<PAGE>
As filed with the Securities and Exchange Commission on June 2, 1999
Registration Statement No. 333-57921
U.S. Securities and Exchange Commission
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
(Amendment No. 1)
DYNATEC INTERNATIONAL, INC.
(Name of small business issuer in its charter)
UTAH 3661 87-0367267
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
3820 Great Lakes Drive Salt Lake City, UT 84120
(801) 973-9500
(Address and telephone number of principal executive offices
and principal place of business)
Paul A. Boyer, Chief Financial Officer
DYNATEC INTERNATIONAL, INC.
3820 Great Lakes Drive
Salt Lake City, Utah 84120
(801) 973-9500
(Name, address, and telephone number of agent for service)
-----------------------------------------
Approximate date of proposed sale to the public: As soon as practicable after
the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _______________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box.
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------- ------------------ ------------------ ---------------- --------------
Title of each Dollar amount to Proposed maximum Proposed Amount of
class of be registered offering price maximum Registration
securities to be per unit aggregate Fee
registered offering price
(1)
- -------------------- ------------------ ------------------ ---------------- --------------
<S> <C> <C> <C> <C>
Common stock, $.01 $ 5,263,336 Variable $17,817,500 $5,260
par value per share
- -------------------- ------------------ ------------------ ---------------- --------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, based on average bid
and asked prices of the Company's common stock as reported by the Nasdaq
SmallCap Stock Market on May 21, 1998.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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8,000,000 Shares
DYNATEC INTERNATIONAL, INC.
Common Stock
This Prospectus relates to the offer and sale of up to 8,000,000 shares
of common stock, par value $.01, of Dynatec International, Inc., a Utah
corporation (the "Company" or "Dynatec"), all of which shares are to be offered
and sold by or on behalf of certain persons who are or may become shareholders
of the Company (the "Selling Shareholders"). The Company will not receive any of
the proceeds from the sale of shares of common stock by the Selling
Shareholders. See "Summary of the Offering." All of the securities offered by
this Prospectus are offered for resale only.
The common stock of the Company presently trades on the Nasdaq SmallCap
Stock Market and is quoted under the symbol DYNX. On June 1, 1999, the per share
closing bid and asked prices of the Company's common stock as reported by the
Nasdaq SmallCap Stock Market were $2.125 and $2.375, respectively. The shares of
common stock to be offered by the Selling Shareholders may be offered and sold
by them from time to time on terms not yet determined. Sales, which may or may
not involve cash consideration or sales on the Nasdaq SmallCap Stock Market, may
be made directly to other purchasers or through one or more underwriters or
broker-dealers. In addition, the Selling Shareholders may be deemed to be
underwriters of such shares pursuant to Section 2(11) of the Securities Act of
1933, as amended (the "Securities Act"), and become subject to the rules and
regulations promulgated thereunder and the rules and regulations promulgated
under the Securities Exchange Act of 1934, as amended ("Exchange Act"),
including, without limitation, the restrictions and limitations contained in
Regulation M thereunder. See "Plan of Distribution."
The shares of common stock offered by this Prospectus include the
following:
No. Shares Description
1,312,982 Issuable upon conversion of $2,000,000 principal amount of
convertible debentures ("Convertible Debentures") issuable
pursuant to a Convertible Debenture and Private Equity Line of
Credit Agreement dated as of May 22, 1998 ("Credit Agreement"),
of which total principal amount, $1,500,000 of Convertible
Debentures are outstanding as of the date hereof. For purposes
of estimating the number of shares of common stock issuable
upon conversion of the Convertible Debentures and to be covered
by this Prospectus, Dynatec has assumed that the entire
$2,000,000 aggregate principal amount of Convertible Debentures
has been issued and hypothetically has been converted into common
stock as of May 14, 1999. Solely for purposes of this
hypothetical conversion, the conversion price of the Convertible
Debentures would have been $1.5233, which constitutes 75% of the
average of the three lowest closing bid prices of Dynatec's
common stock during the 22 trading day period immediately
preceding the hypothetical conversion date.
352,002 Reserved for payment in common stock of interest accrued at the
annual rate of 12% on the principal amount of the Convertible
Debentures, payable at the time of conversion in common stock at
the same conversion price as is applicable to the principal
amount of the Convertible Debentures.
5,405,016 Issuable upon the exercise by Dynatec of a "put" feature
associated with an equity line of credit (the "Line of Credit")
established under and described in the Credit Agreement.
Specifically, under the Credit Agreement, Dynatec may put, or
sell, to the Selling Shareholders up to $10,000,000 of common
stock, issuable at a price that is 80% of the average of the
three lowest closing bid prices of Dynatec'scommon stock during
a six trading day period surrounding the date Dynatec exercises
the put option. Within the two-year period following the
effectiveness of the registration statement of which this
Prospectus is part, Dynatec is obligated to exercise at least
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$1,000,000 of this put feature, unless that put exercise would
result in the Selling Shareholders owning in excess of 4.99%
of Dynatec's then issued and outstanding common stock. Solely for
purposes of estimating the number of shares of common stock
issuable upon exercise of the put feature and to be covered by
this Prospectus, Dynatec has assumed that it exercised the entire
$10,000,000 of the put feature as of May 14, 1999. The purchase
price of the common stock issuable upon an exercise of the put
feature on that date, as calculated as described above, would
have been $1.8501.
400,000 Issuable upon exercise of "A Warrants" issued or issuable in
connection with the Credit Agreement.
450,000 Issuable upon exercise of "B Warrants" issued or issuable in
connection with the Credit Agreement.
80,000 Issued or issuable to Settondown Capital International, Inc., as
placement agent.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------ --------------------- --------------------- ---------------------
Price to Public Underwriting Proceeds to the Proceeds to Selling
Discounts and Company (1) Shareholders
Commissions
- ------------------------ --------------------- --------------------- ---------------------
<S> <C> <C> <C>
(1) (2) (3) (4)
- ------------------------ --------------------- --------------------- ---------------------
</TABLE>
(1) The securities offered by this Prospectus may be offered to the public
on the Nasdaq Smallcap Market or pursuant to private negotiated
transactions, at prevailing market prices or at negotiated prices.
(2) Although the Selling Shareholders may engage underwriters to assist with
offers and sales of the securities offered by this Prospectus, the
Company is not aware of any such arrangements at this point. The Selling
Shareholders will be responsible for payment of any commissions or
discounts in connection with their sales of shares and such amounts may
vary.
(3) The Company will receive no portion of the proceeds from the sale of
shares by the Selling Shareholders. The Company will, however, receive
proceeds from exercises of the A Warrants and B Warrants, and the
issuance of common stock upon the Company's exercise of the "put"
feature under the Equity Line of Credit, if any.
(4) The prices at which the registered shares may be sold will be dependent
upon market prices and other factors on the date of any such sale. The
Selling Shareholders may sell such securities at prevailing market
prices or at negotiated prices, through public sales or privately
negotiated transactions. The Selling Shareholders are not obligated, and
therefore may not, sell any of the shares covered by this Prospectus.
The Company is paying the cost of the preparation and filing of the
registration statement of which this Prospectus is a part. The cost
paid by the Company includes professional fees, filing fees, printing
and engraving expenses, transfer agent fees, listing fees and other
expenses. The total of such expenses associated with the registration
of the shares is estimated at approximately $200,000.
The date of this Prospectus is ___________ __, 1999.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in the Prospectus. Each prospective purchaser of the
securities offered by this Prospectus is encouraged to read this Prospectus in
its entirety and to carefully consider, among other things, the information
under the heading "RISK FACTORS." THE SECURITIES OFFERED HEREBY INVOLVE A HIGH
DEGREE OF RISK.
Securities Offered. The securities and transactions that are the
subject of this Prospectus include the following:
(1) Resales of up to 5,405,016 shares of common stock (the "Line of
Credit Shares") issuable upon exercise by Dynatec of a "put" feature in
connection with funding provided to the Company under the Line of Credit,
pursuant to which certain investors have agreed to advance up to an aggregate of
$10,000,000 to the Company, generally at its request after an initial minimum
investment of $1,000,000. As a condition to the covenant of these investors to
provide any funding under the Line of Credit, the Company agreed to register the
shares of common stock issuable to the investors. The number of shares issuable
in connection with the Line of Credit is to be determined by the market price of
the common stock prevailing at and around the date of issuance. Because there is
no fixed price for such shares, it is not possible to predict the maximum number
of shares that may be issued pursuant to the Line of Credit. See "Description of
Securities" and "Risk Factors" for a discussion of the risks associated with the
fluctuations in the Company's common stock, including the possibility that the
common stock will be issued in a sufficient number of shares as to result in a
change of control of the Company and the significant dilution that will occur in
connection with such issuances. The investors that receive the shares of common
stock pursuant to the Line of Credit are Selling Shareholders as contemplated by
this Prospectus. See "Selling Shareholders." These investors are Balmore Funds
S.A., TLG Realty, Austost Anstalt Schaan, Ellis Enterprises and Hewlette Fund
(collectively, "Investors").
(2) Resales of up to 1,312,982 shares of common stock (the "Debenture
Shares") issuable upon the conversion of the aggregate $2,000,000 principal
amount of convertible debentures issued at the closing of the Line of Credit
("Convertible Debentures"), of which the principal amount of $1,500,000 is
outstanding as of the date of this Prospectus, and up to 352,002 shares of
common stock payable as interest accrued thereon.
(3) Resales of shares of 850,000 shares of common stock (the "Warrant
Shares") issuable upon the exercise of stock purchase warrants ("Warrants")
issued in conjunction with the issuance of the Convertible Debentures. There are
two series of Warrants, the A Warrants, which may be exercised to purchase a
total of 400,000 shares of common stock, and the B Warrants, which may be
exercised to purchase a total of 450,000 shares of common stock. The exercise
price of the Warrants fluctuates depending on the market price of the Company's
common stock prevailing at the time of exercise. The holders of the Warrants are
the Investors, Settondown Capital International, Ltd. (the "Placement Agent")
and certain of its assignees (collectively, with Settondown Capital
International, Ltd. the "Placement Agents").
(4) Resales of a maximum of 80,000 shares (the "Agency Shares") as a fee
or other consideration to the Placement Agents.
Overview of the Company
Dynatec is a Salt Lake City, Utah based manufacturer and distributor of
consumer products. The Company has four wholly owned subsidiaries: Softalk,
Inc., Arnco Marketing, Inc., Nordic Technologies, Inc. and SofTalk
Communications, Inc. During the year ended December 31, 1998, the Company
conducted most of its operations through its subsidiaries.
The Company is engaged primarily in the manufacture and distribution of
the following consumer product lines: telecommunication headsets and amplifiers
and other telephone accessories, home storage and organization and premium
flashlights. The Company also from time to time distributes other miscellaneous
products sold to mass market merchandisers. For information about the Company's
industry segments and operations in different geographical areas, see Note 11 to
the Company's consolidated financial statements, entitled "Business Segment
Information."
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The Company's corporate offices and principal place of business is 3820
Great Lakes Drive, Salt Lake City, Utah 84120. The Company's telephone number is
(801) 973-9500. See "Business."
Background of Transaction
On May 21, 1998, the Company entered into a Convertible Debenture and
Line of Credit Agreement ("Credit Agreement") with the Investors and the
Placement Agents, none of which had previously been affiliated with or a
shareholder of the Company. See "Selling Security Holders." Pursuant to the
Credit Agreement, the Investors purchased Convertible Debentures in the
aggregate face amount of $1,500,000. The Investors also agreed to purchase
additional Convertible Debentures in the aggregate face amount of $500,000
within five trading days of the effective date of the registration statement, of
which this Prospectus is a part ("Registration Statement"). The Convertible
Debentures have a term of three years and pay interest, payable in cash or
common stock, at the rate of 12% per annum during the period between issuance
and the date of effectiveness of the registration statement of which this
Prospectus is part, and 6% thereafter. The principal and accrued interest under
the Convertible Debentures is convertible, at the option of the Convertible
Debenture holders, into shares of Dynatec common stock at the lesser of (a) 75%
of the average of the three lowest closing bid prices of the common stock during
the 22 trading-day-period preceding the conversion date; or (b) $6.50.
The Credit Agreement established the Line of Credit, under which the
Company may receive from the Investors additional capital funding up to an
aggregate amount of $10,000,000. Under the Line of Credit, the Investors are
obligated to purchase additional shares of common stock of the Company at prices
determined by reference to the market price of the Company's common stock at the
date and time the Company chooses to call for additional funds from the
Investors or makes a "put" of common stock to the Investors. Under the put
provision of the Line of Credit, the Company may draw down up to $10,000,000 of
additional funding. The Company, in all events, will be required to draw down at
least $1,000,000 of common stock during the two year period commencing on the
date the registration statement of which this Prospectus is a part becomes
effective. The Company does not know at this time how much, if any, of the Line
of Credit (in excess of the $1,000,000 minimum) will be drawn down from the
Investors. The number of shares of common stock issuable upon the Company's put
rights under the Line of Credit is determined by dividing the dollar amount of
the put exercised by a per share dollar amount which is 80% of the average of
the three lowest closing bid prices of Dynatec's common stock during the six
trading day period commencing three days before the put exercise date and
concluding two trading days after that date.
Pursuant to the Credit Agreement, in addition to the Convertible
Debentures and the Line of Credit, the Company has issued 20,000 shares and may
issue 60,000 additional shares of its common stock to the Placement Agents, all
of which shares are offered for resale by this Prospectus (the "Agency Shares").
The Company has also issued Warrants to the Investors and the Placement Agents,
which allow the holders thereof to purchase common stock of the Company. The A
Warrants cover a total of 400,000 shares of common stock, 300,000 shares of
which have a per share exercise price of $6.50, and 100,000 shares of which will
have an exercise price at the per share closing bid price of the Company's
common stock on the first trading day following the effective date of the
registration statement of which this Prospectus is part (subject to compliance
with certain contingencies and conditions set forth in the Credit Agreement).
The B Warrants cover a total of 450,000 shares of common stock at a per share
exercise price of $7.15 per share. As an inducement to the Investors, the
Company agreed to register the Debenture Shares, the Line of Credit Shares, the
Warrant Shares and the Agency Shares, to permit resales of such shares by the
Selling Shareholders.
Because the exercise price of part of the A Warrants is based on the
price of the Company's common stock at a future date, it is not possible to
reliably estimate the amount of proceeds that may be received by the Company in
connection with the exercise of those Warrants. If all A Warrants exercisable
for $6.50 per share were exercised and the shares issued, the Company would
receive gross proceeds of approximately $1,950,000. If all of the B Warrants
were issued and exercised, the Company would receive gross proceeds of
approximately $3,217,500. No assurance can be given that any of the Warrants
will ever be exercised. See "Description of Securities."
The Investors and the Placement Agents may be deemed to be statutory
underwriters under applicable federal securities laws in connection with the
sale, if any, of the shares of common stock issued by the Company under the Line
of Credit, upon conversion of the Convertible Debentures, upon exercise of the
Warrants, or upon resales of the Agency Shares.
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RISK FACTORS
AN INVESTMENT IN DYNATEC COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND
SHOULD NOT BE MADE BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW IN ADDITION
TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS BEFORE DECIDING TO INVEST
IN THE DYNATEC SHARES OFFERED HEREBY. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, DYNATEC'S BUSINESS, FINANCIAL CONDITION, OR RESULTS OF OPERATIONS COULD
BE MATERIALLY ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OF DYNATEC
COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
Holders of Dynatec common stock are subject to the risk of substantial dilution
to their interests as a result of the conversion of the Convertible Debentures,
exercise of the Warrants or issuance of Line of Credit Shares.
Introduction
The Convertible Debentures are convertible, the Warrants are exercisable
and the Line of Credit Shares are issuable at prices or according to formulas
that are based on the market price of Dynatec common stock at and around the
time of conversion, exercise or issuance. Such formulas are described in more
detail in the section of this Prospectus entitled "Selling Stockholders". In the
case of the Line of Credit Shares, the Company has some ability to control the
number of shares issuable by declining to draw down in excess of the first
$1,000,000, which the Company is obligated to draw down. Additionally, in the
case of the Warrants, although the exercise price is dependent upon the market
price of Dynatec's common stock prevailing at the time of exercise, the total
number of shares of common stock issuable is determined. However, in the case of
the Convertible Debentures that are or may be outstanding, there effectively is
no limitation on the number of shares of Dynatec common stock into which the
Convertible Debentures may be converted. As the market price of Dynatec common
stock decreases, the number of shares of Dynatec common stock issuable upon
conversion of the Convertible Debentures continues to increase. If the Selling
Shareholders were to acquire and hold all of the shares of common stock covered
by this Prospectus, they collectively would own approximately 71% of the common
stock that would then be issued and outstanding.
The following specific risk factors relative to this dilution should be
considered before deciding to purchase the Dynatec common stock offered by this
Prospectus.
Overall Dilution to Market Price and Relative Voting Power of Previously
Issued Common Stock
The conversion of the Convertible Debentures and the issuance of Line of
Credit Shares may result in substantial dilution to the equity interests of
other holders of Dynatec common stock. Specifically, the issuance of a
significant amount of additional Dynatec common stock would result in a decrease
of the relative voting control of Dynatec common stock issued and outstanding
prior to the conversion of the Convertible Debentures or the issuance of the
Line of Credit Shares. Furthermore, public resales of Dynatec common stock
following the conversion of the Convertible Debentures likely would depress the
prevailing market price of Dynatec common stock. Even prior to the time of
actual conversions or issuances under the Line of Credit, the market "overhang"
resulting from the mere existence of Dynatec's obligation to honor such
conversions could depress the market price of Dynatec common stock.
Increased Dilution with Decreases in Market Price of Common Stock
The Convertible Debentures are convertible, and the Line of Credit
Shares are issuable, at a floating price that will be below the market price of
Dynatec common stock prevailing at the time of conversion or issuance. As a
result, the lower the market price of Dynatec common stock at and around the
time the holder converts or the Company exercises the put feature, the more
common stock the holder of the Convertible Debentures or the Investor gets.
Any increase in the number of shares of common stock issued upon conversion
or issuance as a result of decreases in the prevailing market price would
compound the risks of dilution described in the preceding paragraph.
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Increased Potential for Short Sales
Downward pressure on the market price of Dynatec common stock that
likely would result from sales of Dynatec common stock issued on conversion of
the Convertible Debentures or exercise by the Company of the Line of Credit
could encourage short sales of common stock by the Investors or others. Material
amounts of such short selling could place further downward pressure on the
market price of Dynatec common stock.
Possible Adverse Effect of Pending Litigation and Administrative
Proceedings
The Company is presently engaged in litigation outside the ordinary
course of its business, the effect of which on its business condition or results
of operations could be materially adverse. See "Legal Proceedings." In addition,
the Company has previously disclosed that it has been informed of an
investigation by the Enforcement Division of the Securities and Exchange
Commission. The Company believes this investigation concerns certain trading
activity in the Company's common stock and other transactions involving the
Company's securities, however, the Company has not been informed of the
specifics of such investigation. The Company is cooperating fully with these
administrative proceedings. Any finding or order of the Commission adverse to
the Company or any judgment against the Company in any of the pending litigation
matters, would have an adverse effect on the business, financial condition or
results of operations of the Company, or the market for its common stock.
