U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998,
Commission file number: 0-12806
Dynatec International, Inc.
(Name of small business issuer in its charter)
Utah 87-0367267
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
3820 Great Lakes Drive
Salt Lake City, UT 84120
(Address of principal (Zip Code)
executive offices)
Issuer's telephone
number: (801) 973-9500
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock (Par Value $0.01 per share)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of August 13, 1998, the Registrant had 2,675,112 shares of Common
Stock outstanding. The aggregate market value of voting stock held by
non-affiliates of the Company at August 13, 1998 was $13,704,878.
Transitional small business disclosure format. Yes__ No X
<PAGE>
INTRODUCTION
This Amendment No. 1 to the Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1998, of Dynatec International, Inc. (the
"Company") is submitted to amend the following Items:
Part I - Financial Information
Item 1. Financial Statements (Incorporated by reference)
Item 2. Management's Discussion and Analysis
PART I. - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Reference is made to the attached Unaudited Consolidated Condensed
Financial Statements for the first six months of the 1998 and 1997 calendar
years. These condensed financial statements are hereby incorporated by
reference. The information for the Company's first six months of calendar years
1998 and 1997 ended June 30, 1998 and 1997 is unaudited, but in the opinion of
management reflects all adjustments which are necessary for a fair presentation
of operations for such periods.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
For the six months ended June 30, 1998, the Company generated total
revenues of $7,783,758 compared to total revenues of $6,045,561 in the prior six
month period ended June 30, 1997. Comparative period revenues increased
$1,738,197 or 29%, reflecting the largest revenues ever earned by the Company
during the first two quarters of any calendar year since the Company's
inception.
Overall, the Company experienced a net loss of $576,767 for the first two
quarters of 1998 compared to a net loss of $433,144 for the first two quarters
of 1997 primarily due to increased interest expense related to the sale of
$1,500,000 of Convertible Debentures in May 1998 (the "Convertible Debentures"),
as well as amortization of non-cash interest expense associated with debt
issuance costs. The Convertible Debentures and associated equity line of credit
are described more fully in the Liquidity and Capital Resources section below.
Telephone Accessories:
For the two quarters ended June 30, 1998, there was an overall increase of
$379,542 (13%) in the revenues generated from the telephone accessory product
segment of the Company compared to total revenues for the same period in 1997.
Although the sales mix for various shoulder rests changed slightly, overall 1998
sales of shoulder rests increased by approximately $212,219 over 1997 sales. The
remainder of the increase was attributable to increased volume on sales of other
telephone accessory products.
Hardware/Housewares:
The hardware/housewares products segment produced an increase in revenues
during the six month period ended June 30, 1998 of $252,751 or 14% compared to
the period ended June 30, 1997. During the latter part of 1997, the Company
introduced several new drawer organizer products which have accounted for the
majority of the increase in the current year. Sales in this segment continue to
grow as the Company continues to aggressively market and expand the housewares
product lines.
Mass Market:
Sales in the Mass Market segment were down from $833,049 for the quarter
ended June 30, 1998 compared to $830,212 for the quarter ended June 30, 1997.
Virtually all of the sales in this segment were to Dolgencorp, Inc.
Historically, products in this segment have consisted of cameras, audio cassette
tapes, crayons, three piece flashlights, and disposable lighters.
<PAGE>
Flashlights:
Total sales in the Flashlight segment were $635,665 compared to $404,178
for the periods ended June 30, 1998 and 1997, respectively. The Company
continues the development of stronger relationships with overseas vendors to
ensure the timely delivery of reliable, high-quality flashlight products.
Earlier plans represented by a letter of intent to form a joint
venture/partnership with a flashlight supplier in Taiwan have been determined to
not be in the best interest of the Company.
Telecommunications Headsets
Revenues in the telecommunication headset segment were $895,787 for the six
month period ending June 30, 1998 compared to $-0- for the same period in 1997.
The Company has been aggressively developing a line of telecommunications
products to include wired and wireless telephone headsets, telephones,
conference speakers, and other products. In the first quarter of 1998, initial
orders for telephonic amplifiers and headsets were filled with Lucent
Technologies. The Company has been able to secure pages in several catalogues of
providers for various office products coming out during the second and third
quarters.
Expenses
Overall gross margins of the Company for the six months ending June 30,
1998 and 1997 were 35% and 32% , respectively. This overall increase in gross
margin is largely attributable to increased sales of telephone accessory and
headset products which have gross margins ranging from 35% to 50%.
