third parties and Canaccord, and believes that
a resolution of the outstanding claims, in whole or in part, will be reached.
Related to the Canaccord litigation, a claim for an additional 125,000
shares of the stock of the Company had been made by Katori Consultants, Ltd., a
Philippines corporation. The answer and third party complaint of Dynatec named
Katori Consultants, Ltd. as a third party defendant so that such additional
claim could be addressed as part of the Canaccord legal action. On October 21,
1998, Katori Consultants, Ltd. gave written notice to Dynatec that it
relinquished any claim to additional shares of common stock of the Company. (See
Part II - Other Information; Item 1. "Legal Proceedings").
(4)CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT
On May 22, 1998, the Company closed a transaction that has provided to
date net capital proceeds of $1,335,000. These funds were raised pursuant to the
sale by the Company of Convertible Debentures (the "Convertible Debentures") in
the aggregate principal amount of $1,500,000 due May 22, 2001. The Convertible
Debentures are convertible into shares of the Company's common stock at the
lesser of: (i) 75% of the average of the three lowest closing bid prices of the
Company's common stock during the 22-trading-day period immediately preceding
the conversion date or (ii) $4.624, which was 100% of the closing bid price on
the trading day immediately preceding the closing date of the agreement.
Assuming a hypothetical conversion of the entire principal amount of the
Convertible Debentures outstanding as of April 30, 1999, and all interest
accrued thereon at the rate of 12% per annum as of April 30, 1999, the
Convertible Debentures would be convertible into 978,961 shares of the Company's
common stock. The Convertible Debentures are callable by the holders thereof.
The transaction was accomplished pursuant to a Convertible Debenture and Private
Equity Line of Credit Agreement (the "Credit Agreement") between the Company and
a group of five unaffiliated investors. In addition to the sale of the
Convertible Debentures, the Company also obtained the right to use a "put"
mechanism to periodically draw down up to $10,000,000 of additional equity
capital.
10
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT-(CONTINUED)
Under the terms of the Credit Agreement, a minimum of $1,000,000 must be
drawn, and all amounts must be drawn in increments of not less than $50,000. In
return for the payment of additional capital upon such put exercises, the
Company is required to issue shares of its common stock at a per share purchase
price equal to 80% of the average of the three lowest closing bid prices of the
common stock during a six day valuation period commencing three days before the
put date and ending two days after the put date. The put mechanism cannot be
utilized, and the Company has no obligation to exercise any portion of the put
mechanism, until after the effective date of the registration statement for the
underlying stock of the Credit Agreement. Additionally, upon registration of the
underlying shares which may be issued upon conversion of the Convertible
Debentures, the Company is obligated to issue an additional $500,000 of
Convertible Debentures.
In connection with the Credit Agreement, the investors and placement agent
were issued warrants. These warrants have been issued as Series A and Series B
as follows:
<TABLE>
<CAPTION>
Placement Exercise
Investors Agent Price
------------ ----------- -----------
<S> <C> <C> <C>
Series A Warrants 150,000 150,000 $6.50
Series B Warrants 150,000 300,000 $7.15
</TABLE>
The Company must issue 50,000 additional Series A warrants to both the
placement agent and the investors, collectively, upon the issuance of the
additional $500,000 of Convertible Debentures. One-sixth of the market value of
the Series A and B warrants was allocated to the Convertible Debenture and
five-sixths was allocated to the equity line-of-credit established under the
Credit Agreement. This allocation was based on the relative notional amounts of
the two elements of the Credit Agreement. The value of the warrants issued to
the investors was written off in the fourth quarter of 1998 as a one-time,
non-cash debt issuance cost, as the warrants are immediately exercisable. The
value of the warrants issued to the placement agent and allocated to the
Convertible Debentures was also written off in the fourth quarter of 1998. In
addition, because the Convertible Debentures are convertible at a 25% discount
from the market value, an additional $500,000 representing the intrinsic value
of the beneficial conversion premium was written off as a non-cash expense for
the second quarter of 1998. The market value of the warrants issued to the
investors in connection with the additional $500,000 of Convertible Debentures
will be charged to operations at the time of issuance.
The Company is also directly issuing, as part of the transaction involving
the Credit Agreement, consideration of up to 80,000 shares of its common stock
as a fee to the placement agent. Of these shares, 20,000 were issued at the time
of the closing. The remaining 60,000 shares are retained in escrow and are to be
released in 6,000 share increments as each $1,000,000 is drawn down under the
equity line-of-credit established under the Credit Agreement. If all of the
equity line-of-credit is not utilized, the remaining shares held in escrow will
be returned to the Company and cancelled.