Recent Net Losses
The Company had significant net operating losses in fiscal years 1996,
1997 and 1998. Specifically, the Company reported a net loss for the year ended
December 31, 1998 of $2,245,427. As a result, the Company had an accumulated
deficit of approximately $1,380,329 at December 31, 1997 and $3,625,755 at
December 31, 1998. For the three months ended March 31, 1999, the Company had
net loss of $525,503. The Company recently has undergone a change of management
and has adopted or will be implementing a variety of business practices designed
to improve the financial condition and operating results of the Company.
Nevertheless, there can be no assurance that the Company will be able to achieve
growth, that net losses will not be incurred in future operating periods, or
that the Company will become profitable in the foreseeable future, if at all.
Need for Additional Funding.
The Company has operated with negative cash flow for several fiscal
years and has substantial accumulated operating deficits. In order to finance
its operations, the Company may require additional financing. The Company
has agreed to the Credit Agreement, under which the Company could receive
additional capital upon the satisfaction of certain preconditions to such
funding. See "Selling Stockholders". However, there can be no assurance that
such preconditions will be satisfied. Moreover, given the terms and conditions
of the Credit Agreement, the Company may not determine to proceed with any
discretionary funding that may be available to it under the Credit Agreement.
Thus, there can be no assurance that the Company will receive any additional
funding under he Credit Agreement. The Company may be required to seek
additional sources of financing through future offers and sales of its equity or
debt securities. Securities issued in such offerings (including the Debenture
Shares, Warrant Shares and Line of Credit Shares) would substantially dilute the
holdings of other shareholders, including purchasers of the shares offered by
this Prospectus. There can be no assurance that the Company will be successful
in obtaining such financing or that financing will be available to the Company
on terms and at rates that are favorable to the Company. Absent such funding,
however, the Company's ability to continue its operations may be adversely
affected.
Foreign Operations Risks
The Company out-sources most of its manufacturing to manufacturers
located outside the United States. There are numerous risks associated with
conducting business in foreign countries, including the distance from corporate
headquarters, problems associated with possible political risks, instability of
local governments, safety of personnel and equipment, the lack of spare parts or
adequate service assistance, the need for skilled labor and supervision, lack of
infrastructure and accessibility to sources of power and other supplies
necessary for operations, tariff restrictions, currency control regulations,
competing or conflicting manufacturing and production standards, governmental
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approval, licensing and permit requirements and procedures, high inflation and
currency fluctuations which may erode profitability levels, and the difficulty
of obtaining and enforcing judgments in foreign courts and under foreign legal
systems that differ substantially from the United States all add to the risk of
foreign operations. Difficulties arising out of any of these risks could
adversely affect the Company's financial condition and operations.
Competition
The Company's current products are divided into three primary product
lines: Telecommunications amplifiers, headsets and other telephone accessories,
flashlights and home storage and organization products. Although certain of the
products offered by the Company in these product lines are subject to patent or
other intellectual property protections, barriers to entry for competing
manufacturers and distributors are relatively low for the majority of the
Company's products. Accordingly, there can be no assurance that competitors of
the Company, many of which are likely to have substantially greater financial
resources, experience and marketing ability will not be able to successfully
compete with the Company, which successful competition could adversely affect
the Company's operations and financial condition.
Dependence on Licensed Technology
The Company is dependent upon licenses granted by third parties for
certain key elements of its product line. Some of these license agreements
require that the Company achieve minimum sales in order to retain the license
rights. There can be no assurance that the Company will meet the minimum sales
requirements to avoid cancellation of the licenses or a change in its rights or
that such license rights will continually be available to the Company. The
Company's failure to observe or perform any of the covenants, terms, conditions
or provisions contained in the license agreements or in the event of a breach of
any representation or warranty made by the Company, may result in a termination
or restriction of the Company's rights. Termination of such licenses or any
restriction or limitation of the Company's rights under such licenses may
adversely affect the Company's operations and financial condition.
Dependence on Third-Party Manufacturers
For the majority of its products, the Company is dependent on
third-party manufacturers to manufacture its products. Most of these third-party
manufacturers are located in foreign countries, primarily Hong Kong, Taiwan and
China. Although the Company believes that it could replace such manufacturers,
if any manufacturer of products fails to supply any or all of the Company's
requirements for product, or if the Company's suppliers of raw materials or
parts fails to fulfill the Company's requirements, there can be no assurance
that alternate sources of supply will be immediately available to the Company at
reasonable cost or at all, and, if available at a reasonable cost, whether the
Company will be able to secure such alternate sources in a timely manner. If
such alternate sources of supply or manufacturing are not available on a timely
basis or on reasonable economic terms, the Company's results of operations could
be severely and adversely affected.
Government Regulation
Various aspects of the Company's business are subject to both domestic
and foreign government regulation by such agencies as the Federal Trade
Commission, the Federal Communications Commission and taxing authorities, such
as the Internal Revenue Service. In addition, as a public company, the Company
is subject to reporting requirements and other regulations promulgated and
enforced by the Securities and Exchange Commission. Although the Company is
aware of no respect in which it is not in substantial compliance with such
regulations, laws and requirements, failure to comply with them could have a
material adverse effect on the Company, its business, financial condition and
results of operations. For example, if the Company were found to be in violation
of regulations or other laws governing its business, it could be assessed with
substantial penalties, fees and expenses, temporary or permanent suspension of
trading in its shares, or ultimately interruption or the shutdown of some or all
of its operations. The Company also must obtain and comply with local, state,
provincial and federal permits, use permits, plans of operation and other
authorizations. Obtaining these permits can be very costly and take significant
amounts of time. Although the Company foresees no material problems or delays,
there can be no assurance that the Company can obtain the necessary permits,
commence new operations or continue existing operations or that the Company can
maintain economic production in compliance with the necessary permits. There can
be no assurance that future changes in existing law or new legislation will not
limit or adversely impact the Company's business operations.
Page 9
<PAGE>
Limited Market and Volatility of Stock Price
The Company has a limited public market and resales of the shares of
common stock covered by this Prospectus may adversely affect the prevailing
market price of shares currently issued and outstanding, or adversely affect the
ability of the Company to raise future capital through equity offerings. The
trading price of the Company's common stock has been and is likely to continue
to be subject to wide fluctuations in response, among other things, to
variations in the Company's operating results, material announcements by the
Company or its competitors, governmental regulatory actions, conditions in the
Company's industry, or other events or factors, many of which are beyond the
Company's control. The Company's operating results in future periods may be
below the expectations of investors. In such event, the price of the common
stock would likely decline, perhaps substantially. In addition, the stock market
has historically experienced extreme price and volume fluctuations which have
particularly affected the market prices of many public companies and which often
have been unrelated to the operating performance of such companies. Moreover,
the Company's common stock may be even more prone to volatility than the
securities of other businesses in similar industries because of the relatively
small number of shares of common stock not held by affiliates. Given such a
small "public float," there can be no assurance that the prevailing market price
of common stock will not be artificially inflated or deflated by trading even
of relatively small amounts of common stock. See "Price Range of Common Stock."
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 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 does not presently anticipate that its operations or financial
conditions will be materially adversely affected by the Year 2000 problem.
Nevertheless, there can be no assurance that the Company will not be adversely
affected by Year 2000 problems, either as a result of problems affecting its
internal systems and operations, or as a result of the failure of third parties
upon which the Company depends to address their respective internal Year 2000
issues. See "Management's Discussion and Analysis - Year 2000 Compliance."
No Dividends
The Company has never declared or paid any cash dividends on its shares
and does not anticipate paying cash dividends in the foreseeable future.
Effect of Certain Anti-Takeover Provisions of Utah Law
Utah, the state in which the Company was organized, has adopted a
"Control Shares Acquisition Act" (the "Control Shares Act"). This act provides
that any person or entity that acquires 20% or more of the outstanding voting
shares of a publicly held Utah corporation is denied voting rights with respect
to the acquired shares, unless a majority of the disinterested stockholders of
the corporation elects to restore such voting rights. The provisions of the
Control Shares Act may discourage companies or persons interested in acquiring a
significant interest in or control of the Company, regardless of whether such
acquisition may be in the interest of the Company's stockholders. See
"Description of Securities."
Page 10
<PAGE>
USE OF PROCEEDS
The shares offered hereby are offered and sold exclusively by the Selling
Shareholders. No portion of the proceeds from the sale of shares by the Selling
Shareholders will be paid to the Company. See "Plan of Distribution." The
Company intends to use the proceeds, if any, from the Line of Credit and the
exercise of the Warrants to provide working capital for its operations. The
Company cannot require the exercise of the Warrants. Under the Credit Agreement,
the Company is required to draw down at least $1,000,000, of the Line of Credit,
at some time during the two year period following the effectiveness of the
registration statement of which this Prospectus is part. Additionally, upon the
effectiveness of the registration statement of which this Prospectus is a part,
and upon the satisfaction of additional terms and conditions, the Company
will be obligated to issue additional Convertible Debentures in the principal
amount of $500,000. If received, the proceeds of the issuance of such additional
Convertible Debentures will be used primarily for working capital and for the
payment of certain expenses relating to the offering, including payment of
professional fees and printing and engraving costs.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its common
stock and does not anticipate declaring or paying cash dividends in the
foreseeable future. The Company's existing credit facilities prohibit the
payment of dividends. The Company intends to retain future earnings, if any, to
finance the operation, development and further expansion of its business.
DETERMINATION OF OFFERING PRICE
The offering price, conversion price and exercise price of the Line of
Credit Shares, Debenture Shares and Warrant Shares were determined by
negotiations between the Company and the Investors, and such prices do not
necessarily reflect the actual value of the Company's shares based upon net
worth. See "Description of Securities." The shares of common stock covered
by this Prospectus Shares may be sold by the Selling Shareholders from time to
time at prices and on terms not yet determined and solely within the discretion
of the Selling Shareholders. Sales, which may or may not involve cash
consideration or transactions on the Nasdaq SmallCap Stock Market may be made
directly to other purchasers or through one or more underwriters or broker-
dealers at prices quoted on the Nasdaq SmallCap Stock Market at the time of sale
Or on other terms as agreed with such underwriters or broker-dealers, as the
case may be. See "Plan of Distribution."
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information and Number of Stockholders. The Company's common
stock is listed on The Nasdaq SmallCap Market under the symbol "DYNX". As of
May 14, 1999, there were approximately 1,232 shareholders of the Company's
common stock and 3,391,627 shares of common stock were outstanding.
Price Range of Common Stock. The following table sets forth the high and
low sale prices of the Company's common stock as reported by the Nasdaq SmallCap
Market during the indicated periods. The referenced quotations do not reflect
inter-dealer prices, dealer retail markup, markdown, or commissions, and may not
necessarily represent actual transactions.
Page 11
<PAGE>
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
- ------------------ ---------------- -----------------
Quarter & Year Market High Market Low
- ------------------ ---------------- -----------------
<S> <C> <C>
1st 1997 $ 5.75 $2.63
- ------------------ ---------------------------------
2nd 1997 $11.00 $5.75
- ------------------ ---------------- -----------------
3rd 1997 $10.69 $4.00
- ------------------ ---------------------------------
4th 1997 $ 8.81 $4.50
- ------------------ ---------------- -----------------
1st 1998 $ 7.88 $6.06
- ------------------ ---------------------------------
2nd 1998 $ 8.25 $4.75
- ------------------ ---------------- -----------------
3rd 1998 $ 6.25 $2.25
- ------------------ ---------------------------------
4th 1998 $ 5.75 $1.38
- ------------------ ---------------- -----------------
1st 1999 $ 4.31 $2.25
- ------------------ ---------------------------------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the information set forth in the consolidated financial statements and the notes
thereto appearing elsewhere in this Prospectus.
Year Ended December 31, 1998 Compared to December 31, 1997
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 twelve-month periods
ended December 31, 1998 and 1997, respectively. As supplemental information, the
table also segregates the Company's revenues by product line type.
Page 12
<PAGE>
<TABLE>
<CAPTION>
% OF
For the Year Ended CHG
------------------------------------ FROM
DECEMBER DECEMBER 1997 TO
31, 1998 31, 1997 1998
--------------- ---------------------------
Statement of Operations Data:
<S> <C> <C> <C>
Product sales......................... $16,579,000 $14,566,000 13.8 %
Cost of sales......................... 10,973,000 10,174,000 7.9
------------ ------------
Gross margin.................. 5,606,000 4,392,000 27.6
------------ ------------
Operating Costs and Expenses:
Selling expenses...................... 2,874,000 2,379,000 20.8
Research and development.............. 143,000 508,000 (71.9)
General and administrative............ 3,029,000 1,730,000 75.1
------------ ------------
Total operating costs and
Expenses.................... 6,046,000 4,617,000 31.0
------------ ------------
Other Income (Expense), net:
Interest expense...................... (1,773,000) (427,000) 315.2
------------ ------------
Interest income....................... 3,000 9,000 (66.7)
------------ ------------
Other expense......................... (35,000) (61,000) 42.6
------------ ------------
Other income.......................... - 295,000 -
------------ ------------
Net loss.............................. $(2,245,000) $ (409,000) 448.9%
============ ============
Supplemental Information:
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories........................ $ 7,640,000 $ 6,146,000 24.3 %
Home storage and organization........... 4,444,000 3,387`000 31.2
Miscellaneous/mass market............... 3,506,000 4,140,000 (15.3)
Flashlights........................... 989,000 893,000 10.8
------------ ------------
Total product sales $16,579,000 $14,566,000 13.8%
============ ============
and other.........................
</TABLE>
Following are explanations of significant period to period changes for the years
ended December 31, 1998 and 1997:
Revenues
Total Product Sales. Total product sales increased by $2,013,000, or
13.8%, from $14,566,000 to $16,579,000 for the year ended December 31, 1998
compared to the year ended December 31, 1997.
Telecommunication Headsets and Amplifiers and Telephone Accessories.
Telecommunication headsets and amplifiers and Telephone accessories sales
increased $1,496,000, or 24.3%, from $6,146,000 to $7,640,000 for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The increase was
primarily attributable to an increase of approximately $210,000 in the Company's
"Cord Manager" product line and an increase of approximately $38,000 in the
"Twisstop" line, offset in-part by a decrease in shoulder rest sales. Overall
gross margins for these products increased to 48.4%, from 46.6% for the years
ended December 31, 1998 and 1997, respectively, as a result of the sales mix.
Additionally, this increase was due to the Company's introduction of a new line
of telecommunications products including wired and wireless telephone headsets,
telephones, conference speakers, and other related products. Overall gross
margins for these products for the year ended December 31, 1998 were
approximately 36.4%. In addition, the Company has been able to secure pages in
several catalogues of major providers for various office products for all of
these types of products which began circulating during the third and fourth
quarters of 1998 and will continue for the 1999 year.
Home Storage and Organization. Home storage and organization revenues
increased $1,057,000, or 31.2%, from $3,387,000 to $4,444,000 for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The increase in
home storage and organization revenues was primarily attributable to the
introduction of several new products, including drawer organization products,
namely "Expand-A-Drawer", which accounted for approximately $1,042,297 of the
revenue increase, and several wire basket rollout products which made up
approximately $66,000 of the increase. These increases were offset in part by a
decrease in sales of the "Expand-a-shelf" product line of approximately $88,000.
Overall gross margins for products in this category increased to 30.1% for the
year ended December 31, 1998 from 27.3% for the year ended December 31, 1997.
Page 13
<PAGE>
This increase in gross margins was primarily attributable to increased sales in
the higher margin "Expand-A-Drawer" product line.
Miscellaneous and Mass Market. Mass market revenues decreased $579,000,
or 15.1%, from $3,825,000 to $3,246,000 for the year ended December 31, 1998
compared to the year ended December 31, 1997. This decrease was primarily the
result of the Company's receipt of large orders for crayons in early 1998 from
Dolgencorp., Inc., which orders were subsequently deferred indefinitely. Before
learning of the deferral, the Company had procured crayons to fill Dolgencorp's
order. Consequently, Dolgencorp's deferral of delivery of product under those
orders caused the Company to stockpile approximately $1,000,000 in crayon
inventory with no guarantee of future orders for these crayons. At the end of
1998, the Company decided to change its relationship with Dolgencorp due to the
inordinate strain that servicing Dolgencorp's orders placed on the Company's
physical and financial resources. In addition, the Company determined that,
strategically, it should focus on its other product categories which produce
greater gross margins and have the most growth potential. Therefore, the Company
anticipates a significant drop in revenues from this segment of its business in
1999. Overall gross margins for products in this category decreased to 13.5% for
the year ended December 31, 1998 from 17.6% for the year ended December 31,
1997. This decrease in gross margins resulted from the additional warehouse
space leased to store the crayon inventory. Substantially all sales in 1998 in
this category were to Dolgencorp, Inc.
On December 24, 1998, the Company entered into an inventory and single
customer purchase 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 the approximately $1,800,000 of
Dolgencorp inventory then owned by the Company, 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 March 31, 1999, Grandway had
purchased all but approximately $339,124 of the remaining inventory. Finally,
for a period of two years, Grandway will pay a two percent (2%) royalty to
the Company on all orders shipped to Dolgencorp, in addition, the Company can
still sell other types of products to Dolgencorp.
Other revenue decreased $55,000, or 17.5%, from $315,000 to $260,000 for
the year ended December 31, 1998 compared to the year ended December 31, 1997.
The decrease in other revenue was primarily attributable to a decline in other
miscellaneous products sold by the Company, namely, closet hangers and tote
bags.
Flashlights. Flashlight revenues increased $96,000, or 10.8%, from
$893,000 to $989,000 for the year ended December 31, 1998 compared to the year
ended December 31, 1997. The increase in flashlight revenues was primarily
attributable to increased military sales. In addition, gross margins for
flashlights improved significantly, from 0.4% for the year ended December 31,
1997 to 24.9% for 1998. This improvement resulted from the Company's decision to
change the source of manufacturing from the United States to certain Asian
countries.
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 effective as of December 1, 1996. In connection with that
transaction, the assets of Nordic Lights were transferred to a newly
incorporated, wholly owned subsidiary of the Company, Nordic Technologies, Inc.
("Nordic Technologies"), a Utah corporation. After the acquisition, Nordic
Technologies began selling a broad range of flashlight products and accessories
under the trademark "Nordic Lites."
The initial purchase of the assets of Nordic Lights, Inc. was
accomplished through the issuance of 550,000 shares of the Company's common
stock to the shareholders of Nordic Lights. A value of $1.60 per share was
determined based upon subsequent sales of stock by shareholders of Nordic
Lights, Inc. for a total purchase price of $880,000. In addition to the stock
issued, warrants to purchase 250,000 shares of common stock at an exercise price
of $1.00 were issued to the shareholders of Nordic Lights, Inc. Those warrants
are exercisable only if and when certain gross sales requirements have been
reached over a five year period beginning January 1, 1999. In April 1997,
several third parties agreed to purchase portions of the shares issued in
connection with the acquisition transaction from the shareholders of Nordic
Lights, Inc. The April 1997 agreement also nullified a repurchase agreement
which was originally included as part of the 1996 Nordic acquisition.