The Company spent $73,695 and $167,878 in research and development expenses
for the six months ending June 30, 1998 and 1997. Most of the research and
development expenses over these two periods was spent in developing the headset
and flashlight product lines. Research and development expenses have decreased
during 1998, as current year research and development efforts relate to product
enhancements as opposed to initial product development.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1998, the Company experienced a net decrease in its cash
position of $111,908 from December 31, 1997. The Company had a decrease in cash
from operations of $2,149,629. The majority of this decrease was caused by
increases in trade accounts receivable ($1,011,812) and inventory ($1,712,002)
as well as the net loss incurred during the period. The increase in inventories
reflects purchases made to prepare for catalogue sales of telephony headset
products and to fill mass merchandise orders received for the third and fourth
quarters. The Company experienced a net increase in cash position resulting from
financing activities reflecting the receipt of a deposit of $940,000 for stock
issuance, as authorized by the Board of Directors in March of 1997, and the
issuance of $1,500,000 pursuant to the sale of Convertible Debentures (explained
more fully below). A net use of cash in investing activities reflects the
capital expenditures of $356,232 during the first two quarters of 1998. The
Company anticipates that the inventory and related payables will increase
throughout 1998 as sales increase in the flashlight and telecommunication
headset segments.
Current assets increased from $5,092,374 at December 31, 1997 to $7,224,092
at June 30, 1998. Of this increase, approximately $1,712,002 reflects increases
in inventory partially funded by increases under the line of credit facility of
$307,545 as the Company prepares for increased sales in calendar year 1998.
Additionally, trade accounts receivable also increased due to increased first
quarter sales of approximately $656,509 over fourth quarter 1998.
On May 22, 1998, the Company closed a transaction that has provided net
capital proceeds of $1,335,000. These funds have been raised pursuant to the
sale by the Company of Convertible Debentures in the face amount of $1,500,000
to meet immediate cash needs under an equity line of credit. The Convertible
Debentures are convertible into common stock of the Company at the lesser of:
(i) seventy five percent of the average of the three lowest closing bid prices
of the Common Stock during the ten day trading period immediately preceding the
conversion date or (ii) one hundred percent of the closing bid price on the
trading day immediately preceding the closing date of the agreement. The
transaction has been accomplished pursuant to a Convertible Debenture and
Private Equity Line of Credit Agreement (the "Credit Agreement") between the
Company and a group of five investors which have not previously been
shareholders of the Company. In addition, the Company can use a "put" mechanism
to periodically draw down up to $10,000,000. Under the terms of the Credit
Agreement, a minimum of $1,000,000 must be drawn in increments of not less than
$50,000 in exchange for common stock of the Company issued at 80 percent of the
average of the three lowest bid prices during the six day valuation period
consisting of three days prior to the put and ending two days after the put
date. The put mechanism cannot be utilized until after the effective date of the
registration statement for the common stock underlying the Credit Agreement.
Additionally, upon registration of the underlying shares which may be purchased
pursuant to the Convertible Debentures, the Company will sell an additional
$500,000 principal amount of Convertible Debentures.
<PAGE>
In connection with the Credit Agreement, the investors and placement agent
were issued warrants. These warrants have been issued as Series A and Series B
as follows:
<TABLE>
<CAPTION>
Placement Exercise
Investors Agent Price
--------- --------- --------
<S> <C> <C> <C>
Series A Warrants 150,000 150,000 $6.50
Series B Warrants 150,000 300,000 $7.15
</TABLE>
The Company is to issue an additional 50,000 Series A warrants each to both the
placement agent and the investors upon receipt of the additional $500,000 of
gross sales proceeds. The market value for the Series A warrants issued to the
investors has been written off as a one-time, non-cash debt issuance cost of
$426,000 as the warrants are immediately exercisable. The market value of the
Series A warrants issued to the placement agent have been capitalized and will
be written off by the Company over the 36 month life of the Convertible
Debentures. Although these debt issuance costs are non-cash items, current GAAP
requires disclosure for the market value of warrants issued along with
Convertible Debentures. In addition, because the Convertible Debentures are
convertible at a 25 percent discount from the market value, an additional
$500,000 (the intrinsic value of the beneficial conversion premium) of the
proceeds received were established as a contr-debt account and $166,667 of this
premium was written off as a non-cash expense for the second quarter of 1998.