Because the registration statement for the shares of common stock
underlying the Credit Agreement was not effective with the Securities and
Exchange Commission within 90 days of the closing date, liquidated damages were
assessed against the Company at the rate of two percent per month of the
purchase price of the outstanding Convertible Debentures for the first 30-day
period beyond the original 90 days and three percent per month of the purchase
price of the then outstanding securities (pro rated on a daily basis) for each
30-day period thereafter. As of April 30, 1999 (the date of this filing), the
registration statement had not yet become effective, and as a result the Company
has paid $210,000 and accrued $90,000 in liquidated damages.
11
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) BUSINESS SEGMENT INFORMATION
During the year ended December 31, 1998 the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance.
Information as to the operations of the Company in different business
segments is set forth below based on the nature of the products and services
offered. Management evaluates performance based on several factors, of which the
primary financial measure is business segment operating income before non-cash
amortization of intangible assets ("EBITDA"). The accounting policies of the
business segments are the same as those described in the summary of significant
accounting policies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
REVENUES: 1999 1998
- ------------------------------------ ------------- -------------
<S> <C> <C>
Telecommunication Headsets and
Amplifiers and Telephone Accessories $ 1,836,000 $ 2,242,000
Home Storage and Organization 990,000 1,100,000
Flashlights 210,000 192,000
Miscellaneous/Mass Market 608,000 114,000
------------- ------------
Total $ 3,644,000 $ 3,648,000
============= ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
OPERATING INCOME (LOSS): 1999 1998
- ------------------------------------ ------------ -------------
<S> <C> <C>
Telecommunication Headsets and
Amplifiers and Telephone Accessories $ (20,000) $ 294,000
Home Storage and Organization (138,000) 11,000
Flashlights (126,000) (99,000)
Miscellaneous/Mass Market 32,000 23,000
------------- ------------
Total $ (252,000) $ 229,000
============= ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
DEPRECIATION AND AMORTIZATION (1): 1999 1998
- ------------------------------------ ------------ ------------
<S> <C> <C>
Telecommunication Headsets and
Amplifiers and Telephone Accessories $ 72,000 $ 55,000
Home Storage and Organization 38,000 27,000
Flashlights 8,000 5,000
------------- ------------
Total $ 118,000 $ 87,000
============= ============
</TABLE>
(1) Amortization includes all amortization relating to product license rights,
non-competes and purchased patents.
12
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) BUSINESS SEGMENT INFORMATION (Continued)
Information as to the assets and capital expenditures of Dynatec International,
Inc. is as follows:
<TABLE>
<CAPTION>
MARCH DECEMBER
ASSETS (1): 31, 1999 31, 1998
- ----------------------------------- ------------- -------------
<S> <C> <C>
Telecommunication Headsets and
Amplifiers and Telephone Accessories $ 5,420,000 $ 4,794,000
Home Storage and Organization 2,891,000 3,200,000
Flashlights 1,185,000 1,729,000
Miscellaneous/Mass Market 508,000 1,366,000
------------ -------------
Total assets for reportable segments $ 10,004,000 11,089,000
Other assets 570,000 388,000
Deferred loan costs and other
assets not allocated to segments 55,000 62,000
------------ -------------
Total $ 10,629,000 $ 11,539,000
============ =============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
CAPITAL EXPENDITURES: 1999 1998
- ----------------------------------- ------------- -------------
<S> <C> <C>
Telecommunication Headsets and
Amplifiers and Telephone Accessories $ 42,000 $ 106,000
Home Storage and Organization.... 22,000 52,000
Flashlights...................... 5,000 9,000
Miscellaneous/Mass Market........ - -
------------ -------------
Total................... $ 69,000 $ 167,000
============ =============
</TABLE>
Information as to Dynatec International, Inc.'s operations in different
geographical areas is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
REVENUES: 1999 1998
- ---------------------------- ------------ -------------
<S> <C> <C>
United States $ 3,588,000 $ 3,624,000
Other (1) 56,000 24,000
------------ -------------
Total $ 3,644,000 $ 3,648,000
============ =============
</TABLE>
(1) Includes Canada, Europe and other miscellaneous.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
OPERATING LOSS (INCOME): 1999 1998
- ---------------------------- ------------ -------------
<S> <C> <C>
United States $ (252,000) $ 229,000
============ =============
MARCH DECEMBER
ASSETS: 31, 1999 31, 1998
- ---------------------------- ------------ ------------
United States $10,200,000 $ 11,089,000
Asia 429,000 450,000
-------------- -------------
Total $10,629,000 $ 11,539,000
============ =============
</TABLE>
13
<PAGE>
(6) STOCK OPTIONS
The Company has established two stock option programs under which it has
granted both non-qualified and incentive stock options to employees, board
members, and certain related entities. Under the non-qualified stock option
program (the "Non-Qualified Plan"), the Company has granted to date options to
acquire 1,640,000 shares of common stock of the Company. The 1996 Incentive
Option Plan ("1996 Plan") provides for grants of qualified stock options to
acquire a maximum of 300,000 shares of common stock, of which 200,000 options
have been granted to date. The exercise price of options granted to employees
under either option program equals the market price on the date of grant, and as
a result no compensation expense has been recognized in the accompanying
financial statements. In January 1999, the Company's former Chairman and CEO,
and holder of 900,000 of the options granted in December 1996 (500,000 shares)
and January 1997 (400,00 shares) under the Non-Qualified Plan, agreed to cancel
those options. In addition to the non-qualified options granted to employees to
date, the Company granted non-qualified options to purchase 537,500 shares of
common stock to Muito Bem Ltd., an entity controlled by a shareholder and former
CEO of the Company, at a strike price of $2.50 per share in December 1996. The
shareholder and former executive officer of the Company who owns Muito Bem, Ltd.