Page 14
<PAGE>
In July 1997, the Company sold the tangible assets acquired from Nordic
Lights and non-exclusive rights to certain patents in exchange for 73,515 shares
of the Company's common stock and $106,850 in cash. The majority of the assets
sold represented various fixed assets which had previously been used by the
Company to manufacture flashlights. The shares received in exchange for these
assets were recorded as treasury stock at the fair market value of $10.00 per
share. Because the market value of the stock received into treasury on the sale
of these assets equaled the current book value of the assets sold, no gain or
loss was recognized for this sale. Instead of producing the flashlights
domestically, the Company has arranged with overseas vendors that are providing
product at reduced costs leading to healthier margins on the flashlight
products.
Operating Costs and Expenses
Selling Expenses. Selling expenses increased $495,000, or 20.8%, from
$2,379,000 to $2,874,000 for the year December 31, 1998 compared to the year
December 31, 1997. The increase in selling expenses was primarily attributable
to an increase in advertising expense of approximately $128,000, related to the
Company securing pages in several office products providers' catalogues. In
addition, the Company experienced an increase of approximately $220,000 in the
cost of shipping products to its customers. Management is addressing this issue
by sourcing competitive bids from carriers. These increases were partially
offset by a decrease of approximately $46,000 in travel and entertainment
expense.
Research and Development. Research and development decreased by
$365,000, or 71.9%, from $508,000 to $143,000 for the year ended December 31,
1998 compared to the year ended December 31, 1997. This decrease was primarily
attributable to the completion of the research and development related to the
introduction of the Company's new line of telecommunication headset products.
General and Administrative Expenses. General and administrative expenses
increased $1,299,000, or 75.1%, from $1,730,000 to $3,029,000 for the year ended
December 31, 1998 compared to the year ended December 31, 1997. Of this
increase, approximately $450,000 was incurred by the Company to defend itself in
patent infringement lawsuits, approximately $300,000 related to legal and
accounting fees related to the Company's effort to register securities on a
registration statement on Form SB-2 in connection with a Convertible Debenture
and Equity Line-of-Credit financing agreement between the Company and private
investors which was put into place in May 1998, and approximately $500,000 in
legal expense was incurred as a result of certain internal investigative and
general corporate matters.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $1,429,000, or 31.0%, from $4,617,000 to $6,046,000 for the year
ended December 31, 1998 compared to the year ended December 31, 1997, for the
reasons discussed above.
Interest Expense. Interest expense, increased $1,346,000, or 315.2%,
from $427,000 to $1,773,000 for the year ended December 31, 1998 compared to the
year ended December 31, 1997. This increase was primarily related to the
recognition of a one-time, non-cash charge for the fair value of common stock
warrants and a beneficial conversion premium, totaling $500,000 and $137,000,
respectively, both associated with the issuance of $1,500,000 of the Convertible
Debentures in May 1998. Additionally, normal non-cash interest was recognized
on the Convertible Debentures, as well as the amortization of the fair value
of other common stock warrants issued in connection with the debt. Also,
liquidated damages were assessed against the Company in the amount of $110,000
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 with the time specified in a registration rights agreement
executed in connection with the sale of the Convertible Debentures.
Interest Income. Interest income decreased $6,000, or 66.7%, from $9,000
to $3,000 for the year ended December 31, 1998 compared to the year ended
December 31, 1997. 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 $26,000, from $61,000 to $35,000
for the year ended December 31, 1998 compared to the year ended December 31,
1997. This decrease is primarily the result of a smaller tax provision due to
net operating loss carryforwards.
Other Income. Other income decreased $295,000, from $295,000 to $-0- for
the year ended December 31, 1998 compared to the year ended December 31, 1997.
This decrease is primarily the result of the Company recognizing a gain on the
sale of assets during the year ended December 31, 1997 that did not recur in
1998.
Page 15
<PAGE>
Net Loss. Net loss increased by $1,836,000, or 448.9%, from a loss of
$409,000 to a loss of $2,245,000 for the year ended December 31, 1998 compared
to the year ended December 31, 1997 due to a combination of the factors
described above.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
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>
% OF
For the Three Months Ended CHG
--------------------------------- FROM
MARCH 31, MARCH 31, 1998 TO
1999 1998 1999
----------------- --------------- ------------
Unaudited Statement of Operations Data:
<S> <C> <C> <C>
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)....................... (4,000) (21,000) (95.2)
------------- ------------
Other income.......................... 3,000 -
------------- ------------
-
Net income (loss)..................... $ (526,000) $ 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.
Page 16
<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.
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<PAGE>
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.
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 as of March 31, 1999, 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) $6.50. 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 interim, unaudited 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.
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<PAGE>
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.
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.
Page 19
<PAGE>
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 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
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<PAGE>
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.
PROPERTIES
The Company owns and occupies the building located at 3820 Great Lakes
Drive, Salt Lake City, Utah 84120, at which its corporate headquarters,
manufacturing and warehouse operations are housed. This facility was built in
1996 on property purchased by the Company for that purpose. The Company's
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 warehouse area.
BUSINESS
Cautionary Note Regarding Forward-looking Statements.
This Prospectus, in particular the "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections, contains forward-looking statements concerning the expectations and
anticipated operating results of the Company. All of these forward-looking
statements contained herein are intended to qualify for the safe harbor
protection provided by the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended. The reader should understand that
numerous factors govern whether any forward-looking statement made by the
Company will be or can be achieved. Any one of such factors could cause actual
results to differ materially from those projected by the forward-looking
statements made herein. These forward-looking statements include plans and
objectives of management for future operations, including plans and objectives
relating to the products and the future economic performance of the Company. The
forward-looking statements are based on current expectations that maybe affected
by a number of risks and uncertainties. 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.
Assumptions made by management for purposes of such forward looking statements
involve judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements in this Report are reasonable,
any of these assumptions could prove inaccurate. Therefore, there can be no
assurance that the results contemplated in any of the forward-looking statements
will be realized. Budgeting and other management decisions are subjective
in many respects and are susceptible to interpretations and periodic revision
based on actual experience and business developments, the impact of which may
cause the Company to alter its marketing capital expenditure plans or other
budgets. This will affect the Company's results of operations. In light of
the significant uncertainties inherent in the forward-looking statements, any
such statement should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
General
Dynatec is a Salt Lake City, Utah based manufacturer and distributor of
consumer products. The Company has four wholly owned subsidiaries: Softalk,
Inc., Arnco Marketing, Inc., Nordic Technologies, Inc. and SofTalk
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<PAGE>
Communications, Inc. During the year ended December 31, 1998, the Company
conducted most of its operations through its subsidiaries.
The Company is engaged primarily in the manufacture and distribution of
the following consumer product lines: telecommunication headsets and amplifiers
and other telephone accessories, home storage and organization and premium
flashlights. The Company also from time to time distributes other miscellaneous
products sold to mass market merchandisers. For information about the Company's
industry segments and operations in different geographical areas, see Note 11 to
the Company's unaudited consolidated financial statements, entitled "Business
Segment Information."
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.
Telecommunication Headsets and Amplifiers and Telephone Accessories
Historically, the manufacture and distribution of telephone accessories
have been the principal source of revenues for the Company. The Company's lead
product in this line has been a group of soft plastic shoulder rests that are
attached to a telephone handset by use of a proprietary adhesive strip
manufactured for the Company by 3M. These products are designed to ease neck
strain suffered by people who, needing both hands free while they talk on the
telephone, hold the handset between their ear and shoulder by bending their neck
toward their shoulder. These telephone shoulder rest products are currently
manufactured and distributed by the Company under the trade names of "Softalk
(R)", "Mini-Softalk (TM) ", "Softalk II" and "Universal Phone Rest", and are
available in a variety of colors, sizes and styles. The Company owns or licenses
the patent rights used in the manufacture of the Softalk product line, and
manufactures these products at its Salt Lake City, Utah headquarters.
The Company's telephone accessory product line also includes "Twisstop"
and "Cord Manager" products. The Twisstop product is a plastic connector that
plugs into a telephone handset and allows the telephone cord to twist around the
axis of the connector to the effect that the telephone cord does not become
tangled. The Cord Manager product is a disk-shaped device approximately two
inches in diameter that plugs into a telephone handset. Coiled inside the Cord
Manager is telephone cord of approximately 25 feet in length. The product is
designed to allow the telephone user to have the benefit of a relatively long
telephone cord, but avoid the hassles associated with a normal cord of such
length.
The Company has invested significant capital in research and development
in developing a new line of telephone and computer headset amplifiers
and headset telephones. These products are designed to supplement or replace
traditional telephone handsets allowing increased flexibility for the user,
particularly users who can benefit from having their hands free while they use
the telephone. Such products currently are distributed by the Company under the
trade names of "Tele-Link (TM)", "Computer-Link (TM)", "Power-Link (TM)", and
"Power Phone (TM)". These products were launched during the fourth quarter of
1997.
For the year ended December 31, 1998, revenues from the telephone
accessories product line accounted for 46.1% of the Company's total revenues and
42.2% of total revenues for the year ended December 31, 1997. Major customers
for this product line include United Stationers, Lucent Technologies, Boise
Cascade, Radio Shack, Staples, Gemini Industries and Corporate Express. In
addition, the Company has secured pages in several catalogues of major providers
for various office products for all of these types of products, which pages
began circulating during the third and fourth quarters of 1998 and will continue
for 1999.
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<PAGE>
Home Storage and Organization
The Company's home storage and organization product line includes the
following products:
>> "Expand-A-Shelf" >> "The Wedge"
>> "Mini Expand-A-Shelf" >> "Super Wedge"
>> "Mega Expand-A-Shelf" >> "Medicine Cabinet Organizer"
>> "Expandable Book Shelf" >> "Drawer Organizer"
>> "Sofstop" >> "Freedom Hanger"
>> "Cover-Up" >> "Expand-A-Drawer"
>> "Hide It" >> "Easy Reach Roll-Out" shelves.
>> "Expanding-Roll-Out"
These products are designed to promote convenience and comfort in the
home by helping people take better advantage of limited space by organizing
drawers, closets and shelves and providing other useful home products such as
door stops. The products in this line are typically custom manufactured for
Dynatec by offshore, nonaffiliated manufacturers using proprietary third party
designs that the Company licenses.
For the year ended December 31, 1998, the home storage and organization
product line accounted for 28.4% of the Company's total revenues, compared to
25.4% of Company revenues for the year ended December 31, 1997. These products
generally are distributed directly to retail stores, distributors, and catalogs
including National Manufacturing, Lechters, Container Store, Sams Club,
Wal-Mart, Target, Bed Bath & Beyond and others.
Flashlights
In December 1996, Dynatec acquired substantially all of the assets of
Nordic Lights, Inc., a Texas corporation. Prior to the acquisition, Nordic
Lights was engaged in the business of manufacturing and distributing a
line of battery-powered flashlight products. The Company transferred the assets
acquired from Nordic Lights to a wholly owned subsidiary of the Company,
Nordic Technologies, Inc., a Utah corporation ("Nordic Technologies"),
which continues to operate Dynatec's flashlight business. Nordic Technologies
manufactures and markets a broad range of specialty and premium flashlight
products and accessories under the trademark "Nordic Lites." These products
include water and impact resistant aluminum flashlights that operate on "AA",
"C" and "D" batteries, specialty flashlights that have such features as
focusable beams and flexible handles, and ordinary plastic flashlights. In 1998,
the Company began offering flashlight packages containing multiple flashlights
and related accessories bundled together in a convenient storage and display
container. These package units are being marketed to major retailers and
warehouse shopping customers. Major customers for the flashlight products
include Giga, Inc. (U.S. military procurement) and Dixie Electric Supply Corp.
In July 1997, the Company sold the assets located at the Ft. Worth,
Texas facility at which Nordic Lights had operated in favor of more economical
and efficient manufacturing relationships with Asian sources. Presently,
although the Company does some packaging of its flashlight products, all
manufacturing is sourced from third parties. Sales of flashlight products for
the year ended December 31, 1998 amounted to $989,000 or 6.0% of the Company's
total revenues and 6.1% of revenues for the year ended December 31, 1997.
Miscellaneous/Mass Market
Miscellaneous products the Company has offered from time to time have
included the "Softalk Erasable Board", a soft wipe erasable planning board for
office and personal use, product packaging for AT&T and the Fuji Novel Battery
Line. The miscellaneous product segment accounted for less than one percent of
the Company's revenues for the year ended December 31, 1998.
Additionally, the Company sells commodity type products to national
mass-market merchandisers, such as Dolgencorp, Inc. Such products have included
single-use cameras, audiocassette tapes, three piece flashlights, and disposable
lighters, all of which products were distributed to Dolgencorp. Sales for these
types of products accounted for 19.6% and 26.3% of the Company's revenues for
the years ended December 31, 1998 and 1997, respectively.
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<PAGE>
Subsidiaries of the Company
During the year ended December 31, 1998, the Company conducted most of
its operations through its subsidiaries. The name of each of the Company's
subsidiaries, the date of organization and the date of acquisition by the
Company is set forth in the following table. Dynatec owns 100% of the voting and
other equity securities of each of its subsidiaries.
<TABLE>
<CAPTION>
Date Date Acquired
Subsidiary Organized By Company
- -------------------------------- ------------------- -------------------------
<S> <C> <C>
Softalk, Inc. (1) 7/15/82 4/18/83
Arnco Marketing, Inc. (2) 7/22/86 9/30/91
Nordic Technologies, Inc. (3) 10/25/96 10/25/96
SofTalk Communications, Inc. (4) 12/23/96 12/23/96
</TABLE>
(1) Engaged in the manufacturing, sourcing and distribution of the telephone
accessory, home storage and organization, 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, development and marketing of telecommunications
products.
Raw Material 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 forming the Softalk products is manufactured.
Other than the Softalk products, the Company's products are purchased in
finished form and packaged according to Dynatec's specifications by the
Company's various suppliers. In some cases, Dynatec purchases finished product
and packages the product for distribution at its Salt Lake City 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 plasticproducts or of plastisol in the past year, and does not
anticipate any shortage in the future. The Company anticipates usual,
inflationary increases in the price of plastic products, freight, and
packaging in 1999. The Company anticipates that these usual, inflationary
increases will not materially impact the results of operations for the year
ended 1999, although there can be no assurance that the Company will not
encounter raw material or other manufacturing delays, price increases or
shortages, any of which could adversely affect the Company's financial
condition and operations. With respect to finished products the Company
purchases from domestic or foreign manufacturers, which products constitute the
majority of the Company's business, the Company's suppliers have demonstrated
continued dependability in supplying quality product in a timely manner.
Moreover, the Company believes that the third party manufacturers it uses
to produce its products could be readily replaced if necessary.
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<PAGE>
Trademarks and Patents
The Company currently owns or licenses the following U.S. and foreign
trademarks.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Trademarks
- -----------------------------------------------------------------------------------------------
Year of
Trademark
Product Trademark Expiration
Country Granted/Filed or Renewal
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Softalk U.S.A. Each 10 Years
Canada 02/05/81 Each 15 Years
Mini-Softalk U.S.A. Each 10 Years
Sofstop U.S.A. 08/04/92 Each 10 Years
The Wedge U.S.A. 10/20/92 Each 10 Years
Wall Saver U.S.A. 07/15/97 Each 10 Years
Expand-A-Shelf U.S.A. 08/24/95 Pending
Phoneworks & Design U.S.A. 05/10/96 Pending
Audioworks & Design U.S.A. 05/10/96 Pending
Videoworks & Design U.S.A. 05/10/96 Pending
Easy Reach U.S.A. 11/17/98 Each 10 Years
Tele Link U.S.A. 04/10/97 Pending
Computer Link U.S.A. 04/10/97 Pending
Power Link U.S.A. 04/10/97 Pending
Pace Setter U.S.A. 04/10/97 Pending
Power Phone U.S.A. 04/10/97 Pending
Smart Sound U.S.A. 04/10/97 Pending
Softalk Design (Shape) U.S.A. 04/09/96 Each 10 Years
Mini Softalk Design (Shape) U.S.A. 05/21/96 Each 10 Years
Cord Manager U.S.A. 09/16/97 Each 10 Years
Canada 10/27/97 Each 15 Years
European Community 08/31/98 Each 8 Years
Japan 08/07/98 Each 10 Years
Home Organization U.S.A. 07/23/97 Pending
NordicLite U.S.A. 04/03/96 Pending
Nordic Helmet Design U.S.A. 07/05/97 Each 10 Years
Smoke Cutter U.S.A. 12/23/97 Each 10 Years
Nite-Site-Lite U.S.A. 04/25/97 Each 10 Years
Zoom Switch U.S.A. 08/19/96 Pending
See It, Find It, Get It U.S.A. 05/11/98 Pending
Expand-A-Drawer (Design) U.S.A. 04/17/98 Pending
Color Splash U.S.A. 04/17/98 Pending
Softalk U.S.A. 04/17/98 Pending
</TABLE>
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<PAGE>
The Company owns or licenses the following U.S. and foreign patents.
<TABLE>
<CAPTION>
Patents Year of
Patent
Patent Expiration
Product Country Granted/Filed or Renewal
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Universal Softalk U.S.A. 09/06/94 2008
Softalk II U.S.A. 02/11/92 2006
Expand-A-Drawer U.S.A. 04/14/98 2016
Easy Reach Roll-Out U.S.A. 08/01/97 Pending
Expand-A-Shelf, Book Edition U.S.A. 06/25/96 2010
Door Protector U.S.A. 02/18/97 2013
Interchangeable Doorstop U.S.A. 02/18/97 2015
Zoom Light U.S.A. 10/27/98 2016
Slide Focus Flashlight U.S.A. 02/02/99 2016
Switch w/Spare Bulb Carrier U.S.A. 11/14/89 2009
Flashlight w/Switch Assembly U.S.A. 06/27/89 2007
Flashlight w/Nite-Site-Lite U.S.A. 05/07/91 2009
Cord Manager U.S.A. 02/17/98 2016
Medicine Cabinet Organizer U.S.A. 07/15/93 Pending
Spring Wedge U.S.A. 12/11/90 2007
Expand-A-Drawer Continued U.S.A. 03/17/98 Pending
Expand-A-Drawer Canada 02/19/98 Pending
Mini Softalk U.S.A. 02/11/92 2006
Combination Flashlight & Area U.S.A. 01/29/99 Pending
Lights
Magnetic Door Stop & Holder U.S.A. 05/16/93 2011
Cover Up U.S.A. 03/03/87 2001
</TABLE>
The Company believes its ownership of trademarks and patents is
important to success in its markets. The cost of prosecuting and defending
against claims for infringement may be prohibitive and there can be no assurance
that third parties will not violate the Company's proprietary rights or that the
Company will be successful in protecting its rights under applicable law.