These non-cash amortization and write-off of the market value of warrants issued
are included with interest expense in the income statement. Upon the effective
date of the registration statement, the market value of the warrants issued to
the investors in connection with the additional $500,000 of Convertible
Debentures (estimated to be an additional third quarter non-cash expense of
$121,500) and the remaining beneficial conversion premium will be written off as
a third quarter, non-cash item. The Series B warrants which have been issued
have no current impact to the Company financial statements, as they were issued
in connection with the equity line of credit.
On May 27, 1998, the Company obtained a new, revolving line-of-credit from
a financing institution up to $5,000,000 bearing interest at a rate of prime
plus one percent with interest payable monthly. The line is secured by both
accounts receivable and inventories. The note is due May 26, 2001. Under the
terms of the agreement, the Company is required to maintain certain covenants
and ratios including book net worth, net income, and debt service coverage.
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 a
capital addition in the accompanying consolidated financial statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned hereunto duly authorized on the March 31, 1999.
DYNATEC INTERNATIONAL, INC.
/s/Frederick W. Volcansek, Sr.
-----------------------------------
Frederick W. Volcansek, Sr.
Chairman and Chief Executive Officer
/s/Paul A. Boyer
-----------------------------------
Paul A. Boyer
Senior Vice President-Chief Financial Officer
<PAGE>
DYNATEC INTERNATIONAL, INC.
CONDENSED FINANCIAL STATEMENTS
June 30, 1998 and 1997
<PAGE>
C O N T E N T S
Page
CONDENSED BALANCE SHEETS 3
CONDENSED STATEMENTS OF OPERATIONS 5
CONDENSED STATEMENTS OF CASH FLOWS 6
NOTES TO CONDENSED FINANCIAL STATEMENTS 8
<PAGE>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC.
Condensed Balance Sheets
June 30, 1998 and December 31, 1997
June 30, 1998 Dec. 31, 1997
ASSETS (Unaudited) (Audited)
-------------------------- ------------------------
<S> <C> <C>
CURRENT ASSETS (Restated-see Note2)
Cash $ 220,986 $ 332,894
Trade accounts receivable, net of allowance for doubtful
accounts of $31,257 in 1998 and $29,684 in 1997 2,551,700 1,549,888
Related part and other receivables 43,728 426,131
Inventories (Note 3) 4,234,151 2,522,149
Prepaid expenses 151,997 234,120
Other 21,530 27,192
--------------------------- -----------------------
TOTAL CURRENT ASSETS 7,224,092 5,092,374
PROPERTY, PLANT AND EQUIPMENT, NET 4,014,377 3,941,587
OTHER ASSETS
Deposits 69,425 107,631
Debt Issue costs (Note 10) 682,150 -
Intangible assets, net 236,834 267,825
-------------------------- -----------------------
TOTAL OTHER ASSETS 988,409 375,456
-------------------------- -----------------------
TOTAL ASSETS $ 12,226,878 $ 9,409,417
========================= =======================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC.
Condensed Balance Sheets (Continued)
June 30, 1998 and December 31, 1997
June 30, 1998 Dec. 31, 1997
LIABILITIES AND EQUITY (Unaudited) (Audited)
-------------------- ---------------------
<S> <C> <C>
CURRENT LIABILITIES (Restated-see Note2)
Short-term note payable $ 1,638,714 $ 1,331,169
Current portion of long-term debt 174,673 1,003,477
Current portion of capital lease obligations 15,892 15,699
Accounts payable 947,216 992,632
Accounts payable-other (Note 8) 1,232,375 85,000
Accrued expenses 205,110 238,121
Accrued advertising 191,595 350,000
Accrued royalties payable 38,235 17,882
Accrued income taxes - -
--------------------- ---------------------
TOTAL CURRENT LIABILITIES 4,443,810 4,033,980
LONG-TERM LIABILITIES
Long-term debt 2,118,937 1,994,355
Capital lease obligations 37,507 46,086
Deferred income taxes 5,036 5,036
Convertible debentures, net (Note 10) 1,186,393 -
---------------------- ---------------------
TOTAL LIABILITIES
7,791,683 6,079,457
STOCKHOLDERS' EQUITY (Note 8)
Common stock, $.01 par value, authorized 100,000,000 shares 2,766,627 issued
at June 30, 1998 and
2,859,940 issued at December 31, 1997 27,667 28,599
Treasury Stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 7,279,774 5,596,840
Accumulated deficit (1,957,096) (1,380,329)
---------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 4,435,195 3,329,960
---------------------- --------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 12,226,878 $ 9,409,417
====================== ====================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC.