agreed in January 1999 to cancel all stock options issued to Muito Bem, Ltd.
Additionally, in December 1996, the Company granted a total of 200,000
non-qualified stock options to WAC Research, Inc., an entity owned, in part, by
a shareholder and the former CEO of the Company, which options were granted in
exchange for the reduction of royalties payable by the Company to WAC on sales
of the Softalk products and for reimbursement to the Company of certain travel
expenses incurred by the Company's former CEO.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in dollars
(rounded) and percentage changes from period to period. Data in the table
reflects the consolidated results of the Company for the three month period
ended March 31, 1999 and 1998, respectively. As supplemental information, the
table also segregates the Company's revenues by product line type.
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------
% of
Chg
from
March 31, March 31, 1998 to
1999 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Unaudited Statement of Operations
Data:
Product sales $ 3,644,000 $ 3,648,000 (0.1)%
Cost of sales 2,209,000 2,074,000 6.5
----------- -----------
Gross margin 1,435,000 1,574,000 (8.8)
----------- -----------
Operating Costs and Expenses:
Selling expenses 830,000 840,000 (1.2)
Research and development 26,000 10,000 160.0
General and administrative 831,000 495,000 67.9
----------- -----------
Total operating costs and
Expenses 1,687,000 1,345,000 25.4
----------- -----------
Other Income (Expense), net:
Interest expense (273,000) (107,000) 155.1
----------- -----------
Interest income - 3,000 -
----------- -----------
Other (expense) (1,000) (21,000) (95.2)
----------- -----------
Other income 3,000 - -
----------- -----------
Net income (loss) $ (523,000) $ 104,000 (602.9)%
=========== ===========
Unaudited Supplemental Information:
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories $ 1,836,000 $ 2,242,000 (18.1)%
Home storage and organization 990,000 1,100,000 (10.0)
Miscellaneous/mass market 608,000 114,000 433.3
Flashlights 210,000 192,000 9.4
----------- -----------
Total product sales $ 3,644,000 $ 3,648,000 (0.1)%
=========== ===========
</TABLE>
The following are explanations of significant period to period changes for the
three months ended March 31, 1999 and 1998:
Revenues
Total Product Sales. Total product sales decreased by $4,000, or 0.1%,
from $3,648,000 to $3,644,000 for the three months ended March 31, 1999 compared
to the three months ended March 31, 1998.
Telecommunication Headsets and Amplifiers and Telephone Accessories.
Telecommunication headsets and amplifiers and telephone accessories sales
decreased $406,000, or 18.1%, from $2,242,000 to $1,836,000 for the three months
ended March 31, 1999 compared to the three months ended March 31, 1998. Of this
decrease, $180,000 was attributable to a one-time order from Lucent Technology
received during the three months ended March 31, 1998 that did not occur during
the three months ended March 31, 1999. Additionally, the Company's Softalk and
MiniSoftalk products decreased $121,000, offset in part by an increase in the
Softalk II product of $7,000. Overall gross margins for telephone accessories
increased to 54.2% from 47.5% for the three months ended March 31, 1999, as a
result of the sales mix and a more efficient production process.
15
<PAGE>
Home Storage and Organization. Home storage and organization revenues
decreased $110,000, or 10.0%, from $1,100,000 to $990,000 for the three months
ended March 31, 1999 compared to the three months ended March 31, 1998. The
decrease is primarily attributable to a decline of $64,000 in the
"Expand-A-Drawer" product line, $67,000 in doorstops and $28,000 in other
miscellaneous shelves, offset in part by an increase of $73,000 in several of
the Company's drawer organization products, namely "Mega-Expand-A-Drawer", which
accounted for $51,000 of this increase. Overall gross margins for products in
this category decreased from 35.9% to 35.2% for the three months ended March 31,
1999.