Inventory Supply and Backlog Orders
The Company has followed a standard policy of shipping within 24 hours
of receipt of payment on orders, or within 48 hours of orders on approved credit
lines with the exception of large home storage and organization orders, which
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. Nevertheless, the Company may from time to time need to backorder
certain items.
Major Customers
Telecommunication Headsets and Amplifiers and Telephone Accessories
For the year ended December 31, 1998, 42.0% of the Company's telephone
headset products were distributed through Lucent Technologies/Phillips Consumer
Communications, whose headquarters are at P.O. Box 295 Parisippany, NJ 07054.
Another 17.0% of telephone headset products were distributed through United
Page 26
<PAGE>
Stationers, whose headquarters are at 2200 E. Golf Road, Des Plaines, IL 60016.
For the year ended December 31, 1998, 16.5% of the telephone accessory
products were distributed through sales to United Stationers. Another 13.0% of
sales in this product line were to Boise Cascade, whose headquarters are at 800
West Bryn Mawr Road, Itasca, IL 60143. S.P. Richards, whose headquarters are at
P.O. Box 1266, Smyrna, GA 30081, accounted for another 12.7% of sales of
telephone accessory products.
Home Storage and Organization
For the year ended December 31, 1998, 12.8% of the home storage and
organization products were distributed through Target Stores, whose headquarters
are at 33 South 6th Street, P.O. Box 1392, Minneapolis, MN 55440. Another 10.9%
of these products were distributed to National Manufacturing, whose headquarters
are at 1 First Avenue, Sterling IL 61081. An additional 10.4% of the home
storage and organization products sales were to Wal-Mart, whose headquarters are
at 702 S.W. 8th Street, Bentonville, AR 72716. Bed, Bath and Beyond, whose
headquarters are at 110 Bi-County Blvd., Suite 114, Farmingdale, NY 11735,
accounted for another 10.2% of the distribution of houseware/hardware products.
Flashlights
For the year ended December 31, 1998, 38.3% of the flashlight products
were distributed through Giga, Inc. whose headquarters are at P.O. Box 4265,
Macon, GA 31208. Another 12.4% of the flashlight products sales were to Dixie
Electric Supply Corp., whose headquarters are at P.O. Box 6522, Richmond, VA
23230.
Miscellaneous/Mass Market
Dolgencorp, Inc. whose headquarters are at 427 Beech Street,
Scottsville, KY 42164, accounted for substantially all of the Company's
mass-market revenues of $3,246,000 for the year ended December 31, 1998.
Dolgencorp, Inc. was the only customer that accounted for more than 10%
of the 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's overall financial condition and operations.
Competitive Conditions in the Market
The Company believes that it is engaged in highly competitive market
segments for each of its products. 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.
The doorstop products, which are marketed as part of the home
organization product line, 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 believes that its
proprietary rights for both flashlights and headsets, as well as the innovative
features of those products, enable the Company to compete in each of these
markets.
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 requirements or
regulations as to its manufacturing and distribution of products. The Company
Page 27
<PAGE>
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.
Employees
The Company employs a full-time executive, sales, administrative and
clerical staff of 28 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 production demand, and ranged from a high of approximately 56 employees to
a low of approximately 45 employees during the year ended December 31, 1998.
MANAGEMENT
The following table sets forth certain information regarding the
executive officers and directors of Dynatec as of March 31, 1999.
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Frederick W. Volcansek, Sr..... 53 Chairman of the Board of Directors and Chief
Executive Officer
Paul A. Boyer.................. 34 Senior Vice President, Chief Financial Officer and
Director
Reed Newbold................... 52 Director
Wayne L. Berman................ 42 Director
</TABLE>
Mr. Volcansek was employed by the Company's Board of Directors as the
Company's Chief Executive Officer on February 6, 1999. On that same day he was
appointed Chairman of the Company's Board of Directors. Prior to that time, Mr.
Volcansek served as an outside director of the Company from 1988 to February 6,
1999. Before accepting full-time employment as the Chief Executive Officer of
the Company, from June 1996 to February 1999, Mr. Volcansek was the Vice
President of Development for TM Global Power, LLC and the President of Mosbacher
Power do Brasil Ltda. in Houston, Texas. Mr. Volcansek also has several years'
experience in international market development and as a political consultant for
several large multi-national corporations, including US West and Enron. Mr.
Volcansek served as Deputy Under Secretary in the U.S. Department of Commerce
(International Trade Administration) from June 1990 to September 1992. Mr.
Volcansek received a B.S. degree in 1967 from Texas Tech University.
Mr. Boyer has been Senior Vice President, Chief Financial Officer and
Secretary of the Company since October 1998. He was appointed to the Company's
Board of Directors on January 14, 1999. Prior to joining the Company, from
November 1996 to October 1998, Mr. Boyer served as Director of Finance for Mrs.
Fields' Original Cookies, Inc., where he was responsible for mergers &
acquisitions, corporate budgeting, financial planning and strategic analysis.
Mr. Boyer also served as Chief Financial Officer of Wasatch Education Systems,
an educational software development company from October 1990 to November 1996 .
Mr. Boyer received his Masters in Accountancy from San Diego State University in
1987.
Mr. Newbold has been an outside Director of the Company since 1988. Mr.
Newbold is the founder of Newbold Financial, a financial planning and mortgage
brokerage services company. He also served as Vice President of Tracy Collins
Bank & Trust.
Mr. Berman was appointed to the Company's Board of Directors on March 5,
1999. Mr. Berman presently is Managing Director of Park Strategies, L.L.C., an
international business consultancy he founded in 1999. In that capacity, he
advises companies including Lockheed Martin, American International Group, US
West, BMW Corporation, AON Corporation and Philip Morris on matters relating to
new business opportunities, international financing strategies and strategic
relationships. Mr. Berman also is currently a Fellow at the Center for Strategic
and International Studies and was recently appointed to the Library of Congress'
Board of Trustees. From 1993 to 1999, Mr. Berman was Managing Director of Berman
Enterprises, an international consultancy. Prior to that, Mr. Berman was
Managing Partner of American Mercantile Group, a private merchant bank, in which
capacity he developed and managed a $100 million merchant banking fund
specializing in middle-market American companies with underdeveloped exports. In
January 1989, President George Bush appointed Mr. Berman Assistant Secretary of
Commerce for Policy, a position he occupied until January 1991. He has held
numerous other political positions, including Vice Presidential Campaign
Page 28
<PAGE>
Director for Dole-Kemp (1996), member of the Budget and Policy Priorities
Committee of the Pataki transition team (1994), Deputy Director and Executive
Producer, 1992 Republican National Convention, Senior Staff and Director of
Congressional Relations, Bush Campaign (1988), and Deputy Director of the
Reagan-Bush Transition Team (1981). Mr. Berman received his Bachelor of Arts at
the University of Buffalo and attended graduate school at Georgetown University.
During the entirety of the year ended December 31, 1998, Donald M. Wood
served as the Company's Chairman and Chief Executive Officer, positions he had
held since 1982. Effective January 14, 1999, Mr. Wood resigned and retired from
the Company. In the several months leading up to his resignation, Mr. Wood
suffered from several adverse health conditions. Moreover, certain transactions
between Mr. Wood and the Company or between entities owned by or affiliated with
Mr. Wood and the Company, and certain activities conducted by the Company's
executives during Mr. Wood's tenure were the subject of an internal
investigation conducted by the Company's Board of Directors with the assistance
of an independent third party. In light of Mr. Wood's resignation, the Company
terminated its internal investigation. The Company does not anticipate taking
further action, legal or otherwise, with respect to the matters or persons
investigated, although the Company, through its new management, has identified
several areas in which new corporate governance policies have been adopted or
old policies changed.
Additionally, during the entirety of the year ended December 31, 1998,
F. Randy Jack served the Company's President and Chief Operating Officer. Mr.
Jack also served on the Company's Board of Directors from 1986 to August 24,
1998, when he resigned from the Board of Directors. On March 17, 1999, Mr. Jack
resigned as the Company's President and Chief Operating Officer.
Compliance with Section 16(a) of the Exchange Act
During the year ended December 31, 1998, as far as the Company is aware,
all officers and directors prepared and timely filed all Forms 3, 4 and 5
required by Section 16(a) of the Exchange Act, except that a Form 3 for Mr.
Boyer inadvertently was not timely filed. This oversight subsequently was
corrected. Mr. Boyer has had no transactions in the Company's common stock.
Board Compensation
Board members, who are not employees of the Company, presently are
compensated $2,000 per month for their services rendered. Until March 1, 1999,
board members were compensated in the amount of $10,000 annually. The Company
believes that, given the amount of time expended by the board members during the
fourth quarter of 1998 and the first quarter of 1999, an increase in board
compensation to the present level was necessary to attract qualified new members
of the board. Officers of the Company, also serving as directors, are
compensated according to the historical rate of $10,000 per annum. All of the
present members of the Board of Directors are director nominees for election at
the Company's 1999 Annual Meeting of shareholders.
Board Committees
Three functioning committees of the Company's Board of Directors have
been organized including (i) Executive Committee, (ii) Compensation Committee
and (iii) Audit Committee. Following is a brief description of each of these
committees.
Executive Committee. The Executive Committee is composed of Messrs.
Volcansek (Chairman) and Boyer. The purpose of this committee is to act on
routine matters on behalf of the entire Board of Directors between Board
Meetings.
Compensation Committee. The Compensation Committee is composed of
Messrs. Berman (Chairman), Newbold, and Volcansek. The purpose of this committee
is to ensure that the Company has a broad plan of executive compensation
that is competitive and motivating to the degree that it will attract, hold and
inspire performance of managerial and other key personnel of a quality and
nature that will enhance the growth and profitability of the Company.
Page 29
<PAGE>
Audit Committee. The Audit Committee is comprised of Messrs. Newbold
(Chairman), Berman and Volcansek. The purpose of the Audit Committee is to
provide oversight and review of the Company's accounting and financial reporting
process in consultation with the Company's independent auditors.
Indemnification and Compensation
The Company's Bylaws authorize the Company to indemnify its present and
former directors and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding upon receipt of
an undertaking by or on behalf of such individuals to repay such amounts if so
required.
EXECUTIVE COMPENSATION
The following table sets forth information with regard to
compensation for services rendered in all capacities to the Company by the Chief
Executive Officer, the four most highly compensated executive officers other
than the CEO who were serving as executive officers at the end of the last
completed fiscal year and two additional individuals for whom disclosure would
have been provided, but for the fact that the individual was not serving as an
executive officer at the end of the last completed fiscal year. Information set
forth in the table reflects compensation earned by such individuals for services
with the Company or its subsidiaries.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------- --------------------------------------------------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP All Other
Name and Salary(1) Bonus (2) Compensation Award(s) SARs (3) Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------ ---- ------------ ----------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald M. Wood (4) 1998 $193,723 $1,624 $12,500 - - - -
Chairman and CEO 1997 194,433 3,249 14,000 - 14,000 - -
1996 194,640 1,421 8,000 - 10,000 - -
F. Randy Jack (5) 1998 140,333 1,725 10,000 - - - -
President and COO 1997 129,142 3,465 14,000 - 10,000 - -
1996 142,440 1,522 8,000 - 9,000 - -
Dale Gledhill (6) 1998 162,556 355 - - - - -
Vice President Sales 1997 143,029 541 - - - - -
1996 124,354 152 - - - - -
</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.
(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.
(4) Resigned from Company on January 14, 1999.
(5) Resigned from Company on March 17, 1999.
(6) Not an Executive Officer.
In November 1996, the Company's 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, except that the Plan authorizes grants of
no more than 300,000 shares. 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 Notes to the accompanying Consolidated Financial
Statements.
Employment Agreements
Mr. Wood and Mr. Jack had employment contracts with the Company prior
to their respective resignations. In both cases, their employment contracts
were terminated upon their respective resignations. Additionally, Mr. Volcansek,
the Company's Chief Executive Officer as of February 5, 1999, and Mr. Boyer, the
Company's Chief Financial Officer as of October 19, 1998, each have employment
contracts with the Company.
Page 30
<PAGE>
Mr. Volcansek's employment agreement with the Company provides for a
period of employment of four years from the date of the agreement, subject to
termination provisions and to extension of the agreement as provided for
therein. The employment agreement permits Mr. Volcansek to participate in any
incentive compensation plan adopted by the Company, benefit plans and an
equity-based plan or arrangements. If the Company terminates Mr. Volcansek's
employment for cause or if Mr. Volcansek terminates employment without good
reason, the Company has no further obligation to pay him. If the Company
terminates his employment without cause, he may receive severance pay equal to
two years of his then current annual salary. In the event of a merger,
acquisition, dissolution or transfer of substantially all of the Company's
assets, the contract must then be honored by the surviving entity or it must
purchase the contract for a sum equal to three (3) years' base salary. The
employment agreement prohibits Mr. Volcansek, for two years from the date of
termination of employment under the agreement, from becoming an employee, owner
(except for investments in up to 5% of the equity securities of a company
listed or traded on a national securities exchange or the NASDAQ Stock Market),
officer, agent or director of a firm or person that competes with the Company in
the consumer products industry. The employment agreement has customary
provisions for vacation, fringe benefits, payment of expenses and automobile
allowances. Mr. Volcansek's base salary is $195,000.
Mr. Boyer's employment agreement with the Company provides for a
period of employment of four years from the date of the agreement, subject to
termination provisions and to automatic extension of the agreement. This
employment agreement permits Mr. Boyer to participate in any incentive
compensation plan adopted by the Company, benefit plans and an equity-based plan
or arrangements. If the Company terminates Mr. Boyer's employment for cause or
if he terminates his employment without good reason, the Company has no further
obligation to pay Mr. Boyer. If the Company terminates Mr. Boyer's employment
without cause, or he terminates employment with good reason, he can receive
severance pay equal to the amount equal to the product of his then current
semi-monthly base salary by the greater of the number of semi-monthly periods
from the notice of termination or twenty-four monthly periods, plus a portion of
any discretionary bonus that would otherwise have been payable. In the event of
a merger, acquisition, dissolution or transfer of assets the contract must then
be honored by the surviving entity or purchase the contract for a sum equal to
four (4) years base salary and then current benefits. The employment agreement
prohibits Mr. Boyer, for a year from the date of termination of employment under
the agreement, from becoming an employee, owner (except for investments of not
more than 3% of the equity of a company listed or traded on a national
securities exchange or an over-the-counter securities market), officer, agent or
director of a firm or person that directly competes with the Company in a line
or lines of business of the Company that accounts for 10% or more of the
Company's gross sales, revenues or earnings before taxes. The employment
agreement has customary provisions for vacation, fringe benefits, payment of
expenses and automobile allowances. Mr. Boyer's base salary is $140,000.
Security Ownership of Certain Beneficial Owners and Management
The Company has only one class of equity, common stock, par value
$.01 per share. 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 December 31, 1998 are indicated in the
following table:
Page 31
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERS HOLDING FIVE PERCENT OR MORE OF THE SECURITIES
Name and Address of Common Stock Percent of Class
Beneficial Owner Beneficially Owned as of 12/31/98
- -------------------------------------- ----------------------------- -----------------------
<S> <C> <C>
Boa Sorte Limited 162,000 5.6%
Partnership
1819 East Southern Avenue
Mesa, AZ 85204
Ditta Limited Partnership 158,831 5.5%
1819 East Southern Avenue
Mesa, AZ 85204
Muito Bem, LTD (1) 158,000 5.5%
3078 American Saddler Dr.
Park City, UT 84060
- -------------------------
</TABLE>
The above table reflects the actual Beneficial Ownership as of December 31,
1998. It does not take into account shares available under the incentive stock
option plans. A total of 2,891,627 shares were outstanding at December 31, 1998.
(1) Muito Bem LTD is a limited partnership in which Mr.
Donald M. Wood, former Chairman and CEO, 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 Company's Board of Directors authorized grants of
non-qualified stock options which are tied to the profitability of the Company
and based upon minimum years of employment. Options to purchase a total of
840,000 shares at an exercise price of $2.00 per share were granted. To vest,
the holder-employee must continue his employment with the Company through the
year 2001, and the Company must be profitable three out of four years commencing
January 1, 1998. Additional non-qualified stock options for 800,000 shares with
similar terms were granted on January 2, 1997. To vest, the holder-employee must
continue his employment with the Company through the year 2001, and the Company
must be profitable three out of four years commencing January 1, 1998.
In 1996, the Company granted 537,500 non-qualified stock options to
Muito Bem Ltd., an entity owned by Donald M. Wood, the Company's former Chief
Executive Officer, at an exercise 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., an entity affiliated with Mr. Wood, was granted 200,000 options
having terms identical to the Muito Bem options. These options are not
exercisable until December 30, 2000. In January 1999, upon his resignation from
the Company, Mr. Wood agreed to the cancellation of all of the Muito Bem
options.
The following table sets out the beneficial ownership of the
Company's common stock of all of the Company's directors and officers as of
December 31, 1998.
Page 32
<PAGE>
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF MANAGEMENT
Amount and Nature of
Beneficial Ownership of
Common Stock by
Management as of
Name December 31, 1998 Percent of Class
- --------------------------------- -------------------------------- ----------------------- -----------------------
<S> <C> <C>
Donald M. Wood (3) 188,007 (1) 6.5%
Frederick R. Jack (4) 37,009 (2) 1.3%
Reed D. Newbold 2,000 (5)
All directors and officers 227,016 7.9%
as a group (5 persons)
- ----------------------
</TABLE>
(1) Includes 2,007 shares owned by Annalee G. Wood, spouse 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 incentive stock option plan.
(2) Includes 19,000 shares subject to options exercisable under the
incentive stock option plan.
(3) Resigned from the Company on January 14, 1999.
(4) Resigned from the Company on March 17, 1999.
(5) Ownership is less than 1% of the outstanding shares of the Company.
SELLING SHAREHOLDERS
The shares of common stock offered pursuant to this Prospectus
include issued and outstanding shares held by and shares to be issued in the
future to those persons identified herein as the Selling Shareholders. None of
the Selling Shareholders have held any position or office or had any other
material relationship with Dynatec during the prior three years.
The following table provides information about the present ownership
of shares of Dynatec common stock by the Selling Stockholders as of May 15,
1999, and the number of such shares included for sale in this Prospectus owned
or potentially owned by the Selling Shareholders.