Condensed Statements of Operations
For the Three and Six Months ended June 30, 1998 and 1997
(Unaudited)
Three months Three months Six months Six months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
(Restated-see
Note 2)
<S> <C> <C> <C> <C>
REVENUE $ 4,135,972 $ 3,490,943 $ 7,783,758 $ 6,045,561
COST OF SALES 2,746,298 2,344,651 5,027,349 4,124,434
------------------ ------------------ ------------------ -----------------
GROSS PROFIT 1,389,674 1,146,292 2,756,409 1,921,127
EXPENSES
Selling expenses 721,364 531,829 1,387,131 1,119,578
Research and development 40,495 31,724 73,695 167,878
General and administrative expenses 510,755 468,030 949,970 925,594
Provision for losses on accounts receivable 10,000 8,500 10,000 13,500
------------------ ------------------ ------------------ -----------------
TOTAL EXPENSES 1,282,614 1,040,083 2,420,796 2,226,550
------------------ ------------------ ------------------ -----------------
OPERATING GAIN (LOSS) 107,060 106,209 335,613 (305,423)
OTHER INCOME/(EXPENSE)
Interest income - 2,033 3,340 6,015
Interest expense (Note 10) (787,379) (120,058) (894,388) (223,772)
Loss on sale of asset (326) - (21,332) -
Miscellaneous - 90,536 - 90,536
------------------ ------------------ ------------------ -----------------
TOTAL OTHER EXPENSE (787,705) (27,489) (912,380) (127,221)
------------------ ------------------ ------------------ -----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (680,645) 78,720 (576,767) (432,644)
INCOME TAX EXPENSE (Note 7) - - - (500)
------------------ ------------------ ------------------ -----------------
NET INCOME (LOSS) $ (680,645) $ 78,720 $ (576,767) $ (433,144)
================== ================== ================== =================
BASIC NET INCOME (LOSS) PER SHARE $ (0.24) $ 0.04 $ (0.21) $ (0.20)
================== ================== ================== =================
DILUTED NET INCOME (LOSS) PER SHARE (Note 4) $ (0.24) $ 0.03 $ (0.21) $ (0.20)
================== ================== ================== =================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC.
Condensed Statements of Cash Flows
For the Six Months ended June 30, 1998 and 1997
(Unaudited)
Six months ended June 30, Six months ended June 30,
1998 1997
--------------------------- --------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated-see Note2)
Net Loss $ (576,767) $ (433,144)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 203,198 224,220
Amortization 30,741 32,134
Interest expense on convertible debentures (Note 10) 624,226 -
Loss on sale of assets 21,332 -
Provision for losses on accounts receivable 10,000 13,500
Changes in operating assets and liabilities:
Trade accounts receivable (1,011,812) (617,979)
Related party and other accounts receivable 382,403 (410)
Inventories (1,712,002) (403,990)
Prepaid expenses 82,123 (173,531)
Other 5,662 (87,492)
Deposits 38,206 (96,032)
Accounts payable (45,416) 107,174
Accounts payable-other (42,625) -
Accrued Expenses (20,846) 289,439
Accrued advertising (158,405) -
Accrued royalties payable 20,353 11,555
Income tax payable - (100)
--------------------------- --------------------------
NET CASH USED IN OPERATING ACTIVITIES $ (2,149,629) $ (1,134,656)
--------------------------- --------------------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC.
Consdensed Statements of Cash Flows (Continued)
For the Six Months ended June 30, 1998 and 1997
(Unaudited)
Six months ended June 30, Six months ended June
1998 30, 1997
---------------------------- -------------------------
(Restated-see Note2)
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets $ 47,000 $ -
Receivable from related parties - 115,419
Capital expenditures (356,232) (132,293)
---------------------------- -------------------------
NET CASH USED IN INVESTING ACTIVITIES (309,232) (16,874)
---------------------------- -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreements 307,545 249,080
Increase in debt issuance costs (267,983) -
Net borrowings (payments) on long-term debt (704,222) 285,433
Net borrowings (payments) on capital lease obligations (8,387) (12,784)
Proceeds from capital addition (Note 8) 580,000 -
Net borrowings under convertible debentures (Note 10) 1,500,000 -
Proceeds from deposit for stock issuance (Note 8) 940,000 -
Issuance of Stock pursuant to Regulation S offerings - 500,000
---------------------------- -------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,346,953 1,021,729
---------------------------- -------------------------
DECREASE IN CASH (111,908) (129,801)
CASH AT BEGINNING OF PERIOD 332,894 240,145
---------------------------- -------------------------
CASH AT END OF PERIOD $ 220,986 $ 110,344
============================ =========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 118,818 $ 93,587
Cash paid for income taxes - 400
Share certificate cancelled (Note 8) 250,000 -
Debt issuance cost attributable to warrants to placement agent 426,000 -
Convertible debt discount associated with warrants to investors 426,000 -
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
DYNATEC INTERNATIONAL, INC.