Miscellaneous and Mass Market. Miscellaneous and mass market revenues
increased $494,000, or 433.3%, from $114,000 to $608,000 for the three months
ended March 31, 1999 compared to the three months ended March 31, 1998. This
increase was primarily the result of the Company's December 24, 1998 agreement
with Grandway China ("Grandway"), a Hong Kong enterprise. The agreement provided
for the transfer of inventory, distribution and sales rights of products that
the Company was then supplying to Dolgencorp. Upon execution, Grandway agreed to
purchase from the Company approximately $1,800,000 of Dolgencorp inventory on
the following terms: (i) at the closing date, the Company transferred to
Grandway approximately $800,000 of unpaid crayon liability, and (ii) at the
closing date Grandway purchased $103,000, or cost plus three percent, of
additional inventory. Additionally, Grandway agreed to continue to make
guaranteed minimum monthly inventory draws of $103,000, or cost plus three
percent, until the remaining approximately $1,000,000 of inventory is purchased.
As of April 30, 1999, Grandway had purchased all but approximately $320,000 of
the remaining inventory. Gross margins on products in this category decreased
from 19.7% to 2.3% for the three months ended March 31, 1999 as a result of the
"pass-through" effect.
Flashlights. Flashlight revenues increased $18,000, or 9.4%, from $192,000
to $210,000 for the three months ended March 31, 1999 compared to the three
months ended March 31, 1998. Although sales were relatively flat for the period,
gross margins on these product lines decreased from 24.0% to 16.1% for the three
months ended March 31, 1999, as a result of various changes made to certain of
its flashlight products to increase the quality of these products. Management is
addressing this decrease by working with its Asian supplier to effectively
source various components from more reliable sub-assembly vendors.
Operating Costs and Expenses
Selling Expenses. Selling expenses decreased $10,000, or 1.2%, from
$840,000 to $830,000 for the three months ended March 31, 1999 compared to the
three months ended March 31, 1998. This decrease is due, in part, to a decrease
in royalty and commission payments due to lower sales on commissionable and
royalty based products, offset by increases in advertising expense as the result
of the Company securing additional pages in certain office product catalogues
and trade show expenditures due to the Company participating in more regional
trade shows.
Research and Development. Research and development increased by $16,000,
or 160.0%, from $10,000 to $26,000 for the three months ended March 31, 1999
compared to the three months ended March 31, 1998. This increase was primarily
attributable to the addition of a full time Vice President of Research and
Development.
General and Administrative Expenses. General and administrative expenses
increased $336,000, or 67.9%, from $495,000 to $831,000 for the three months
ended March 31, 1999 compared to the three months ended March 31, 1998. The
increase in general and administrative expenses was primarily the result of
approximately $120,000 in non-recurring legal expense incurred as a result of
the Company's internal investigation which concluded on January 14, 1999, as
well as approximately $210,000 in combined severance paid to the Company's
former Chairman and CEO who resigned on January 14, 1999 as well as the former
President of the Company who resigned effective March 17, 1999.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $342,000, or 25.4%, from $1,345,000 to $1,687,000 for the three
months ended March 31, 1999 compared to the three months ended March 31, 1998,
for the reasons discussed above.
Interest Expense. Interest expense increased $166,000, or 155.1%, from
$107,000 to $273,000 for the three months ended March 31, 1999 compared to the
three months ended March 31, 1998. This increase was primarily associated with
the issuance of $1,500,000 of Convertible Debentures (the "Convertible
Debentures") in May 1998. Also, liquidated damages were assessed against the
Company for the three months ended March 31, 1999, in the amount of $135,000 due
to the Company's failure to have effective a registration statement covering the
shares of common stock issuable upon conversion of the Convertible Debentures
within the time specified in a registration rights agreement executed in
connection with the sale of the Convertible Debentures.
Interest Income. Interest income decreased $3,000, from $3,000 to $-0- for
the three months ended March 31, 1999 compared to the three months ended March
31, 1998. This decrease was primarily the result of the Company utilizing its
revolving credit facility, under which "draws" are made by the Company. After a
draw is made a corresponding payable is established, when collections of
outstanding accounts receivable are received, collections are swept, daily, and
re-applied against outstanding draws. As a result the Company does not keep
excess cash on hand to invest.
Other Expense. Other expense decreased $20,000, from $21,000 to $1,000 for
the three months ended March 31, 1999 compared to the three months ended March
31, 1998. This decrease was primarily the result of a loss on the sale of
equipment sold by the Company in the three months ended March 31, 1998 that did
not occur in the three months ended March 31, 1999.