Page 33
<PAGE>
<TABLE>
<CAPTION>
Number of Shares and
Shares of Common Stock Number of Shares of Percentage of Common
Beneficially Owned Prior to Common Stock Offered Stock Beneficially Owned
Name of Selling Stockholder Offering Hereby (1) After the Offering
- ----------------------------------------- -------------------------------- ----------------------- -------------------------------
<S> <C> <C> <C>
Austost Anstalt Schaan 584,133 (2) 3,010,101 (3) (4)
733 Fuerstentum Liechtenstein
Landstrasse 163
Balmore Funds S.A. 584,133 (5) 3,010,101 (6) (4)
Trident Chambers
P.O. Box 146
Roadstown, Tortula BVI
Ellis Enterprises 93,461 (7) 481,616 (8) (4)
12A Waterloo Road
London NW2 7UF, England
Hewlette Fund 46,731 (9) 240,808 (10) (4)
1615 Avenue I
Brooklyn, NY 11230
TLG Realty 93,461 (11) 481,616 (12) (4)
c/o Melo
525 West 52nd St.
New York, NY 10019
Settondown Capital International, Ltd. 102,500 (13) 190,000 (14) (4)
Charlotte House, Charlotte Street
P.O. Box N. 9204
Nassau, Bahamas
Manchester Asset Management Limited 117,500 (15) 140,000 (16) (4)
Charlotte House, Charlotte Street
Nassau, Bahamas
Avalon Capital Limited 125,000 (17) 125,000 (4)
487 Sherwood Drive, Suite 101
Sausalito, CA 94965
Avalon Capital, Inc. 125,000 (18) 125,000 (4)
17 Earlsfort Terrace
Dublin 2, Ireland
- ---------------------
</TABLE>
(1) All share amounts include common stock issuable upon
conversion of presently issued Convertible Debentures and
Warrants, as well as common stock issuable upon Convertible
Debentures that may be issued in the future and upon draws
by the Company in the future under the Equity Line of
Credit. The number of shares of common stock issuable upon
conversion of the Convertible Debentures and the number of
shares of common stock issuable in connection with the
Equity Line of Credit varies according to the market price
at and around the conversion date or the Equity Line of
Credit funding date. Solely for purposes of estimating the
number of shares of common stock that would be issuable to
the Selling Stockholders as set forth in the table above,
Dynatec and the Selling Stockholders have assumed that all
of the Convertible Debentures contemplated by the Credit
Agreement have been issued and all of the funding available
under the Equity Line of Credit has been drawn by the
Company, and that the Selling Stockholders have converted
all of the Convertible Debentures issued to them as of May
14, 1999, on which date the conversion price of the
Convertible Debentures would have been $1.52325 and the
purchase price under the Equity Line of Credit would have
been $1.8501. The actual conversion price and purchase
price and the number of shares of Dynatec common stock
Shares issuable upon such conversion or draws could differ
substantially. The information set forth in the table,
above, is not determinative of any selling stockholder's
beneficial ownership of Dynatec common stock pursuant to
Rule 13d-3 or any other provision under the Securities
Exchange Act of 1934, as amended.
(2) Includes: (a) 410,307 shares issuable upon the
hypothetical conversion as of May 14, 1999, of presently
issued Convertible Debentures in the aggregate principal
amount of $625,000; (b) 48,827 shares issuable as payment
in stock of $74,375 of accrued interest on $625,000
principal amount of Convertible Debentures, assuming a
hypothetical conversion on May 14, 1999; (c) 62,500 shares
issuable on exercise of presently issued A Warrants; and
(d) 62,500 shares issuable on exercise of presently issued
B Warrants.
Page 34
<PAGE>
(3) Includes (a) all shares described in footnote (2); (b)
136,769 shares issuable upon the hypothetical conversion as
of May 14, 1999 of Convertible Debentures in the aggregate
principal amount of $208,333 issuable after the date
hereof; (c) 16,276 shares issuable as payment in stock of
$24,792 of interest assumed to have accrued on $208,333
principal amount of Convertible Debentures, assuming such
Convertible Debentures were outstanding and converted as of
May 14, 1999; (d) 2,252,090 shares issuable upon a
hypothetical exercise by the Company of $4,166,667 put
feature in connection with Equity Line of Credit as of May
14, 1999; and (e) 20,833 shares issuable upon the
hypothetical exercise of A Warrants issuable after the date
hereof.
(4) There is no assurance that the Selling Shareholders will
sell any or all of the shares of common stock offered hereby.
(5) Includes: (a) 410,307 shares issuable upon the
hypothetical conversion as of May 14, 1999, of presently
issued Convertible Debentures in the aggregate principal
amount of $625,000; (b) 48,827 shares issuable as payment
in stock of $74,375 of accrued interest on $625,000
principal amount of Convertible Debentures, assuming a
hypothetical conversion on May 14, 1999; (c) 62,500 shares
issuable on exercise of presently issued A Warrants; and
(d) 62,500 shares issuable on exercise of presently issued
B Warrants.
(6) Includes (a) all shares described in footnote (5); (b)
136,769 shares issuable upon the hypothetical conversion as
of May 14, 1999 of Convertible Debentures in the aggregate
principal amount of $208,333 issuable after the date
hereof; (c) 16,276 shares issuable as payment in stock of
$24,792 of interest assumed to have accrued on $208,333
principal amount of Convertible Debentures, assuming such
Convertible Debentures were outstanding and converted as of
May 14, 1999; (d) 2,252,090 shares issuable upon a
hypothetical exercise by the Company of $4,166,667 put
feature in connection with EquityLine of Credit as of May
14, 1999; and (e) 20,883 shares issuable upon the
hypothetical exercise of A Warrants issuable after the
date hereof.
(7) Includes: (a) 65,649 shares issuable upon the
hypothetical conversion as of May 14, 1999, of presently
issued Convertible Debentures in the aggregate principal
amount of $100,000; (b) 7,812 shares issuable as payment in
stock of $11,900 of accrued interest on $100,000 principal
amount of Convertible Debentures, assuming a hypothetical
conversion on May 14, 1999; (c) 10,000 shares issuable on
exercise of presently issued A Warrants; and (d) 10,000
shares issuable on exercise of presently issued B Warrants.
(8) Includes (a) all shares described in footnote (7); (b)
21,883 shares issuable upon the hypothetical conversion as
of May 14, 1999 of Convertible Debentures in the aggregate
principal amount of $33,333 issuable after the date hereof;
(c) 2,604 shares issuable as payment in stock of $3,967 of
interest assumed to have accrued on $33,333 principal
amount of Convertible Debentures, assuming such Convertible
Debentures were outstanding and converted as of May 14,
1999; (d) 360,334 shares issuable upon a hypothetical
exercise by the Company of $666,667 put feature in
connection with Equity Line of Credit as of May 14, 1999;
and (e) 3,333 shares issuable upon the hypothetical
exercise of A Warrants issuable after the date hereof.
(9) Includes: (a) 32,825 shares issuable upon the
hypothetical conversion as of May 14, 1999, of presently
issued Convertible Debentures in the aggregate principal
amount of $50,000; (b) 3,906 shares issuable as payment in
stock of $5,950 of accrued interest on $50,000 principal
amount of Convertible Debentures, assuming a hypothetical
conversion on May 14, 1999; (c) 5,000 shares issuable on
exercise of presently issued A Warrants; and (d) 5,000
shares issuable on exercise of presently issued B Warrants.
(10) Includes (a) all shares described in footnote (9); (b)
10,942 shares issuable upon the hypothetical conversion as
of May 14, 1999 of Convertible Debentures in the aggregate
principal amount of $16,667 issuable after the date hereof;
(c) 1,302 shares issuable as payment in stock of $1,983 of
interest assumed to have accrued on $16,667 principal
amount of Convertible Debentures, assuming such Convertible
Debentures were outstanding and converted as of May 14,
1999; (d) 180,167 shares issuable upon a hypothetical
exercise by the Company of $333,333 put feature in
connection with Equity Line of Credit as of May 14, 1999;
and (e) 1,667 shares issuable upon the hypothetical
exercise of A Warrants issuable after the date hereof.
(11) Includes: (a) 65,649 shares issuable upon the
hypothetical conversion as of May 14, 1999, of presently
issued Convertible Debentures in the aggregate principal
amount of $100,000; (b) 7,812 shares issuable as payment in
stock of $11,900 of accrued interest on $100,000 principal
amount of Convertible Debentures, assuming a hypothetical
conversion on May 14, 1999; (c) 10,000 shares issuable on
exercise of presently issued A Warrants; and (d) 10,000
shares issuable on exercise of presently issued B Warrants.
(12) Includes (a) all shares described in footnote (11);
(b) 21,883 shares issuable upon the hypothetical conversion
as of May 14, 1999 of Convertible Debentures in the
aggregate principal amount of $33,333 issuable after the
date hereof; (c) 2,604 shares issuable as payment in stock
of $3,967 of interest assumed to have accrued on $33,333
principal amount of Convertible Debentures, assuming such
Convertible Debentures were outstanding and converted as of
May 14, 1999; (d) 360,334 shares issuable upon a
hypothetical exercise by the Company of $666,667 put
feature in connection with Equity Line of Credit as of May
14, 1999; and (e) 3,333 shares issuable upon the
hypothetical exercise of A Warrants issuable after the date
hereof.
(13) Includes: (a) 20,000 shares issued as placement agent fees; and (b) 82,500
shares issuable on exercise of presently issued A Warrants.
(14) Includes (a) all shares described in footnote (13); (b) 27,500 shares
issuable upon the hypothetical exercise of A Warrants issuable after the
date hereof; and (c) 60,000 shares issuable after the date hereof as
placement fees.
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(15) Includes: (a) 67,500 shares issuable on exercise of presently issued A
Warrants; and (b) 50,000 shares issuable on exercise of presently issued B
Warrants.
(16) Includes (a) all shares described in footnote (15); and (b) 22,500 shares
issuable upon the hypothetical exercise of A Warrants issuable after the
date hereof.
(17) All shares issuable on exercise of presently issued B Warrants.
(18) All shares issuable on exercise of presently issued B Warrants.
In connection with the sale of shares, these Selling Shareholders may be deemed
to be underwriters under applicable federal securities laws. See "Plan of
Distribution."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's subsidiary Softalk, Inc., holds licensing rights for the
patent and trademark rights associated with the Company's Softalk product line
pursuant to a royalty agreement with WAC Research Inc., a Utah corporation
("WAC"). Donald M. Wood, a shareholder who, until January 14, 1999, was the
Company's Chairman and Chief Executive Officer, owns a one-half equity interest
in WAC. WAC obtained the patent and trademark rights for the Softalk products in
August 1986, when WAC purchased them from the inventor of Softalk and related
products in a private transaction. The purchase price for such patent and
trademark rights was $1 to 2 million, which was paid to Practical Innovations,
Inc. in a combination of Dynatec common stock and cash. Under the terms of the
agreement, Dynatec was obligated to pay a 10% royalty on all Softalk sales. At
that time, WAC and the Board of Directors of the Company determined that the 10%
royalty was onerous and non-sustainable. Therefore, WAC agreed to lower the
royalty to 5%. In addition, under the royalty arrangement between WAC and
Dynatec, the payment of royalties for the fourth quarter of each year is
contingent upon the Company obtaining a specified level of earnings for each
calendar year. During the years ended December 31, 1998 and 1997, the Company
paid WAC $172,669 and $120,312, respectively, in royalties.
During 1995, the Company sold all rights and interest in various
discontinued 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. In 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 common stock was issued to WAC to pay $154,000 on
the note, including accrued interest, and $26,000 of other WAC obligations to
Dynatec.
In September 1998 WAC advanced $98,403 to the Company as
reimbursement to the Company of Mr. Wood's salary for the first six months of
1998. The Company subsequently determined that this amount was a payable to WAC,
and at December 31, 1998 recognized the obligation on its consolidated balance
sheet. In February 1999, the Company repaid this amount to WAC.
Donald M. Wood, who served as the Company's Chief Executive Officer
during the entirety of 1998 and until January 14, 1999, owned a residential
rental property in Park City, Utah during all of 1997 and until August 1998. The
Company leased this property from him to use for Dynatec-related travel,
promotional work, lodging, and entertainment for customers, suppliers, and
employees. The monthly rental payment for this property was $7,000. The Company
paid total rents of $56,000 and $84,000 for the years ending December 31, 1998
and 1997, respectively. This cost also covered operating and maintenance costs,
and general care of the property. In August 1998, this property was sold by Mr.
Wood. As a result, the Company is no longer obligated to pay rental fees.
In July 1998, the Company's Board of Directors commenced an internal
investigation into the facts and circumstances of a number of transactions
between the Company and certain of its officers and directors as well as several
general corporate and management concerns brought to the attention of the
Company's independent directors. The Company engaged an unrelated third party to
conduct the investigation, which the Company eventually terminated in January
1999. Thereafter, the Company's former Chairman and CEO resigned and retired
from the Company. The Company does not anticipate taking further action, legal
or otherwise, with respect to the matters and individuals investigated, although
the Company, through its new management, has identified several areas in which
new corporate governance policies have been adopted or old policies changed. In
connection with the ongoing investigation, several of the Company's directors
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engaged independent legal counsel. An aggregate of $230,000 of such legal fees
were reimbursed by the Company pursuant to action by the Company's Board of
Directors at the commencement of the investigation.
During 1997 the Board of Directors authorized grants of various
options under both non-qualified and incentive stock options plans. These
options are described in detail in Note 14 to the accompanying financial
statements for the years ended December 31, 1998 and 1997. The non-qualified
plans included 537,500 options granted to Muito Bem Ltd., an entity controlled
by a shareholder and former CEO of the Company, at an exercise price of $2.50
per share. The shareholder and former executive officer of the Company who owns
Muito Bem agreed in 1999 to cancel all stock options issued to Muito Bem.
Additionally, in 1997, 200,000 options were granted to WAC, at an exercise price
of $2.50 per share in consideration for certain royalty reductions and
abatements.
In May 1989, the Company engaged Alpha Tech Stock Transfer Company
("Alpha Tech") as the Company's stock transfer agent. Alpha Tech served in that
capacity until January 13, 1999, when the Company notified Alpha Tech of the
Company's termination of Alpha Tech's agency and instructed Alpha Tech to
transfer the Company's records to American Stock Transfer Company, New York, New
York. James W. Farrell, the principal of Alpha Tech, is the brother-in-law of
Donald M. Wood, the Company's Chairman and Chief Executive Officer until his
resignation from the Company effective January 14, 1999. During the years ended
December 31, 1998 and 1997, the Company paid Alpha Tech a total of $1,530 and
$16,679, respectively, in fees for services rendered. The Company believes that
the fees paid to Alpha Tech during these periods were roughly comparable to the
fees it would have paid to a similar local transfer agent for similar services.
DESCRIPTION OF SECURITIES
The following descriptions are qualified in their entirety by
reference to the detailed provisions of the Company's articles of incorporation
and bylaws, and the instruments and agreements relating to the offer and sale of
such instruments, copies of which have been filed as exhibits to the
registration statement of which this Prospectus forms a part.
Common Stock
The Company's authorized capital stock consists of 100,000,000 shares
of common stock, par value $.01 per share. As of the date of this Prospectus,
there are 3,391,627 shares issued and outstanding. Holders of the common stock
are entitled to one vote for each share held of record on matters submitted to a
vote of stockholders. Each share of stock is entitled to share pro rata in
dividends and distributions with respect to the shares when, as and if declared
by the Company's Board of Directors from funds legally available therefor.
The articles of incorporation of the Company do not grant any
shareholder of the Company preemptive rights to subscribe for any of the
Company's securities. Upon dissolution, liquidation or winding up of the
Company, the assets will be divided pro rata on a share-for-share basis among
the holders of the common stock, subject to the rights of creditors. The
outstanding shares of the Company's common stock are fully paid and
non-assessable.
The shareholders of the Company are not entitled to cumulative voting
in the election of directors. Accordingly, the holders of more than 50% of the
shares voting for the election of directors can elect all of the directors if
they choose to do so; in such event, the holders of the remaining shares voting
for the election of the directors will be unable to elect any person or persons
to the Board of Directors.
The Board of Directors has authority to issue the authorized but
unissued shares of common stock without action by the shareholders. Future
issuance of shares, whether by exercise of outstanding options, warrants or
conversion rights or otherwise, would reduce the percentage ownership held by
existing shareholders, including persons purchasing the shares.
The Company has also issued several instruments and agreements that
require issuance of shares of its common stock upon occurrence of certain events
or in accordance with the terms of such instruments and agreements. The exercise
of such rights would result in immediate and substantial dilution to existing
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shareholders and, because the maximum number of shares is determined by
fluctuations in the market price of the Company's common stock as reported by
the Nasdaq SmallCap Stock Market, such dilution may result in an effective
change in control of the Company and depression of the market price of the
Company's securities.
Convertible Debentures
On May 22, 1998, the Company issued Convertible Debentures in face
amount of $1,500,000 to the Investors pursuant to the terms of the Credit
Agreement. The Company has agreed to issue and will receive payment for
additional Convertible Debentures in face amount of $500,000 within five days of
the effective date of the registration statement of which this Prospectus is a
part. The Convertible Debentures have a three-year term and no cash interest or
cash premium is payable by the Company with respect to the Convertible
Debentures, provided a conversion is elected by the holder of the Convertible
Debenture within the three-year life of the Convertible Debentures. The
Convertible Debentures may be converted, at the option of the holder thereof,
into shares of common stock. The number of shares issuable upon conversion of
the Convertible Debentures is determined by dividing the principal amount of
the Convertible Debenture being converted, together with interest thereon
accrued at the rate of 12% per annum from the date of issuance and through the
effective date of the registration statement of which this Prospectus forms a
part and at the rate of 6% thereafter through the date of conversion, by a
conversion price. The conversion price is calculated as the lesser of
(1) 75% of the average of the three lowest closing bid prices of the Company's
common stock as reported by the Bloomberg LP during the 10 trading days
immediately preceding the Conversion Date (the "Lookback Period"), or
(2) 100% of the closing bid price on the trading day immediately preceding
the date of issuance of the Debenture. Convertible Debentures in the
principal amount of $1,500,000 carry a conversion price under alternative
(2) above of $6.50 per share. If a Convertible Debenture remains outstanding
on the first day of the fifth month after the date of issuance of the
Debenture, the Lookback Period will be increased by two trading days (to a
total of 12), and will continue to be increased by two trading days for each
month thereafter that the Convertible Debenture remains outstanding, until
such time, if any, as the Lookback Period is 22 trading days. With respect to
the $1,500,000 principal amount of Convertible Debentures issued May 22, 1998,
the currently applicable lookback period is 22 days.
The Warrants
On May 22, 1998, the Company issued Warrants in connection with the
closing of the Credit Agreement. The A Warrants granted allow the holders
thereof the right to acquire 300,000 shares of common stock at $6.50 per share
(the market price of the common stock on the date of grant). The B Warrants
entitle the holders thereof to purchase 450,000 shares of common stock at $7.15
per share. Within 5 days of the effective date of the registration statement of
which this Prospectus is a part, the Company will receive payment of
approximately $500,000 for a Convertible Debenture or Convertible Debentures in
the same principal amount. The Company will also issue additional A Warrants for
the purchase of 100,000 shares of common stock. All of the Warrants have a
three-year term. Holders of the Warrants have no rights as shareholders (such as
the right to vote for directors of the Company) until such time, if any, as the
Warrants and the Convertible Debentures have been exercised and/or converted to
common stock.