Notes to Condensed Financial Statements
For the Six Months Ended June 30, 1998 and 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited, condensed financial statements
have been prepared in accordance with the instructions to
Form 10-QSB, and therefore, do not include all information
and footnotes necessary for a complete presentation of the
results of operations, the financial position, and cash
flows, in conformity with generally accepted accounting
principles. This report on Form 10-QSB for the six months
ended June 30, 1998 should be read in conjunction with the
Company's annual report on form 10-KSB for the year ended
December 31, 1997.
The accompanying unaudited condensed consolidated financial
balance sheets, statements of operations and cash flows
reflect all normal recurring adjustments which are, in
management's opinion, necessary for a fair presentation of
the Company's financial position, results of operation, and
cash flows. The results of operations for the interim period
ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - RESTATEMENT OF QUARTERLY FINANCIAL INFORMATION
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 a capital addition in
the accompanying consolidated financial statements.
The following table outlines the revisions to the previously reported
condensed consolidated financial statements:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
---------------------------------------------------------
As Restated As Previously Reported
------------------------- --------------------------
<S> <C> <C>
Product revenue............................... $7,783,758 $8,363,758
Gross profit.................................. 2,756,409 3,336,409
Operating gain................................ 335,613 915,613
Income (loss) from operations................. (576,767) 3,233
Net income.................................... (576,767) 3,233
Basic net income (loss) per share............. (0.21) 0.00
Diluted net income (loss) per share........... (0.21) 0.00
</TABLE>
<PAGE>
NOTE 2 - RESTATEMENT OF QUARTERLY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
------------------------------------------
As Restated As Previously Reported
-------------- ----------------------
(Unaudited)
<S> <C> <C>
Additional paid-in capital............................ $ 7,279,774 $ 6,699,774
Accumulated deficit................................... (1,957,096) (1,377,096)
</TABLE>
NOTE 3 - INVENTORIES
Effective January 31, 1998, the Company changed its method
of determining the cost of inventory from last-in, first-out
(LIFO) to first-in, first-out (FIFO). Historically, the
difference between the LIFO and current costs of inventories
has been immaterial.
Inventories, consisting principally of telephone accessory,
hardware/houseware, flashlights, telecommunication headsets,
and other miscellaneous products sold to mass market
merchandisers as of June 30, 1998 and December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------ ------------
<S> <C> <C>
Raw $ 1,382,766 $ 831,483
Finished 2,851,385 1,690,666
------------ -------------
$ 4,234,151 $ 2,522,149
=========== ============
</TABLE>
NOTE 4 - NET EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of
FAS No. 128, Earnings Per Share. FAS 128 requires the
presentation of both basic and diluted earnings per share
(EPS). Basic EPS is the amount of net income or loss divided
by the weighted average number of shares of common stock
outstanding. Diluted EPS is the amount of income or loss for
the period divided by the weighted average number of shares
plus all potentially dilutive common shares.
<PAGE>
NOTE 4 - NET EARNINGS PER SHARE (Continued)
In calculating EPS, the earnings were the same for both the
basic and diluted calculation. The effect of common stock
options is not included in the 1997 calculation as such
options would be anti-dilutive. A reconciliation between the
basic and diluted weighted-average number of shares
outstanding as of June 30, 1998 and 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- -----------------
(Restated-see Note 2)
<S> <C> <C>
Basic weighted-average number of common shares 2,785,241 2,160,913
Weighted-average number of shares of potential common stock 672,499 150,336
============================ =================
Diluted weighted-average number of shares 3,457,740 2,311,249
============================ =================
</TABLE>
NOTE 5 - YEAR 2000
During 1997, the Company developed a plan to deal with the
Year 2000 problem and began converting its computer systems to
be Year 2000 compliant. During the fourth quarter of 1997 and
the first quarter of 1998, the Company began converting to a
new accounting and materials resource planning software
program. The Year 2000 problem is the result of the computer
programs being written using two digits rather than four to
define the applicable year. The Company is capitalizing costs
associated with the new software as the new software is being
implemented to provide better inventory tracking and
accounting controls. All other system changes are being
expensed as incurred. The Company does not anticipate any year
2000 compliance problems.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards No. 130
(SFAS 130), Reporting Comprehensive Income, effective January
1, 1998. SFAS 130 establishes standards for reporting and
displaying comprehensive earnings and its components in
financial statements. As of March 31, 1998, the Company has no
items to report as components of comprehensive income.