16
<PAGE>
Other Income. Other income, increased $3,000, from $-0- to $3,000 for the
three months ended March 31, 1999 compared to the three months ended March 31,
1998.
Net (Loss) Income. The net income decreased by $627,000, or 605.9%, from
$104,000 to a loss of $523,000 for the three months ended March 31, 1999
compared to the three months ended March 31, 1998 due to a combination of the
factors described above.
Liquidity and Capital Resources
General
The Company's principal sources of liquidity are cash flows from
operations, cash on hand and borrowing under the Company's existing secured
revolving credit facilities. On May 27, 1998, the Company obtained a secured
revolving credit facility from a regional financing institution for up to
$5,000,000, bearing interest at a rate of prime plus one percent, with interest
payable monthly. The credit facility is secured by both the Company's accounts
receivable and inventories. The note underlying the revolving credit line is due
May 26, 2001. Under the terms of the loan agreement, the Company is required to
maintain financial covenants and ratios, including book net worth, net income
and debt service coverage. At March 31, 1999 the Company was in default of
certain of these covenants, however, the Company has obtained a waiver from the
lending institution. The Company and the lending institution have negotiated an
amendment to the loan agreement which changed the terms of certain of the
financial covenants and ratios for the remainder of 1999. The interest rate
applicable to the revolving credit line is prime plus three percent, with
interest payable monthly. At March 31, 1999, the Company had $147,000 of cash
and $3,400,000 million of unused borrowings under its credit facility. It is
expected that the Company's principal uses of cash will be to provide working
capital, finance capital expenditures, meet debt service requirements and for
other general corporate purposes. Based on current operations and anticipated
cost savings through operating efficiencies, the Company believes that its
sources of liquidity will be adequate to meet its anticipated requirements for
working capital, capital expenditures, scheduled debt service requirements and
other general corporate purposes.
On May 22, 1998, the Company closed a transaction that has provided to
date net capital proceeds of $1,335,000. These funds were raised pursuant to the
sale by the Company of convertible debentures ("Convertible Debentures") in the
aggregate principal amount of $1,500,000. The Convertible Debentures are
convertible into the Company's common stock at the lesser of: (i) 75% of the
average of the three lowest closing bid prices of the common stock as quoted on
the Nasdaq SmallCap Market during the 22 trading-day period immediately
preceding the conversion date or (ii) $4.624, which was 100% of the closing bid
price on the trading day immediately preceding the closing date of the
agreement. The transaction was accomplished pursuant to a Convertible Debenture
and Private Equity Line of Credit Agreement (the "Credit Agreement") between the
Company and a group of five unaffiliated investors. In addition to the sale of
the Convertible Debentures, the Company also obtained the right to use a "put"
mechanism to periodically draw down up to $10,000,000 of additional equity
capital. Under the terms of the Credit Agreement, a minimum of $1,000,000 must
be drawn, and all amounts must be drawn in increments of not less than $50,000.
In return for the payment of additional capital upon such put exercises, the
Company is required to issue shares of its common stock at a per share purchase
price equal to 80% of the average of the three lowest closing bid prices of the
common stock during a six day valuation period commencing three days before the
put date and ending two days after the put date. The put mechanism cannot be
utilized, and the Company has no obligation to exercise any portion of the put
mechanism, until after the effective date of the registration statement for the
underlying stock of the Credit Agreement. Additionally, upon registration of the
underlying shares which may be issued upon conversion of the Convertible
Debentures, the Company is obligated to issue an additional $500,000 of
Convertible Debentures (see Note 4 to the condensed consolidated financial
statements). The Company filed a registration statement on Form SB-2 as required
by the Credit Agreement and is in the process of preparing an amendment to that
registration statement. However, there can be no assurance that the registration
statement will be declared effective.
March 31, 1999 Compared to December 31, 1998
As of March 31, 1999, the Company had liquid assets (cash and cash
equivalents, trade accounts receivable and other) of $2,101,000, a decrease of
5.8%, or $130,000, from December 31, 1998 when liquid assets were $2,231,000.
Cash increased $145,000, or 7250.0%, to $147,000 at March 31, 1999 from $2,000
at December 31, 1998. This increase in cash was primarily the result of the
Company utilizing its revolving credit facility, under which "draws" are made by
the Company to fund capital expenditures, purchase inventory and for general
purpose use. After a draw is made a corresponding payable is setup, when
collections of outstanding accounts receivable are made the monies collected,
are swept, the next day, and re-applied against outstanding draws. Trade
accounts receivable decreased $275,000, or 12.3%, to $1,954,000 at March 31,
1999 from $2,229,000 at December 31, 1998. This decrease is primarily the result
of improved collections.