The Line of Credit
On May 21, 1998, the Company entered into the Credit Agreement with
the Investors. Under the terms of the Credit Agreement, the Investors agreed to
acquire the Convertible Debentures and the Warrants and covenanted to advance up
to $10,000,000 in cash to the Company during a period of two years under the
Equity Line of Credit, for which they would receive shares of the Company's
commonstock (i.e., the Line of Credit Shares). The two-year period covered
by the Equity Line of Credit commences with the effective date of the
registration statement of which this Prospectus is a part. At a minimum,
the Company is required under the Credit Agreement to exercise the put feature
as to $1,000,000 under the Equity Line of Credit. The number of shares to be
issued upon receipt of funds under the Equity Line of Credit is calculated with
reference to 80% of the average of the lowest closing bid prices of Dynatec
common stock during the six trading days ("Valuation Period") beginning three
days immediately preceding and ending on the second trading day after the
date on which a notice ("Put Notice") is given by the Company to the Investors
requiring them to purchase shares under the Equity Line of Credit. The Company
may deliver numerous Put Notices, to the maximum amount indicated. In
addition, the principal amount under the Credit Agreement that may be the
subject of a particular Put Notice is limited by changes in the Company's share
price and trading volume. Generally speaking, the higher the trading price
and the greater the volume of trading in the Company's common stock for the 30
days preceding the date of the Put Notice, the larger the principal sum subject
to the Put Notice. These variables make it difficult to predict precisely at
any time the maximum number of shares of common stock that may be issuable
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under the Equity Line of Credit. In addition to the Line of Credit Shares, the
Company is obligated to issue to the Placement Agents 6,000 shares of common
stock for each $1,000,000 in principal paid under the Credit Agreement. The
following table illustrates the calculation of amounts that may be put to the
Investors and the number of shares to be issued in each such put under the Line
of Credit, based on a range of prices for the Company's common stock as of the
date any funding may occur.
<TABLE>
<CAPTION>
30-day Avg. Daily 30-day Avg. Daily 30-day Avg. Daily 30-day Avg. Daily
Trading Volume Trading Volume Trading Value Trading Value
Closing Price 7,500 B 25,000 25,001 B 50,000 50,001 B 75,000 75,001 +
------------- --------------- --------------- --------------- --------
<S> <C> <C> <C> <C>
$3.00 B $6.00 $ 600,000 $ 750,000 $1,000,000 $1,250,000
$6.01 B $8.00 $ 750,000 $1,000,000 $1,250,000 $1,500,000
$8.01 B $10.00 $1,000,000 $1,250,000 $1,500,000 $1,750,000
$10.01 B $12.00 $1,250,000 $1,500,000 $1,750,000 $2,000,000
$12.01 B $14.00 $1,500,000 $1,750,000 $2,000,000 $2,250,000
$14.01 + $1,750,000 $2,000,000 $2,250,000 $2,500,000
</TABLE>
Utah Corporation Law Affecting Change of Control Transactions
The Company was organized under Utah law and conducts the majority of
its business from its corporate offices located in Utah. The Utah Control Shares
Acquisition Act ("Control Shares Act") provides that any person or entity that
acquires 20% or more of the outstanding voting shares of a publicly-held Utah
corporation in the secondary public or private market may be denied voting
rights with respect to the acquired shares, unless a majority of the
disinterested shareholders of the corporation elects to restore such voting
rights in whole or in part. The Control Share Acquisition Act provides that a
person or entity acquires "control shares" whenever it acquires shares that, but
for the operation of the Control Share Acquisition Act, would bring its voting
power within any of the following three ranges: (i) 20 to 331/3%, (ii) 331/3 to
50%, or (iii) more than 50%. A "control share acquisition" is generally defined
as the direct or indirect acquisition of either ownership or voting power
associated with issued and outstanding control shares. The shareholders or board
of directors of a corporation may elect to exempt the stock of the corporation
from the provisions of the Control Share Acquisition Act through adoption of a
provision to that effect in the articles of incorporation or bylaws of the
corporation. The Company's articles of incorporation and bylaws do not exempt
the Company's common stock from the Control Share Acquisition Act.
The provisions of the Control Share Acquisition Act may discourage
companies or persons interested in acquiring a significant interest in or
control of the Company, regardless of whether such acquisition may be in the
interest of the Company's shareholders.
Registration Rights
The Selling Shareholders' shares have been registered for offer and
sale by such shareholders pursuant to this Prospectus under the terms of certain
registration rights granted to the Selling Shareholders. Such rights are
contained in agreements entered into by the Company and the Selling
Shareholders. The existence and/or the exercise of these rights could adversely
affect the market price of the Company's Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
Transfer Agent
The transfer agent and registrar for the Company is American Stock
Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Line of Credit Shares, Debenture Shares and Warrant Shares will
be issued to the Selling Shareholders at prices determined at the time the
agreements relating to such securities were entered into with these investors.
All of these underlying shares may be sold in future by and for the account of
the Selling Shareholders as discussed below. The Convertible Debentures,
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Warrants and Agency Shares were originally issued in connection with private
transactions pursuant to exemptions from the registration provisions of the
securities laws of the United States. Shares issued upon exercise of the
conversion rights under the Convertible Debentures and upon exercise of the
Warrants will also be issued pursuant to exemptions from registration under the
Securities Act. At such time as the registration statement of which this
Prospectus forms a part has been declared effective by the SEC and thereafter
for so long as the registration statement will continue effective, the Selling
Shareholders may offer and sell the shares to the public or otherwise at such
times and in such amounts as they may respectively determine in their sole
discretion. The Company has been advised by the Selling Shareholders that they
may sell the shares or that the shares may be sold on their behalf through one
or more broker-dealers or underwriters or directly to investors pursuant to this
Prospectus or in transactions that are exempt from the requirements of
registration under the Securities Act. As of the date hereof, none of the
Selling Shareholders has advised the Company that it has entered into any
agreement or understanding with any broker-dealer for the offer or sale of any
of the shares. The Selling Shareholders may enter into such agreements or
understandings in the future. Such brokers may act as dealers by purchasing any
or all of the shares covered by the Prospectus.
The Selling Shareholders and any broker-dealer who may act in
connection with the sale of the shares hereunder may be deemed to be
"underwriters" as that term is defined in Section 2(11) of the Securities Act,
as amended. Under the Exchange Act and the regulations promulgated thereunder,
persons (including the Selling Shareholders) deemed to be underwriters and
engaged in a distribution of the shares offered hereby may not simultaneously
engage in market making activities with respect to the common stock of the
Company during the applicable "cooling off" periods prior to the commencement of
such distribution. In addition, and without limiting the foregoing, the Selling
Shareholders, by virtue of their distribution of the shares, may be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of common stock of the Company by the
Selling Shareholders. Regulation M contains certain limitations and prohibitions
intended to prevent issuers and selling security holders and other participants
in a distribution of securities from conditioning the market through
manipulative or deceptive devices to facilitate the distribution. Offers and
sales of the shares may also be made into markets outside the United States.
The Selling Shareholders may offer the shares through market
transactions at prices prevailing in the Nasdaq SmallCap Stock market or at
negotiated prices, which may be fixed or variable and which may differ
substantially from reported market prices. Moreover, the Selling Shareholders
may receive cash or other forms of consideration in exchange for the shares. The
Selling Shareholders have not advised the Company that they anticipate paying
any consideration, other than usual and customary brokers' commissions, in
connection with sales of the shares. The Selling Shareholders are acting
independently of the Company in making such decisions with respect to the
timing, manner and size of each sale.
The Company will bear the cost of registration of the shares with
state and federal agencies. These costs, which include professional (legal and
accounting) fees, transfer agents' fees, printing and engraving costs, and
filing and listing fees, are estimated to be approximately $200,000. The Company
will not pay any commission or finders fees in connection with the sale of
shares by the Selling Shareholders.
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
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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 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.
LEGAL MATTERS
The validity of the securities offered hereby and other legal matters
relative to this offering have been passed upon for the Company by Julian D.
Jensen and Bruce L. Dibb of 311 South State Street, Suite 380, Salt Lake City,
Utah 84111.
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<PAGE>
EXPERTS
The financial statements of the Company as of and for the years ended
December 31, 1997 and December 31, 1998 included in the Prospectus have been
included in the Prospectus in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and as indicated in
their report, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 16-10a-902 (Section 902) of the Utah Revised Business
Corporation Act ("URBCA") and Article X of the Company's its Bylaws contain
provisions for indemnification of the officers, directors, employees and agents
of the Company. The Bylaws require the Company to indemnify such persons to
the full extent permitted by Utah law. Section 902 provides that a corporation
may indemnify any individual who was, is, or is threatened to be made a
named defendant or respondent ("Party") in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative and whether formal or informal (a "Proceeding") because he
is or was a director of the corporation or is or was serving at its request as
a director, officer, partner, trustee, employee, fiduciary or agent of another
corporation or other person or of an employee benefit plan (an "Indemnified
Director"), against any obligation incurred with respect to a Proceeding,
including any judgment, settlement, penalty, fine or reasonable expenses
(including attorneys' fees) incurred in the Proceeding if his conduct was in
good faith, he reasonably believed that his conduct was in, or not opposed to,
the best interests of the corporation, and, in the case of any criminal
Proceeding, he had no reasonable cause to believe his conduct was unlawful;
except that (1) indemnification under Section 902 in connection with a
Proceeding by or in the right of the corporation is limited to payment of
reasonable expenses (including attorneys' fees) incurred in connection
with the Proceeding and (2) the corporation may not indemnify a director in
connection with a Proceeding by or in the right of the corporation in which
the director is adjudged liable to the corporation, or in connection with any
other Proceeding charging that the director derived an improper
personal benefit, whether or not involving any action in his official capacity,
in which Proceeding he was adjudged liable on the basis that he derived an
improper personal benefit.
Section 16-10a-903 (Section 903) of the URBCA provides that, unless
limited by its articles of incorporation, a corporation shall indemnify a
director who was successful, on the merits or otherwise, in the defense of any
Proceeding or in the defense of any claim, issue or matter in the proceeding, to
which he was a party because he is or was a director of the corporation, against
reasonable expenses (including attorneys' fees) incurred by him in connection
with the Proceeding or claim with respect to which he has been successful.
In addition to the indemnification provisions of Sections 902 and
903, Section 16-10a-905 (Section 905), provides that, unless otherwise limited
by a corporation's articles of incorporation, a director may apply for
indemnification to the court conducting the Proceeding or to another court of
competent jurisdiction. The court may, in its discretion in such cases, (1)
order mandatory indemnification under Section 903, in which case the court shall
also order the corporation to pay the director's reasonable expenses incurred to
obtain court-ordered indemnification, or (2) upon the court's determination that
the director is fairly and reasonably entitled to indemnification in view of all
the relevant circumstances and regardless of whether the director met the
applicable standard of conduct set forth in Section 902, the court may order
indemnification as the court determines to be proper, except that
indemnification with respect to certain Proceedings resulting in a director
being found liable for certain actions against the corporation may be limited to
reasonable expenses incorrect by the director.
Section 16-10a-904 (Section 904) of the URBCA provides that a
corporation may pay for or reimburse reasonable expenses (including attorneys'
fees) incurred by a director who is a Party to a Proceeding in advance of the
final disposition of the Proceeding if (1) the director furnishes the
corporation a written affirmation of his good faith belief that he has met the
applicable standard of conduct described in Section 902; (2) the director
furnishes to the corporation a written undertaking executed personally or in his
behalf, to repay the advance if it is ultimately determined that he did not meet
the required standard of conduct, and (3) a determination is made that the facts
then known to those making the determination would not preclude indemnification
under Section 904.
Section 16-10a-907 of the URBCA states that unless a corporation's
articles of incorporation provide otherwise (a) an officer of the corporation is
entitled to mandatory indemnification and is entitled to apply for court ordered
Page 42
<PAGE>
indemnification, in each case to the same extent as a director (2) the
corporation may indemnify and advance expenses to an officer, employee,
fiduciary or agent of the corporation to the same extent as a director (iii) a
corporation may also indemnify and advance expenses to an officer, employee,
fiduciary or agent who is not a director to a greater extent than the right of
indemnification with claims or liability arising out of director or officers'
own negligence or willful misconduct.
The Company may also purchase and maintain insurance on behalf of
present and past directors or officers insuring against any liability asserted
against such person incurred in the capacity of director or officer or arising
out of such status, whether or not the Company would have the power to indemnify
such person.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, or persons controlling
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
In late 1997, the Company decided to engage a larger, international
auditing firm in place of Jones, Jensen & Company. In December 1997, KPMG LLP
became engaged as the Company's new auditing firm. The Company had no
disagreements with Jones, Jensen & Co. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure
The decision to engage KPMG LLP as the Company's independent auditors
was approved by the unanimous consent of the Company's board of directors.
During the years ended December 31, 1998 and 1997, there were no
other reportable events (as referenced in Item 304(a)(1)(iv) of Regulation S-B).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information statements filed by the Company may be inspected and copied at the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission Regional Offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials may also be obtained upon written request from the Commission's Public
Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a Web Site at http://www.sec.gov which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The common
stock of the Company is traded on The Nasdaq SmallCap Market and reports, proxy
statements and other information concerning the Company may be inspected at The
Nasdaq SmallCap Market, 1735 K Street, N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on
Form SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the shares of
its common stock being offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the common stock, reference
is hereby made to the Registration Statement, including the exhibits which are a
part thereof, which may be obtained upon request to the Commission and the
payment of the prescribed fee. Material contained in the Registration Statement
Page 43
<PAGE>
may be examined at the Commission's Washington, D.C. office and copies may be
obtained at the Commission's Washington, D.C. office upon payment of prescribed
fees. Statements in the Prospectus are not necessarily complete, and in each
case reference is made to the copy of such contracts or documents filed as an
exhibit to the Registration Statement, each such statement being qualified by
this reference.
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Independent Auditor's Report of KPMG LLP................................F-1
Dynatec International, Inc. and Subsidiaries Consolidated Balance Sheets
As of December 31, 1998 and 1997........................................F-2
Dynatec International, Inc. and Subsidiaries Consolidated Statements Of
Operations For the Years Ended December 31, 1998 and 1997...............F-4
Dynatec International, Inc. and Subsidiaries
Consolidated Statements Of Stockholders' Equity.........................F-5
Dynatec International, Inc. and Subsidiaries Consolidated Statements Of
Cash Flows For the Years Ended December 31, 1998 and 1997...............F-6
Notes To Consolidated Financial Statements..............................F-8
Unaudited Interim Financial Statements
Dynatec International, Inc. and Subsidiaries Condensed Consolidated
Balance Sheets As of March 31, 1999 and December 31, 1998..............F-27
Dynatec International, Inc. and Subsidiaries Condensed Consolidated
Statements Of Operations For the Three Month Periods Ended March 31, 1999
and 1998...............................................................F-29
Dynatec International, Inc. and Subsidiaries Condensed Consolidated
Statements Of Cash Flows For the Three Month Periods Ended March 31, 1999
and 1998...............................................................F-30
Notes to Consolidated Financial Statements.............................F-32
Page 44
<PAGE>
Independent Auditors' Report of KPMG LLP
The Board of Directors
Dynatec International, Inc.:
We have audited the accompanying consolidated balance sheets of Dynatec
International, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years 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 audits.
We conducted our audits 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 included
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
- -----------------------
KPMG LLP
Salt Lake City, Utah
February 19, 1999, except as to
Note 15, which is as of
March 19, 1999
Page F-1
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------------- --------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ $
2,268 332,894
Trade accounts receivable, net of allowance for doubtful accounts of $30,190
and $29,684, respectively 2,229,157 1,549,888
Accounts receivable - other 110 426,131
Inventories (see Note 3) 4,857,241 2,522,149
Prepaid expenses and other 316,347 261,312
-------------- --------------
Total current assets 7,405,123 5,092,374
-------------- --------------
LAND, BUILDING AND EQUIPMENT, at cost:
Land 365,860 365,860
Building and improvements 2,214,144 2,214,144
Furniture, fixtures and equipment 3,554,045 3,289,886
-------------- --------------
6,134,049 5,869,890
Less accumulated depreciation and amortization 2,336,427 1,928,303
-------------- --------------
Net land, building and equipment 3,797,622 3,941,587
-------------- --------------
TRADEMARKS AND OTHER INTANGIBLES, net (see Note 4) 205,102 267,825
-------------- --------------
DEFERRED LOAN COSTS, net of accumulated amortization of $4,903 and
$-0-, respectively (see Note 2) 61,743 -
-------------- --------------
OTHER ASSETS 69,337 107,631
-------------- --------------
$11,538,927 $9,409,417
============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
Page F-2
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------------- ---------------
CURRENT LIABILITIES:
<S> <C> <C>
Short-term note payable (see Note 5) $ 1,389,223 $ 1,331,169
Convertible debentures (see Note 8) 1,667,079 -
Current portion of long-term debt (see Note 6) 246,855 1,003,477
Current portion of capital lease obligations (see Note 7) 17,881 15,699
Accounts payable 1,518,316 1,077,631
Accounts payable - other 9,000 -
Accounts payable-related party (see Note 12) 98,403 -
Accrued expenses 637,051 238,121
Accrued advertising 320,000 350,000
Accrued royalties payable 70,246 17,882
---------------- ----------------
Total current liabilities 5,974,054 4,033,979
LONG-TERM DEBT, net of current portion (see Note 6) 2,006,518 1,994,355
DEPOSIT FOR STOCK ISSUANCE (see Note 12) 1,000,000 -
DEFERRED INCOME TAXES (see Note 9) - 5,036
CAPITAL LEASE OBLIGATIONS, net of current portion (see Note 7) 28,654 46,086
---------------- ----------------
Total liabilities 9,009,226 6,079,457
---------------- ----------------
STOCKHOLDERS' EQUITY (see Note 10):
Common stock, $.01 par value; 100,000,000 shares authorized and 2,891,627 and
2,859,940 shares outstanding, respectively 28,916 28,599
Treasury stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 7,041,690 5,596,840
Accumulated deficit (3,625,755) (1,380,329)
---------------- ----------------
Total stockholders' equity 2,529,701 3,329,960
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (see Note 7, 8, 14, 15 and 17)
$ 11,538,927 $ 9,409,417
================ ================
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these consolidated
balance sheets.