<PAGE>
NOTE 7 - INCOME TAXES
The Company has net operating loss carryforwards from prior
years which will exceed the income generated for the first two
quarters of 1998. The deferred tax asset related to these
carryforwards was fully reserved for as of December 31, 1997.
NOTE 8 - STOCKHOLDERS' EQUITY
As of June 30, 1998, $940,000 in funds, which is included in
accounts payable-other in the accompanying condensed balance
sheet, has been received in anticipation of future Regulation
S common stock offerings as approved by the Board of Directors
in March 1997. The terms and agreements for these stock
offerings are still under negotiation. Regulation S stock is
typically sold at a significant discount from market value
because of its restricted nature.
On June 16, 1998, Canaccord Capital Corporation ("Canaccord"),
a Canadian broker/dealer, filed an action against the Company
in the U.S. District Court in Salt Lake City, Utah. The action
seeks an order compelling the issuance of 125,000 shares of
Dynatec stock. Canaccord and the Company agree that the
Company, or its transfer agent, had erroneously over-issued
shares of stock to Canaccord in early 1997. In September 1997,
Canaccord tendered certificates for other shares in
acknowledgment of a separate over-issuance. Management of the
Company believed that an additional 125,000 shares had been
over issued. The disputed certificate was subsequently
returned to the transfer agent and cancelled under the
direction of the Board of Directors of the Company. This
action was taken by the Company based upon the understanding
of management that the entity believed by the Company to be
holding the beneficial interest in the certificate had not
paid for the shares, and was not a holder in due course or a
"protected person" under applicable Uniform Commercial Code
provisions. On August 3, 1998, the Court entered an order
granting the preliminary injunction in favor of Canaccord and
compelling the issuance of a stock certificate to Canaccord's
designee for the disputed 125,000 shares of stock. If one of
the other entities now named in the litigation should
subsequently establish a right to the issuance of 125,000
shares of the stock of the Company, Dynatec may be required to
issue additional shares. Dynatec intends to continue to pursue
its claim for damages and declaratory relief in this
litigation.
<PAGE>
NOTE 9 - STOCK OPTIONS
A summary of stock options is as follows for the period ended June 30,
1998:
<TABLE>
<CAPTION>
FIXED OPTIONS: Shares
(Restated-see
Note 2) Exercise
(000's) Price
--------------- -------------
<S> <C> <C>
Outstanding at December 31, 1997 934 $2.50
Exercised (12) $2.50
===============
Outstanding at June 30, 1998 922 Various
===============
Options exercisable at June 30, 1998 184 $2.50
===============
Weighted average fair value of
options granted during first quarter... $0.00
Weighted average remaining
contractual life for exercisable
options at June 30, 1998 3.55 years
</TABLE>
<TABLE>
<CAPTION>
VARIABLE OPTIONS: Shares
(Restated-see
Note 2) Exercise
(000's) Price
--------------- -------------
<S> <C> <C>
Outstanding at December 31, 1997 945 $2.50
---------------
Outstanding at June 30, 1998 945 Various
===============
Weighted average fair value of
options granted during first quarter... $0.00
</TABLE>
NOTE 10 - CONVERTIBLE DEBENTURES
On May 22, 1998, the Company closed a transaction that has
provided net capital proceeds of $1,335,000. These funds have
been raised pursuant to the sale by the Company of a
Convertible Debenture in the face amount of $1,500,000. The
debentures are convertible into common stock of the Company at
the lessor of: (i) seventy five percent of the average of the
three lowest closing bid prices of the Common Stock during the
ten day trading period immediately preceding the conversion
date or (ii) one hundred percent of the closing bid price on
the trading day immediately preceding the closing date of the
agreement. The transaction has been accomplished pursuant to a
Convertible Debenture and Private Equity Line of Credit
Agreement
<PAGE>
NOTE 10 - CONVERTIBLE DEBENTURES (Continued)
(the "Credit Agreement") between the Company and a group of
five investors which have not previously been shareholders of
the Company. In addition, the Company can use a "put" mechanism
to periodically draw down up to $10,000,000. Under the terms of
the Credit Agreement, a minimum of $1,000,000 must be drawn in
increments of not less than $50,000 in exchange for common
stock of the Company issued at 80 percent of the average of the
three lowest bid prices during the six day valuation period
consisting of three days prior to the put and ending two days
after the put date. The put mechanism cannot be utilized until
after the effective date of the registration statement for the
underlying stock of the Credit Agreement. Additionally, upon
registration of the underlying shares which may be purchased
pursuant to the convertible debentures, the Company will
receive an additional $500,000 of gross sales proceeds.