Current assets decreased by $838,000, or 11.3%, to $6,567,000 at March 31,
1999 from $7,405,000 at December 31, 1998. This decrease was primarily the
result of a decrease in accounts receivable-trade of $275,000, discussed above,
inventory levels decreased by $745,000 primarily due to the Company's December
24, 1998 agreement with Grandway China ("Grandway"), a Hong Kong enterprise,
whereby Grandway agreed to make guaranteed minimum monthly inventory draws of
$103,000 or cost plus three percent until the remaining approximately $1,000,000
of inventory is purchased. As of April 30, 1999, Grandway had purchased all but
approximately $320,000 of the remaining inventory. The decrease in current
assets was offset in part by an increase in cash as discussed above.
17
<PAGE>
Long-term assets decreased $72,000, or 1.7%, to $4,062,000 at March 31,
1999 from $4,134,000 at December 31, 1998. This decrease was primarily the
result of recurring depreciation of building and equipment, and amortization of
deferred loan costs, and other intangibles.
Current liabilities decreased by $351,000, or 19.4%, to $5,623,000 at
March 31, 1999 from $5,974,000 at December 31, 1998. This decrease was primarily
due to a decrease of $295,000 in accrued advertising and $148,000 in trade
accounts payable, offset in part by an increase of $210,000 in short-term notes
payable as a result of additional borrowings under the Company's revolving line
of credit.
The Company's working capital decreased by $487,000, or 34.0%, to $944,000
at March 31, 1999 from $1,431,000 at December 31, 1998, for the reasons
described above.
The Company provided net cash of $58,000 in operating activities during
the three months ended March 31, 1999, primarily from decreased inventory levels
as well as a decrease in trade accounts receivable, offset in part by the net
loss incurred during the period.
The Company used net cash of $54,000 in investing activities during the
three months ended March 31, 1999, primarily for capital expenditures relating
to the Company's Year 2000 remediation efforts.
The Company provided net cash of $141,000 from financing activities during
the three months ended March 31, 1999. The increase was primarily due to
borrowings under the Company's revolving line-of-credit, off-set in part by
payments made on long-term debt during the period.
Inflation
Most of the Company's products are purchased in finished form and packaged
by the supplier or at the Company's headquarters. The Company uses a premixed
plastisol (a petroleum based raw material) to manufacture certain of its
telephone accessory products at its headquarters. The Company anticipates usual
inflationary increases in the price of its plastic products and does not intend
to pass these increases along to its customers, primarily as a result of other
operating efficiencies gained through changing the sourcing of certain of its
flashlight manufacturing from the United States to Asia. Significant increases
in the cost of plastisol in the future could materially affect the Company's
profitability if these costs cannot be passed on to customers. In general, the
Company does not believe that inflation has had a material effect on its results
of operations in recent years. However, there can be no assurance that the
Company's business will not be affected by inflation in the future. The Company
purchases corrugated packaging materials from several suppliers. These suppliers
source raw materials from Asia and have indicated to the Company that they
anticipate a price increase of between 10% and 14% in the second quarter of
1999, and have indicated that they will be passing this increase on to all
customers. The Company does not believe that this increase will have a material
adverse affect on results of operations in 1999.
Seasonality
The Company's business is seasonal. The Company typically experiences its
highest sales volume in the fourth quarter of each year as a result of the
retail environment in which most of its customers conduct business. Because the
Company sells its products primarily to major retailers, the Company's sales
performance is significantly dependent on the performance of those retailers.
Accordingly, the fourth quarter is a key determinate to overall profitability
for the year.
Year 2000 Compliance
The Year 2000 problem relates to the inability of many computer programs
and microchip-based products and equipment to operate properly on dates
approaching and following December 31, 1999. This inability to operate correctly
results from the use in many computer programs and embedded microchip code of a
two-digit rather than a
18
<PAGE>
four-digit date field. Thus, non Year 2000 compliant software and firmware
may misinterpret a date entry of "00" as 1900, rather than 2000, resulting in,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar business transactions.
The Company uses and is dependent upon computer systems and software to
conduct its business. In the fourth quarter of 1997, the Company began
implementing a new accounting and materials resource planning integrated
software system. The software system, Made2Manage, was purchased with the Year
2000 issue in mind, and is represented by its manufacturer to be Year 2000
compliant in all material respects. Consequently, the Company believes its core
enterprise resource planning and accounting systems will not be affected by the
Year 2000 problem. However, the Company uses many different software programs to
process and summarize business transactions. The Company is presently continuing
the evaluation of its operating systems and determining what, if any, additional
remediation efforts required to ensure its internal systems will be Year 2000
compliant. That assessment is approximately 95% completed. Preliminary results
of this assessment reveal that remediation efforts required will vary from
system to system. For example, it appears some systems will not require any
additional programming efforts, while others may require some programming
changes or complete replacement.