Page F-3
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
PRODUCT SALES $ 16,578,694 $ 14,566,079
COST OF SALES 10,973,161 10,174,205
-------------- ----------------
Gross Margin 5,605,533 4,391,874
-------------- ----------------
OPERATING COSTS AND EXPENSES:
Selling expenses 2,874,259 2,378,547
Research and development 143,088 508,314
General and administrative 3,028,682 1,729,639
-------------- ----------------
Total operating costs and expenses 6,046,029 4,616,500
-------------- ----------------
Loss from operations (440,496) (224,626)
-------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (see Note 8) (1,773,079) (427,392)
Interest income 3,340 9,417
Other expense (20,192) -
Other income - 295,023
-------------- ----------------
Total other expense, net (1,789,931) (122,952)
-------------- ----------------
Loss before income tax provision (2,230,427) (347,578)
INCOME TAX PROVISION (see Note 9) (15,000) (61,594)
-------------- ----------------
Net loss $ (2,245,427) $ (409,172)
============== ================
BASIC AND DILUTED NET LOSS PER SHARE (see Note 2) $ (.80) $ (.18)
============= ================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 2,792,738 2,284,419
============= ================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
Page F-4
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------
Number of Treasury Stock Additional Accumulated
Shares Amount at Cost Paid-in Capital Deficit
------ ------ ------- --------------- -------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 1,974,104 $ 19,741 $ - $ 3,595,699 $ (971,156)
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 employee 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 $(1,380,328)
Shares issued pursuant to employee stock
option plans 11,687 - (117) -
117
Issuance of convertible debentures and
equity line-of-credit (see Note 8) 20,000 200 - 864,967 -
Capital addition (see Note 10) - - - 580,000 -
Net loss - - - - (2,245,427)
------------------------------------------------------------------ -----------
BALANCE DECEMBER 31, 1998 2,891,627 $ 28,916 $ (915,150) $ 7,041,690 $(3,625,755)
========= ======== =========== =========== ============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
Page F-5
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (2,245,427) $ (409,172)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 504,991 461,231
Amortization of deferred loan costs 97,415
Non-cash charges on issuance of convertible - -
debentures (see Note 8) 1,004,996 -
Loss (gain) on sale of assets 20,192 (90,829)
Changes in assets and liabilities:
Accounts receivable - trade (679,269) (424,138)
Accounts receivable - other 426,021 80,325
Inventories (2,335,092) (1,337,963)
Prepaid expenses and other (16,741) (139,239)
Accounts payable 525,684 537,488
Accounts payable - other 22,403 (11,575)
Accrued expenses 558,136 146,182
Accrued advertising (30,000) 45,500
Accrued royalties 52,365 (48,325)
Income tax payable 15,000 (500)
---------------- -------------
Net cash used in operating activities (2,079,326) (1,191,015)
---------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets 63,706 6,007
Receivable from related parties - (30,000)
Purchase of property and equipment (394,365) (587,187)
---------------- -------------
Net cash used in investing activities (330,659) (611,180)
---------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 58,054 108,447
Debt issuance costs (298,986) 3,906
Net payments on long-term debt (744,459) (190,635)
Principal payments on capital lease obligations (15,250) (36,774)
Proceeds from capital addition (see Note 10) 580,000 -
Proceeds from convertible debenture offering (see Note 8) 1,500,000 -
Proceeds from issuance of stock pursuant to Incentive Stock Option Plan - 10,000
Proceeds from deposit for stock issuance (see Note 10) 1,000,000 -
Proceeds from stock sold pursuant to Regulation S offering - 2,000,000
---------------- -------------
-
Net cash provided by financing activities 2,079,359 1,894,944
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (330,626) 92,749
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 332,894 240,145
---------------- -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,268 $ 332,894
================ =============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
Page F-6
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Cash paid for interest $ 685,573 $ 346,648
=============== ============
Cash paid for income taxes $ - $ 500
=============== ============
Debt issuance costs attributable to warrants to placement agent $ 385,062 $ -
=============== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
Page F-7
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
Nordic was incorporated as a wholly-owned subsidiary of the Company in the
State of Utah on October 25, 1996. Effective December 1, 1996, Nordic and the
Company entered into an agreement with unrelated parties to acquire certain
assets and assume certain related liabilities in exchange for 550,000 shares of
common stock of the Company at $1.60 per share for a total of $880.000. This
acquisition has been accounted for using the purchase method. No goodwill was
recognized and there were no other contingent payments or options.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Effective January 1, 1998, the Company changed its method of
determining the value of inventory from last-in, first-out (LIFO) to first-in,
first-out (FIFO). Historically, the difference between the LIFO and FIFO values
of inventories has been immaterial. Accordingly, the accompanying financial
statements for the years ended December 31, 1997 and 1996 have not been restated
for the change.
Page F-8
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Depreciation on Property and Equipment is computed on the straight-line
method over the following useful lives: 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 and Show Booths 5-7 years
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.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount of fair value less costs to sell.
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. Other intangible
assets such as covenants not to compete are not significant and are being
amortized using the straight-lined method over five years.
Deferred Loan Costs
Deferred loan costs totaling $61,743 resulted from issuance costs related
to the Company's revolving credit facility, and are being amortized as interest
expense over thirty-six months (see Note 5).
Revenue Recognition
The Company recognizes revenue from product sales at the time of
shipment. The Company has established programs, which under specified conditions
enable its customers to return product. The effect of these programs is
estimated and current period sales and cost of sales are reduced accordingly.
Page F-9
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
The Company uses 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.
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, 1998, one customer accounted for 19.6%
and no other customer accounted for more than 10% of the Company's total
revenues.
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 Loss Per Common Share
Basic net loss per common share is calculated based upon the weighted
average number of common shares outstanding during the periods presented. In
calculating net loss per share for the years ended December 31, 1998, and 1997,
warrants and options to purchase 606,145, and 555,062 potential common shares,
respectively, are not included in the computation of diluted net loss per common
share as their effect would have been anti-dilutive, thereby decreasing the net
loss per common share.
A reconciliation between the basic and diluted weighted-average number
of shares outstanding as of December 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Basic weighted average number of common shares................... 2,792,738 2,284,419
Weighted average number of common stock options.................. - -
--------------- -------------
Diluted weighted average number of shares................. 2,792,738 2,284,419
=============== =============
</TABLE>
Page F-10
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Standards
During the year ended December 31, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires an "all-inclusive" income statement approach
which specifies that all revenues, expenses, gains and losses recognized during
the period be reported in income, regardless of whether they are considered to
be results of operations of the period. The adoption of SFAS No. 130 had no
material impact on the Company's financial statement presentation, as the
Company had no items of comprehensive income as defined by SFAS No. 130.
Advertising
Advertising costs are expensed as incurred. The Company does not
participate in direct response advertising. Advertising expense amounted to
$531,949 and $404,426 in 1998 and 1997, respectively.
Reclassifications
Certain reclassifications have been made in the prior period's
consolidated financial statements to conform with the current year presentation.
(3) 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 December 31, 1998 and December 31, 1997, respectively, are summarized as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Raw materials............................ $902,703 $ 671,883
Work-in-Process.......................... 309,815 159,600
Finished Goods........................... 3,644,723 1,690,666
----------------- -----------------
$4,857,241 $2,522,149
================= =================
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets are comprised of the following as of December 31, 1998 and
1997 and are amortized on a straight-line basis over their estimated useful
lives.
Page F-11
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(4) INTANGIBLE ASSETS (Continued)
<TABLE>
<CAPTION>
Est. Useful
1998 1997 Life (years)
---- ---- ------------
<S> <C> <C> <C>
License agreement $203,509 $203,509 40
Product rights 301,263 301,263 5-10
Non-compete agreements 87,500 87,500 5
-------- --------
592,272 592,272
Less accumulated amortization 387,170 324,447
-------- --------
$205,102 $267,825
======== ========
</TABLE>
(5) SHORT-TERM NOTE PAYABLE
The short-term note payable consists of a revolving line-of-credit
obtained on May 27, 1998 from a regional financial institution that provides up
to $5,000,000 bearing interest at a rate of prime plus one percent with interest
payable monthly. The note is secured by accounts receivable and inventory and is
due May 26, 2001. As of December 31, 1998 and 1997, direct outstanding
borrowings totaled $1,389,223 and $1,331,169, respectively. Direct outstanding
borrowings as of December 31, 1997 were under a revolving credit line terminated
in 1998 and replaced by the Company's current credit line. The amount of unused
borrowings under the Company's credit facility is limited to the then-current
levels of inventory and receivables. 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 December 31, 1998 the
Company was in default of certain of these covenants, however, the Company has
obtained a waiver. The Company and the lending institution have negotiated an
amendment to the agreement which amended the terms of certain of the financial
covenants and ratios for 1999. As a result of the net loss incurred in 1998, the
pricing of the credit facility was increased to a rate of prime plus three
percent, with interest payable monthly.
Maximum and average borrowings as well as weighted average interest
rate for the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Maximum Outstanding $ 2,416,638 $ 1,471,802
Average Outstanding $ 1,780,576 $ 1,127,635
Weighted Average Interest Rate 8.25% 9.91%
</TABLE>
(6) LONG -TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revolving line-of-credit up to $1,000,000 payable to a bank; interest
at prime plus 1% and terminated May 1, 1998;
secured by equipment $ - $ 564,816
Term Note payable to a bank, interest at prime plus 1%, due May 26,
2001, secured by equipment 266,175 -
Page F-12
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(6) LONG -TERM DEBT (Continued)
Note payable to a company; due in annual
installments of $79,560 plus interest at 7%;
due December 31, 1999, unsecured - 195,991
Note payable to a company; due in monthly
installments of $6,807 plus interest at 6%;
due October 31, 2000, unsecured 149,755 -
Note payable to a financial institution; due in monthly installments of
$455 with interest at 8.75%, due November 29, 2001,
secured by a vehicle 13,976 17,992
Note payable to a company; due in monthly installments of $1,160 plus
accrued interest at 7.9%, due November 30, 2002,
secured by equipment - 70,800
Note payable to a bank; due in monthly installments of $10,234 with
interest at 8.75%, due November 1, 2010, secured by
land and building 882,782 1,182,158
Note payable to the Small Business Administration; due in monthly
installments of $8,541 with interest at 7.32%; due August 14, 2016,
secured by land and building as well as
assets of a former officer of the Company 940,685 966,075
------------ ------------
Total Long-term debt 2,253,373 2,997,832
Less current portion 246,855 1,003,477
------------ ------------
Total Long-term debt excluding current portion $ 2,006,518 $ 1,994,355
============ ============
</TABLE>
Aggregate maturities for each of the five years subsequent to December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ 246,855
2000 222,440
2001 164,107
2002 107,636
2003 96,989
Later 1,415,346
-----------
Total Long-term debt $ 2,253,373
===========
</TABLE>
Page F-13
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(7) LEASES
The following represents assets under capital lease at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Equipment $82,357 $82,357
Less accumulated depreciation 33,704 19,409
------- -------
Net property under capital lease $48,653 $62,948
======= =======
</TABLE>
Amortization of assets held under capital lease is included with
depreciation expense. Rental expense for operating leases during the years ended
December 31, 1998 and 1997 was $21,407 and $28,007, respectively.
At December 31, 1998 the Company is obligated under the terms of
non-cancelable leases for the following minimum lease commitments:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
Year ended December 31: 1999 $17,882 $20,659
2000 12,958 18,136
2001 15,695 6,960
------ -------
Total minimum lease payments $46,535 $45,755
=======
Less current portion 17,881
-------
Capital Lease obligations excluding
current portion $28,654
=======
</TABLE>
(8) 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) $6.50. Assuming a hypothetical conversion of the
entire principal amount of the Convertible Debentures outstanding as of
March 26, 1999, and all interest accrued thereon at the rate of 12% per
annum as of March 26, 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. 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
Page F-14
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(8) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
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 has been written off 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 is being
amortized over the 36 month life of the Convertible Debentures. 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.
These non-cash charges for the market value of the warrants are
included with interest expense in the consolidated statements of operations for
the year ended December 31, 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 of the purchase price of
the outstanding Convertible Debentures for the first 30-day period beyond the
original 90 days and three percent of the purchase price of the then outstanding
securities (pro rated on a daily basis) for each 30-day period thereafter. As of
March 15, 1999, the registration statement had not yet become effective. As a
result the Company has paid $165,000, and accrued $45,000, in liquidated
damages.
Page F-15
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(9) INCOME TAXES
Income tax expense (benefit) attributable to income from continuing
operations consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1998
Federal $ 19,386 $ (4,386) $ 15,000
State 650 (650) -
---------- ----------- ----------
$ 20,036 $ (5,036) $ 15,000
========== =========== ==========
Year ended December 31, 1997
Federal $ - $ 53,694 $ 53,694
State - 7,900 7,900
---------- ----------- ---------
$ - $ 61,594 $ 61,594
========== =========== =========
</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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Computed "expected" tax benefit $ (983,952) $(118,177)
Change in the valuation allowance for deferred tax
assets allocated to income tax expense 269,952 177,961
Non-deductible financing costs 682,733 -
Other 46,267 1,810
----------- ----------
Total $ 15,000 $ 61,594
=========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997, are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory capitalization $ 60,041 $ 165,343
Allowance for bad debts 11,261 11,072
Compensated absences accrued for financial
reporting purposes 25,784 14,377
Net operating loss carry-forward 649,945 290,216
Intangibles, principally due to differences in
Amortization 17,701 5,273
Warranty reserve 8,837 -
Research and experimentation credit 25,000 -
--------- ---------
-
Total gross deferred tax assets 798,569 486,281
Less valuation allowance 756,233 486,281
--------- ---------
Total deferred tax assets 42,336 -0-
Page F-16
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(9) INCOME TAXES (Continued)
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation 42,336 (5,036)
--------- ----------
Total gross deferred tax liabilities 42,336 (5,036)
========= ==========
Net deferred tax assets (liabilities) $ - $ (5,036)
========= ==========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997
was -0-. The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was $269,952 and $177,961, respectively.
The Company has $1,742,481 of net operating loss carryforwards at
December 31, 1998. Of the total net operating loss carryforwards, $525,792,
$490,219 and $726,470 expire in the years ended December 31, 2011, 2012 and
2018, respectively.
(10) STOCKHOLDERS' EQUITY
On March 11, 1997, the Company's Board of Directors approved Regulation
S offerings of its common stock to raise three to five million dollars in
working capital. The stock was offered to non U.S. persons at a price of
approximately 50% of the then-prevailing market value, which was $3.88 on March
11, 1997. As a result, 881,836 shares of restricted common stock was issued.
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 addition, 4,000 shares
were exercised under the 1996 incentive stock option plan.
In July 1997, the Company received 73,515 shares of its common stock in
exchange for assets sold by the Company. The shares received in exchange for
these assets were recorded as treasury stock at their fair market value of
$10.00 per share. The value of the stock received from the sale of these assets
approximated the current book value of the assets sold.
As of December 31, 1998, $1,000,000, which is included in deposit for
stock issuance in the accompanying balance sheet, was received as a deposit. 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 is recorded as a liability in the accompanying balance sheet, was cancelled
and the Company issued 500,000 shares of restricted common stock under
Regulation D to the depositor.
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
Page F-17
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(10) STOCKHOLDERS' EQUITY (Continued)
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.
In March 1998, the Company received $580,000 as a nonrefundable payment
under an agreement with a third party pursuant to which the third party acquired
nonexclusive rights to market certain of the Company's products internationally.
The cash paid to the Company was obtained from the sale of the Company's common
stock by such third party. The Company is therefore of the opinion that the
proceeds of such transaction were not attributable to the culmination of an
earnings process. Consequently, such proceeds have been accounted for as an
addition to capital in the accompanying consolidated financial statements.
(11) 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 noncash
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>
YEARS ENDED DECEMBER 31,
-----------------------------------------
REVENUES: 1998 1997
- ----------------------------------------------------- --------------- ------------------
<S> <C> <C>
Telecommunication Headsets and
Amplifiers and Telephone Accessories.......... $ 7,640,000 $ 6,146,000
Home Storage and Organization.................... 4,444,000 3,387,000
Flashlights...................................... 989,000 893,000
Miscellaneous/Mass Market........................ 3,506,000 4,140,000
--------------- ------------------
Total..................................... $16,579,000 $14,566,000
=============== ==================
</TABLE>
Page F-18
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(11) BUSINESS SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
OPERATING INCOME (LOSS): 1998 1997
- ----------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 904,000 $ 718,000
Home Storage and Organization.................... (496,000) (317,000)
Flashlights...................................... (696,000) (852,000)
Miscellaneous/Mass Market........................ (152,000) 226,000
---------------- ----------------
Total..................................... $ (440,000) $ (225,000)
================ ================
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
DEPRECIATION AND AMORTIZATION (1): 1998 1997
- ----------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 206,000 $ 189,000
Home Storage and Organization.................... 183,000 167,000
Flashlights...................................... 93,000 87,000
Miscellaneous/Mass Market........................ 23,000 18,000
---------------- ----------------
Total..................................... $ 505,000 $ 461,000
================ ================
</TABLE>
(1) Amortization includes all amortization relating to product license rights,
non-competes and purchased patents.
Information as to the assets and capital expenditures of Dynatec International,
Inc. is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
ASSETS (1): 1998 1997
- ---------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 4,795,000 $ 3,938,000
Home Storage and Organization.................... 3,200,000 2,628,000
Flashlights...................................... 1,728,000 1,213,000
Miscellaneous/Mass Market........................ 1,366,000 502,000
---------------- ----------------
Total assets for reportable segments...... 11,089,000 8,281,000
Other assets..................................... 319,000 1,020,000
Deferred loan costs and other assets not allocated
to segments...................................... 131,000 108,000
---------------- ----------------
Consolidated total........................ $ 11,539,000 $ 9,409,000
================ ================
</TABLE>
Page F-19
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(11) BUSINESS SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
CAPITAL EXPENDITURES: 1998 1997
- ---------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 157,000 $ 397,000
Home Storage and Organization.................... 162,000 135,000
Flashlights...................................... 69,000 46,000
Miscellaneous/Mass Market........................ 6,000 9,000
---------------- ----------------
Total..................................... $ 394,000 $ 587,000
================ ================
</TABLE>
Information as to Dynatec International, Inc.'s operations in different
geographical areas is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
REVENUES: 1998 1997
- ---------------------------------------------------- ---------------- ----------------
<S> <C> <C>
United States.................................... $ 16,402,000 $ 14,344,000
Other (1)........................................ 177,000 222,000
---------------- ----------------
Total..................................... $ 16,579,000 $ 14,566,000
================ ================
</TABLE>
(1) Includes Canada, Europe and other miscellaneous.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
OPERATING LOSS: 1998 1997
- ---------------------------------------------------- ---------------- ----------------
<S> <C> <C>
United States.................................... $ (440,000) $ (225,000)
================ ================
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
ASSETS: 1998 1997
- ---------------------------------------------------- ---------------- ----------------
<S> <C> <C>
United States.................................... $ 11,089,000 $ 8,996,000
Asia............................................. 450,000 413,000
---------------- ----------------
Total..................................... $ 11,539,000 $ 9,409,000
================ ================
</TABLE>
(12) RELATED PARTY TRANSACTIONS
The Company's subsidiary Softalk, Inc., holds licensing rights for the
patent and trademark rights associated with the Company's Softalk product line
pursuant to a royalty agreement with WAC Research Inc., a Utah corporation
("WAC"). Donald M. Wood, a shareholder who, until January 14, 1999, was the
Company's Chairman and Chief Executive Officer, owns a one-half equity interest
in WAC. WAC obtained the patent and trademark rights for the Softalk products in
August 1986, when WAC purchased them from the inventor of Softalk and related
products in a private transaction. The purchase price for such patent and
trademark rights was $1 to 2 million, which was paid to Practical Innovations,
Inc. in a combination of Dynatec common stock and cash. Under the terms of the
agreement,
Page F-20
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(12) RELATED PARTY TRANSACTIONS (Continued)
Dynatec was obligated to pay a 10% royalty on all Softalk sales. At that time,
WAC and the Board of Directors of the Company determined that the 10% royalty
was onerous and non-sustainable. Therefore, WAC agreed to lower the royalty to
5%. In addition, under the royalty arrangement between WAC and Dynatec, the
payment of royalties for the fourth quarter of each year is contingent upon the
Company obtaining a specified level of earnings for each calendar year. During
the years ended December 31, 1998 and 1997, the Company paid WAC $172,669 and
$120,312, respectively, in royalties.