In connection with the Credit Agreement, the investors and
placement agent were issued warrants. These warrants have been
issued as Series A and Series B as follows:
<TABLE>
<CAPTION>
Placement Exercise
Investors Agent Price
-------------- --------------- ------------
<S> <C> <C> <C>
Series A Warrants 150,000 150,000 $6.50
Series B Warrants 150,000 300,000 $7.15
</TABLE>
The Company is to issue an additional 50,000 Series A warrants
each to both the placement agent and the investors upon
receipt of the additional $500,000 of gross sales proceeds.
The market value for the Series A warrants issued to the
investors has been written off as a one-time, non-cash debt
issuance cost of $426,000 as the warrants are immediately
exercisable. The market value of the Series A warrants issued
to the placement agent have been capitalized and will be
written off by the Company over the 36 month life of the
debentures. Although these debt issuance costs are non-cash
items, current GAAP requires disclosure for the market value
of warrants issued along with convertible debentures. In
addition, because the debentures are convertible at a 25
percent discount from the market value, an additional $500,000
(the intrinsic value of the beneficial conversion premium) of
the proceeds received were established as a contr-debt account
and $166,667 of this premium was written off as a non-cash
expense for the second quarter of 1998. These non-cash
amortization and write-off of the market value of warrants
issued are included with interest expense in the income
statement. Upon the effective date of the registration
statement, the market value of the warrants issued to the
investors in connection with the $500,000 of convertible
debentures (estimated to be an additional third quarter
non-cash expense of $121,500) and the remaining beneficial
conversion premium will be written off as a third quarter,
non-cash item. The Series B warrants which have been issued
have no current impact to the Company financial statements, as
they were issued in connection with the equity line of credit.
<PAGE>
NOTE 11 - OTHER
The Board of Directors of the Company has unanimously approved
an investigation of the foregoing transactions and matters,
the Company's relationship and practices with the Company's
transfer agent, certain related party transactions and other
issues which were the subject of a recent preliminary inquiry
conducted by certain members of the Board of Directors, the
actions of officers of the Company with regard to such
matters, and other related and unrelated corporate activities
to assure that proper safeguards and policies are in place or
are implemented which will assist the Board of Directors in
monitoring the business activities of the Company. The Board
is to be assisted in this review by independent outside
counsel who will coordinate his efforts with current corporate
counsel.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
[TYPE] EX-27
<ARTICLE> 5
<CIK> 0000752208
<NAME> DYNATEC INTERNATIONAL, INC.
<CURRENCY> USD
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<PERIOD-TYPE> 6-MOS
<EXCHANGE-RATE> 1
<CASH> 220,986
<SECURITIES> 0
<RECEIVABLES> 2,582,957
<ALLOWANCES> (31,257)
<INVENTORY> 4,234,151
<CURRENT-ASSETS> 7,224,092
<PP&E> 4,014,377
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,226,878
<CURRENT-LIABILITIES> 4,443,810
<BONDS> 0
0
0
<COMMON> 27,667
<OTHER-SE> 4,407,528
<TOTAL-LIABILITY-AND-EQUITY> 12,226,878
<SALES> 7,783,758
<TOTAL-REVENUES> 7,783,758
<CGS> 5,027,349
<TOTAL-COSTS> 7,448,145
<OTHER-EXPENSES> 912,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 894,388
<INCOME-PRETAX> (576,767)
<INCOME-TAX> 0
<INCOME-CONTINUING> (576,767)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (576,767)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