For those systems identified as non-compliant, the Company has begun and,
in certain cases, completed remediation efforts. The Company will utilize both
internal and external resources to reprogram or replace non-compliant software
for Year 2000 modifications. The Company plans to complete the Year 2000 project
before May 31, 1999. The total estimated cost of the Year 2000 project is
approximately $200,000 and is being funded through operating cash flows and the
Company's existing $5,000,000 secured credit facility. Of this project cost,
approximately $120,000 is attributable to the purchase of new software or
equipment which will be capitalized. The remaining $80,000 will be expensed as
incurred. In a number of instances, the Company may decide to install new
software or upgrade versions of current software programs which are Year 2000
compliant. In these instances, the Company may capitalize certain costs of the
new systems in accordance with current accounting guidelines.
The Company is also assessing the impact of the Year 2000 problem on
embedded systems in equipment and machinery located at the Company, comprised
mainly of heating, ventilation and air conditioning equipment and telephone and
alarm systems. Based on the assessments completed to date, the Company is not
aware of any respect in which those systems will fail or otherwise be impaired
by the Year 2000 problem.
The Company has initiated formal communications with all of its
significant suppliers and customers to determine the extent to which the Company
is vulnerable to those third parties' failure to remediate their own Year 2000
problems. In March 1999, the Company, through its own information technology
personnel and its Chief Financial Officer, conducted on-site reviews of certain
of its key Asian suppliers to ascertain, to the extent possible, the Company's
exposure to manufacturing delays or stoppages as a result of those suppliers'
failure to remediate their Year 2000 problems. Based on those efforts, the
Company does not presently anticipate that its operations will be adversely
affected as a result of the Year 2000 problem as it may affect the Company's key
suppliers' internal systems. However, there can be no guarantee that the systems
of other companies on which the Company relies for products and services will be
timely assessed and, where appropriate remediated, or that other companies'
failure to become Year 2000 compliant would not have a material adverse effect
on the Company.
The Company presently believes that with modifications to existing
software and conversions to new software for those systems which it believes may
be affected, the Year 2000 issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material adverse impact on the operations and
financial condition of the Company.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based upon management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in Year 2000 consulting and
remediation, the ability to locate and correct all relevant computer codes and
similar uncertainties. As testing and assessment of third parties is completed,
the Company intends to develop contingency plans for possible Year 2000
problems.
Forward Looking Statements
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
19
<PAGE>
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, 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.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 19, 1999, Alpha Tech Stock Transfer Company ("Alpha Tech") filed
a lawsuit against the Company in Utah state court in Salt Lake City, Utah. Alpha
Tech was the Company's stock transfer agent for a period of approximately ten
years until the Company terminated its relationship with Alpha Tech in January
1999. Alpha Tech has transferred the Company's stock transfer records to
American Stock Transfer, New York, New York, which has assumed its serves as the
Company's present transfer agent. Alpha Tech's complaint alleges that the
Company breached its service contract with Alpha Tech by failing to pay $132,165
to Alpha Tech for transfer agent services rendered and reimbursement for legal
expenses incurred by Alpha Tech. Alpha Tech has not yet served the complaint;
the Company learned about the complaint through an unrelated third party. The
Company has demanded that Alpha Tech voluntarily dismiss the complaint. In any
event, the Company disputes the claims of Alpha Tech's complaint. If the
complaint is not voluntarily dismissed and process is served, the Company
intends to vigorously defend the suit.
On February 22, 1999, the Company received a demand letter from counsel
for Mag Instrument, Inc., a manufacturer and distributor of flashlights and one
of the Company's competitors ("Mag"). In the letter, Mag accuses the Company of
infringing three of Mag's patents and committing false advertising and unfair
competition. Attached to the demand letter was a copy of a complaint filed in
the U.S. District Court for the Central District of California on February 19,
1999. The complaint alleges that the Company has infringed three patents owned
by Mag, and seeks (i) an order enjoining the Company from infringing Mag's
patents, (ii) the delivery to the Court of all flashlights which infringe Mag's
patents, (iii) that the Company identify all entities who have purchased,
distributed or sold any infringing products, (iv) that the Company deliver to
the Court all documents reflecting or relating to the purchase, sale or
distribution of any flashlights which infringe Mag's patents, (v) money damages
sustained by Mag by reason of the alleged patent infringement, including
interest, costs, and attorney's fees. The demand letter specified that the
complaint was filed as a "precaution," and that Mag will refrain from serving
the complaint on the Company pending the receipt of certain assurances from the
Company. The Company has engaged patent litigation counsel and commenced its
preliminary assessment of the claims asserted in the complaint. The Company is
presently involved in further discussions with Mag. If process is served by Mag,
the Company intends to vigorously defend the lawsuit.