During 1995, the Company sold all rights and interest in various
discontinued 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. In 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 interest and $26,000 of other WAC related receivables.
In September 1998 WAC advanced $98,403 to the Company as reimbursement
to the Company of Mr. Wood's salary for the first six months of 1998. The
Company subsequently determined that this amount was a payable to WAC, and at
December 31, 1998 the Company had recognized the $98,403 in accounts payable
related party, in the accompanying consolidated balance sheet. In February 1999,
the Company repaid this amount to WAC.
Donald M. Wood, who served as the Company's Chief Executive Officer
during the entirety of 1998 and until January 14, 1999, owned a residential
rental property in Park City, Utah during all of 1997 and until August 1998. The
Company leased this property from him to use for Dynatec-related travel,
promotional work, lodging, and entertainment for customers, suppliers, and
employees. The monthly rental payment for this property was $7,000. The Company
paid $56,000 and $84,000 for each of the years ending December 31, 1998 and
1997, respectively. This cost also covered operating and maintenance costs, and
general care of the property. In August 1998, this property was sold by Mr.
Wood. As a result, the Company is no longer obligated to pay rental fees.
In July 1998, the Company's Board of Directors commenced an internal
investigation into the facts and circumstances of a number of transactions
between the Company and certain of its officers and directors as well as several
general corporate and management concerns brought to the attention of the
Company's independent directors. The Company engaged an unrelated third party to
conduct the investigation, which the Company eventually terminated in January
1999. Thereafter, the Company's former Chairman and CEO resigned and retired
from the Company. The Company does not anticipate taking further action, legal
or otherwise, with respect to the matters and individuals investigated, although
the Company, through its new management, has identified several areas in which
new corporate governance policies have been adopted or old policies changed. In
connection with the ongoing investigation, several of the Company's directors
engaged independent legal counsel. An aggregate of $230,000 of such legal fees
were reimbursed by the Company pursuant to action by the Company's Board of
Directors at the commencement of the investigation.
Page F-21
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(12) RELATED PARTY TRANSACTIONS (Continued)
During 1997 the Board of Directors authorized grants of various options
under both non-qualified and incentive stock options plans. These options are
described in detail in Note 14. The non-qualified plans included 537,500 options
granted to Muito Bem Ltd., an entity controlled by a shareholder and former CEO
of the Company, at an exercise price of $2.50 per share. The shareholder and
former executive officer of the Company who owns Muito Bem agreed in 1999 to
cancel all stock options issued to Muito Bem. Additionally, in 1997, 200,000
options were granted to WAC, at an exercise price of $2.50 per share in
consideration for certain royalty reductions and abatements.
In May 1989, the Company engaged Alpha Tech Stock Transfer Company
("Alpha Tech") as the Company's stock transfer agent. Alpha Tech served in that
capacity until January 13, 1999, when the Company notified Alpha Tech of the
Company's termination of Alpha Tech's agency and instructed Alpha Tech to
transfer the Company's records to American Stock Transfer Company, New York, New
York. James W. Farrell, the principal of Alpha Tech, is the brother-in-law of
Donald M. Wood, the Company's Chairman and Chief Executive Officer until his
resignation from the Company effective January 14, 1999. During the years ended
December 31, 1998 and 1997, the Company paid Alpha Tech a total of $1,530 and
$16,679, respectively, in fees for services rendered. The Company believes that
the fees paid to Alpha Tech during these periods were roughly comparable to the
fees it would have paid to a similar local transfer agent for similar services.
(13) 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 balance 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.
(14) 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..
Page F-22
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(14) STOCK OPTIONS (Continued)
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. These options have been included
in the options outstanding at year-end in the tables setforth below.
The Company's non-qualified options issued to employees may be
exercised upon the holder-employee's continued employment with the Company for
six years and the Company's achievement of profitable operations for three out
of those six years. Such options expire ten years from the date of the grant.
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.
Summary of stock options is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
FIXED OPTIONS: Shares Exercise Shares Exercise
(000's) Price (000's) Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 934 $2.50 833 $2.50
Granted.................................. -- -- 105 $2.50
Exercised................................ (17) $2.50 (4) $2.50
Canceled................................. (8) $2.50 -- --
============= -------------
Outstanding at end of year............... 909 $2.50 934 $2.50
=============
=============
Options exercisable at year-end.......... 171 $2.50 196 $2.50
============= =============
Weighted average fair value of
Options granted during the year....... -- $1.42
Weighted average remaining
contractual life for exercisable
options at year-end................... 2.5 years 3.5 years
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
VARIABLE OPTIONS: Shares Exercise Shares Exercise
(000's) Price (000's) Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 1,640 $2.00 840 $2.00
Granted.................................. -- -- 800 $2.00
============= =============
Outstanding at end of year............... 1,640 $2.00 1,640 $2.00
============= =============
Weighted average fair value of
Options granted during the year....... -- $2.22
</TABLE>
Page F-23
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(14) STOCK OPTIONS (Continued)
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 option 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>
<CAPTION>
1998 1997
---------------- -------------
<S> <C> <C>
Net loss As reported $(2,245,427) $ (409,172)
Pro Forma $(2,245,427) $ (2,333,753)
Basic and diluted
loss per share As reported $ (0.80) $ (0.18)
Pro Forma $ (0.80) $ (1.02)
</TABLE>
(15) EMPLOYEE BENEFITS
The Company also has a defined contribution plan which is a qualified
retirement plan under section 401(k) of the Internal Revenue Code. Under the
terms of the Plan, employees may make contributions to the Plan and are eligible
to participate in the Plan immediately. The Company does not currently make any
matching contributions to the Plan.
(16) SUBSEQUENT EVENTS
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 is in the process of transferring the Company's stock
transfer records to American Stock Transfer, New York, New York. The 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 filing of 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.
Effective January 14, 1999, Donald M. Wood, who had served as the
Company's Chairman and Chief Executive Officer since 1982, resigned and retired
from the Company. In the several months leading up to his resignation, Mr. Wood
was hindered in his efforts on the Company's behalf by poor health. Moreover,
certain transactions between Mr. Wood and the Company or between entities owned
by or affiliated with Mr. Wood and the Company, and certain activities conducted
by the Company's executives during Mr. Wood's tenure were the subject of an
internal investigation conducted by the Company's Board of Directors with the
assistance of an independent third party. In light of Mr. Wood's resignation,
the Company terminated its internal investigation. The Company does not
anticipate taking further action, legal or otherwise, with respect to the
matters investigated, although the Company, through its new management, has
identified several areas in which new corporate governance policies have been
adopted or old policies changed.
Page F-24
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(16) SUBSEQUENT EVENTS (Continued)
The Company will continue to pay Mr. Wood his salary through July 1999.
Mr. Wood has agreed to the cancellation of 900,000 non-qualified stock options
that were issued to him in 1996 and 1997. He also has agreed to the cancellation
of 537,500 stock options granted in 1996 to an entity owned by him.
On January 14, 1999, Paul A. Boyer, the Company's Senior Vice President
and Chief Financial Officer was appointed to the Company's Board of Directors,
which as of that time was comprised of Frederick W. Volcansek, Sr., Reed Newbold
and Mr. Boyer. On February 6, 1999, the Board of Directors employed Mr.
Volcansek as the Company's Chief Executive Officer and appointed him Chairman of
the Company's Board of Directors. On March 5, 1999, the Honorable Wayne L.
Berman, a principal of Park Strategies, L.L.C. located in Washington D.C., was
appointed as an outside director of the Company. On March 17, 1999, F. Randy
Jack, the Company's President and Chief Operating Officer resigned.
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 is recorded as a liability in the accompanying consolidated
balance sheet, was cancelled and the Company issued 500,000 shares of restricted
common stock under Regulation D to the depositor.
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 certain 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.
(17) CONTINGENCIES
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 December 31, 1998, the Company had received no response from
the Enforcement Division about whether the SEC plans to name the Company in any
administrative action.
Page F-25
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
(17) CONTINGENCIES (Continued)
On February 12, 1998, Fuji Corporation filed a claim with the
International Trade Commission seeking a cease and desist order against
approximately 30 entities. Fuji sought to enlist the aid of the U.S. Customs
Department in preventing the importation of single-use cameras which are
manufactured by any of the defendant entities and which infringe the patents of
Fuji. The Company does not manufacture single-use cameras, but previously has
distributed single-use cameras which have been refurbished and reloaded in
mainland China. The Company was therefore involved in the Fuji proceeding. The
Company engaged intellectual property counsel and vigorously defended its
position until December 1998, when the Company sold its remaining inventory of
single-use cameras to another entity. In connection with that sale, any
liability of the Company in connection with the Fuji proceeding, including the
costs of further defending the action, were assumed by the purchaser of the
Company's single-use camera inventory.
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.
Page F-26
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
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.
Page F-27
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
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.
Page F-28
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months
Ended 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.
Page F-29
<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)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
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.
Page F-30
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Three Months Ended March Three Months Ended
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.
Page F-31
<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, 1999 December 31,
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>
Page F-32
<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.
Page F-33
<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.
Page F-34
<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.
Page F-35
<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.
Page F-36
<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 31, 1998
ASSETS (1): 31, 1999
- ---------------------------------------------------- ---------------- ------------------
<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: 1998 1997
- ------------------------------------------ ---------------- -----------------
<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
================ =================
</TABLE>
<TABLE>
<CAPTION>
MARCH DECEMBER 31,
ASSETS: 31, 1999 1998
- ------------------------------------------ ---------------- -----------------
<S> <C> <C>
United States.......................... $ 10,200,000 $ 11,089,000
Asia................................... 429,000 450,000
---------------- -----------------
Total........................... $ 10,629,000 $ 11,539,000
================ =================
</TABLE>
(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.
Page F-37
<PAGE>
No person has been authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company, the Selling Stockholder or
any Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any of the securities offered hereby to any
person or by anyone in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
-----------------------
TABLE OF CONTENTS
Page
Prospectus Summary............................5
Risk Factors..................................7
Use of Proceeds..............................11
Dividend Policy..............................11
Determination of Offering Price..............11
Market for Common Stock......................11
Management's Discussion and Analysis.........12
Properties...................................21
Business.....................................21
Management...................................28
Executive Compensation.......................30
Security Ownership of Certain
Beneficial Owners and Management..........31
Selling Security Holders.....................33
Certain Relationships and
Related Transactions......................36
Description of Securities....................37
Plan of Distribution.........................39
Legal Proceedings............................40
Legal Matters................................41
Experts......................................42
Indemnification of Directors and Officers....42
Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures.....................43
Available Information........................43
Additional Information.......................43
Financial Statements.........................44
-----------------------
DYNATEC INTERNATIONAL, INC.
Common Stock
8,000,000 Shares
PROSPECTUS
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Utah Revised Uniform Business Corporation Act and the Registrant's
Articles of Incorporation and Bylaws under certain circumstances provide for the
limitation of liability and indemnification of the Registrant's directors
against liabilities which they may incur in the course of acting in such
capacity. A summary of the circumstances in which such indemnification is
provided for is contained in this Item, but that description is qualified in its
entirety by reference to the Registrant's Articles of Incorporation. The Bylaws
of the Registrant extend the same limitation of liability and indemnification to
the executive officers of the Registrant.
In general, under these provisions, any officer, director, employee or
agent may be indemnified against expenses, fines, settlements or judgments
arising in connection with a legal proceeding to which such person is a party,
as a result of such relationship, except in relation to matters in which such
person is adjudged to be liable for his own negligence or intentional misconduct
in the performance of his duty.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future of pursuant to a vote of stockholders or
directors. This indemnification is in addition to any other right of the
indemnified person under any such contract or any law, bylaw, agreement, vote of
stockholders or otherwise.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities of the Registrant being offered
hereby. Some of the expenses included below may be prepaid by the Registrant
prior to the effective date of the Registration Statement. All expenses are
estimated:
<TABLE>
<CAPTION>
<S> <C>
Registration and filing fee(*) $ 5,260
Listing Fee (Nasdaq SmallCap Market 5,264
Transfer agent's fee(*) 2,000
Printing and engraving(*) 5,000
Accounting fees and expenses(*) 25,000
Legal fees and expenses(*) 45,000
Blue sky fees and expense(*) 10,000
Miscellaneous expenses(*) 10,476
----------
Total(*) $ 108,000
===========
</TABLE>
- ----------------
(*) Estimated.
Item 26. Recent Sales of Unregistered Securities.
Within the past three calendar years, the Registrant has issued
securities in transactions summarized below:
Restricted Stock
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,
II-1
<PAGE>
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.
Sales Under Regulation S
The following table shows the sales under Regulation S during 1997 and
1998:
<TABLE>
<CAPTION>
Date of Sale Title of Security # of Shares Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
February 26, 1997 Common Stock 173,500 $1.44
March 26, 1997 Common Stock 125,000 $2.00
July 1, 1997 Common Stock 125,000 $2.00
July 10, 1997 Common Stock 125,000 $2.00
December 31, 1997 Common Stock 333,334 $3.00
</TABLE>
Such sales were completed without registration under the Securities Act
of 1933 in reliance on the provisions of Regulation S under the Securities Act.
Stock Options to Related Parties
Muito Bem Options. In 1996, the Company granted options to Muito Bem,
an entity owned by Donald M. Wood, the Company's former Chairman and Chief
Executive Officer, to purchase 537,500 shares of common stock at an exercise
price of $2.00 per share. The shareholder and former executive officer of the
Company who owns Muito Bem agreed in 1999 to cancel all such stock options. The
Company issued all such options without registration under the 1933 Act in
reliance on Section 4(2) or Regulation D.
WAC Options. In 1997, the Company granted to WAC Research, Inc., an
entity affiliated with Donald M. Wood, the Company's former Chairman and Chief
Executive Officer, options to purchase 200,000 shares of common stock at an
exercise price of $2.00 per share. The Company issued all such options without
registration under the 1933 Act in reliance on Section 4(2) or Regulation D.
Stock Options to Employees and Management
Grants of Incentive Stock Options Under 1996 Incentive Stock Option
Plan. In November 1996, the stockholders of the Company approved an Incentive
Stock Option Plan (the "1996 Plan") for the benefit of the officers, directors
and employees of the Company. In December 1996, the Company granted qualified
incentive stock options to purchase 95,000 shares of the Company's common stock
at an exercise price of $2.50 per share. In January 1997, the Company granted
under the 1996 Plan options to purchase an additional 105,000 shares of common
stock at an exercise price of $2.50 per share.
Grants of Non-qualified Options. During 1996, the Company granted
non-qualified stock options to purchase 840,000 shares of common stock at an
exercise price of $2.00 per share. Such options are performance based and are
not exercisable unless the Company's achieves certain financial performance
standards during the term thereof. In January 1997, the Company issued
additional options to purchase 800,000 shares of common stock at an exercise
price of $2.00 per share. The 1997 options have terms identical to the
non-qualified options granted in 1996. All of such options were issued to
officers, directors and employees of the Company.
II-2
<PAGE>
Acquisitions
In December 1996, the Company issued a total of 550,000 shares of
common stock as consideration for the acquisition of substantially all of the
assets of Nordic Lights, Inc., a Texas corporation.
Each of the transactions described above was entered into and concluded
by the Company pursuant to exemptions from the registration requirements of the
Securities Act and similar exemptions available under state securities laws,
afforded to offers and sales of securities not involving a public offering. The
shares issued in such transactions are "restricted securities" as defined by
rules promulgated under the Securities Act, meaning that they cannot be resold
by the original purchaser unless they are first the subject of a registration
statement filed by the Company or an exemption from registration is available
for the transaction in which they are sold.
Item 27. Exhibits
<TABLE>
<CAPTION>
Item 601 No. Description
<S> <C>
3.1 Restated Articles of Incorporation of the Company*
3.2 Amended and Restated Bylaws of the Company*
4.1 Specimen Common Stock Certificate (Incorporated by reference from the Registration statement on Form 10
filed by the Company with the Commission)
5.1 Opinion of Bruce L. Dibb P.C.*
10.1 Convertible Debenture and Line of Credit Agreement (Incorporated by reference from Form 8-K (File No.
000-12806) filed by the Company with the Commission on June 8, 1998)
10.2 Form of Convertible Debenture (Incorporated by reference from Form 8-K (File No. 000-12806) filed by the
Company with the Commission on June 8, 1998)
10.3 Form of A Warrants (Incorporated by reference from Form 8-K (File No. 000-12806) filed by the Company
with the Commission on June 8, 1998)
10.4 Form of B Warrants*
10.5 Registration Rights Agreement*
10.6 Escrow Agreement*
11.1 Computation of Per Share Earnings for the Three Months Ended March 31, 1999; for the Year Ended December
31, 1998; and for the Year Ended December 31, 1997*
21.1 List of Subsidiaries of the Registrant (See, "Subsidiaries of the Company" at page __)
23.1 Consent of Bruce L. Dibb P.C. (included in its opinion filed as Exhibit 5.1)
23.2 Consent of KPMG LLP
</TABLE>
* Incorporated by reference from registration statement originally filed
June 26, 1998.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(a) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(b) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
(c) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities
offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to its registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Salt Lake City, State of Utah, on May 25, 1999.
DYNATEC INTERNATIONAL, INC.
By: /s/ Frederick W. Volcansek, Sr.
--------------------------------
Frederick W. Volcansek, Sr.
Chairman & CEO
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ Frederick W. Volcansek, Sr. May 27, 1999
- ----------------------------------------- ----------------------
Frederick W. Volcansek, Sr., Date
Chairman of the Board of Directors & CEO
(Principal Executive Officer)
/s/ Paul A. Boyer May 27, 1999
- ----------------------------------------- ----------------------
Paul A. Boyer, Date
Director, Sr. Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Reed D. Newbold May 27, 1999
- ----------------------------------------- ----------------------
Reed D. Newbold, Date
Director
/s/ Wayne L. Berman May 27, 1999
- ----------------------------------------- ----------------------
Wayne L. Berman, Date
Director
II-5
Consent of Independent Certified Public Accountants
The Board of Directors
Dynatec International, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts in the registration statement.
KPMG LLP
Salt Lake City, Utah
June 1, 1999