The Company is a party to pending litigation with a Canadian brokerage
firm captioned as Canaccord Capital Corporation ("Canaccord") vs. Dynatec
International, Inc., Civil No. 2:98-cv-420C, and filed in the United States
District Court for the District of Utah. Canaccord initially sued seeking
injunctive relief and money damages stemming from the Company's allegedly
wrongful cancellation of 125,000 shares of the Company's common stock in January
1998. Canaccord claimed that it suffered damage from a market shortage and
deficiency to various accounts which had previously been sold by Canaccord as a
result of the allegedly wrongful cancellation of shares. On July 17, 1998, the
District Court entered a preliminary injunction requiring the Company to reissue
125,000 shares in the name of CEDE & Company, as the market clearing house, to
replace the alleged market shortage. The court preserved Canaccord's remaining
claims for money damages and the return of an additional block of shares alleged
to have been wrongfully cancelled, which are still pending. The Company has
named various third party defendants to whom it believes the shares may have
been improperly issued and is seeking either recovery of the shares or the
recovery of damages. At present, the Company is engaged in negotiations with
representatives of various of the third parties and Canaccord, and believes that
a resolution of the outstanding claims, in whole or in part, will be reached
during the second quarter of 1999. Related to the Canaccord litigation, a claim
for an additional 125,000 shares of the stock of the Company had been made by
Katori Consultants, Ltd., a Philippines corporation. The answer and third party
complaint of Dynatec named Katori Consultants, Ltd. as a third party defendant
so that such additional claim could be addressed as part of the Canaccord legal
action. On October 21, 1998, Katori Consultants, Ltd. gave written notice to
Dynatec that it relinquished any claim to additional shares of common stock of
the Company.
On April 27, 1998, the Enforcement Division of the Securities and Exchange
Commission notified the Company that the SEC was anticipating filing an
administrative proceeding in the later part of calendar year 1998 against
various individuals and entities who had engaged in transactions with a Canadian
corporation. The SEC Enforcement Division further indicated that the Company may
be named as a defendant in such administrative action. In July 1998, the Company
submitted a Wells Submission to clarify why, in the Company's estimation, it
should not be named in the administrative proceeding, if any. The Company
suggested in the Wells Submission that it should not be named in any
administrative proceeding because the Company never consummated either of the
two transactions with the subject Canadian company that the Company was
considering, and the Company received no consideration in connection with those
aborted transactions. Moreover, the Company believes that its conduct in
connection with those proposed but aborted transactions met applicable legal
requirements. As of April 30, 1999, the Company had received
21
<PAGE>
no response from the Enforcement Division about whether the SEC plans to name
the Company in any administrative action.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these other matters will not have a material adverse effect on
the Company's operations or financial condition.
Item 2(c). Recent Sales of Unregistered Securities
During the three month period ended March 31, 1999, the Company sold the
following equity securities that were not registered under the Securities Act of
1933:
The Company entered a "Deposit Payable Conversion Agreement" dated
February 4, 1999 between the Company and Touchstone Transport Services, Inc., an
entity located in the Philippines. During the first quarter of 1998, in
connection with an ongoing offering of the Company's common stock to offshore
investors under Regulation S of the Securities Act of 1933, the Company received
a wire transfer in the amount of $1,000,000. However, no specific subscription
agreement or other contract was ever prepared or executed in connection with
this wire transfer, and the Company never issued any securities in conjunction
with the transfer. Subsequently, the wire transfer was recorded as a payable.
The Company had the use of the transferred funds for approximately ten months,
in exchange for which it neither issued any securities nor paid any principal or
interest in respect of the payable. In January 1999, the Company requested that
the depositor of the $1,000,000 wire transfer agree to convert the payable that
had been recorded into shares of the Company's restricted common stock. The
depositor agreed to convert the payable into 500,000 shares of the Company's
restricted common stock, which were issued to an entity affiliated with the
depositor. The Company issued such shares without registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act, and
the rules and regulations promulgated under that section including Regulation D.
Such shares of common stock were issued as restricted securities and the
certificate representing such shares was stamped with a standard legend to
prevent any resale without registration under the Securities Act or pursuant to
an exemption.
Item 6Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
27 Financial data schedule (for SEC use only)
(b) Forms 8-K
None
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATEC INTERNATIONAL, INC.
/s/ Frederick W. Volcansek, May 10, 1999
- ----------------------------- ------------
Frederick W. Volcansek, Sr. Date
Chairman & CEO
/s/ Paul A. Boyer May 10, 1999
- ------------------- ------------
Paul A. Boyer Date
Senior Vice President & CFO
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
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