UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-12806
DYNATEC INTERNATIONAL, INC.
(Exact name of registrant specified in its charter)
UTAH 87-0367267
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
3820 Great Lakes Drive
Salt Lake City, Utah 84120
- --------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(801) 973-9500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $0.01 per share)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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. X Yes No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosures will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]
Registrant's revenues for the year ended December 31, 1998 were
$16,578,694.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the average bid and ask price of the Common Stock
on March 16, 1999 as reported on The Nasdaq Stock Market (R), was $7,850,388.
The Company had 3,300,112 shares of common stock outstanding at March
16, 1999.
Transitional small business disclosure format. Yes X No
<PAGE>
TABLE OF CONTENTS
PART I.
Item 1. Description of Business..........................................
Item 2. Description of Property..........................................
Item 3. Legal Proceedings................................................
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.........
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................
Item 7. Financial Statements.............................................
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................
PART III.
Item 9. Directors and Executive Officers, Compliance with Section 16(a)
of the Exchange Act..............................................
Item 10. Executive Compensation...........................................
Item 11. Security Ownership of Certain Beneficial Owners and Management...
Item 12. Certain Relationships and Related Transactions...................
Item 13. Exhibits and Reports on Form 8-K.................................
<PAGE>
PART I
Item 1. Business
General
Dynatec International, Inc., a Utah corporation ("Dynatec" or the
"Company"), 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."
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 ("R&D") 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.
<PAGE>
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 the 1999 year.
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, Walmart,
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 Lites
was engaged in the business of manufacturing and distributing a line of
battery-powered flashlight products. The Company transferred the assets acquired
from Nordic Lites 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 Lites 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.
<PAGE>
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, 1997.
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.
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
<FN>
(1) Engaged in the manufacturing, sourcing and distribution of the
telephone accessory, hardware/housewares, and mass market
products of the Company.
(2) Arnco Marketing imports and markets Twisstop to SofTalk
and others under a license
agreement with Recoton Inc.
(3) Involved in the research, development and marketing of
flashlight products.
(4) Engaged in the research, development and marketing of
telecommunications products.
</FN>
</TABLE>
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
supplier. 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 plastic
products 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.
<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>
<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 Lights U.S.A. 01/29/99 Pending
Magnetic Door Stop & Holder U.S.A. 05/16/93 2011
Cover Up U.S.A. 03/03/87 2001
</TABLE>
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
Stationers, whose headquarters are at 2200 E. Golf Road, Des Plaines, IL 60016.
<PAGE>
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.
<PAGE>
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
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.
Item 2. 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.
Item 3. 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 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 complaint through an
unrelated third party. The Company has demanded that Alpha Tech voluntarily
dismiss the complaint. In any event, the Company disputes the claims of Alpha
Tech's complaint. If the complaint is not voluntarily dismissed and process is
served, the Company intends to vigorously defend the suit.
On February 22, 1999, the Company received a demand letter from counsel
for Mag Instrument, Inc., a manufacturer and distributor of flashlights and one
of the Company's competitors ("Mag"). In the letter, Mag accuses the Company of
infringing 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 contained in the complaint.
<PAGE>
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.
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.
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.
In July 1997, the market price of the Company's common stock dropped
rapidly and dramatically. Thereafter, the Nasdaq Stock Market commenced and
informal inquiry into market activities and transactions by the Company. The
Company cooperated with that inquiry and, on January 13, 1999, the Nasdaq Stock
Market notified the Company that the informal review was terminated.
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>
Part II
Item 5. Market for Registrant's Common Equity 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 December
31, 1998 there were 1,265 shareholders of the Company's common stock and
2,891,627 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.
PRICE RANGE OF COMMON STOCK
Quarter & Year Market High Market Low
-------------- ----------- ----------
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
Dividends. During the year ended December 31, 1998, the Company did not
declare or pay cash dividends. The Company has no history of declaring and
paying cash dividends to its common stockholders and has no intention of
declaring such dividends into the foreseeable future.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in dollars
(rounded) and percentage changes from period to period. Data in the table
reflects the consolidated results of the Company for the 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.
<TABLE>
<CAPTION>
For the Year Ended
------------------------------------
% OF
CHG
FROM
DECEMBER DECEMBER 1997 TO
31, 1998 31, 1997 1998
---------- --------- --------
<S> <C> <C> <C>
Statement of Operations Data:
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 and other.... $16,579,000 $14,566,000 13.8%
=========== ===========
</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 into 1999 for the 1999 year.
<PAGE>
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 increased
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.
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
enormous 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, 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 26, 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.
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.
<PAGE>
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 Convertible
Debentures (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.
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.
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 December 31, 1998 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
<PAGE>
amendment to the loan agreement which changed the terms of certain of the
financial covenants and ratios for 1999. As a result of the net loss incurred in
1998, and to induce the lending institution to change the terms of the financial
covenants for 1999, the interest rate applicable to the revolving credit line
was increased to prime plus three percent, with interest payable monthly. At
December 31, 1998, the Company had $2,268 of cash and $3,311,000 of unused
borrowings under its credit facility, of which amount is limited to the levels
of inventory and receivables. The Company anticipates 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 in the aggregate principal amount
of $1,500,000. The Convertible Debentures are convertible into the Company's
common stock at the lesser of: (i) 75% of the average of the three lowest
closing bid prices of the common stock as quoted on the Nasdaq SmallCap Market
during the 22 trading-day period immediately preceding the conversion date or
(ii) $4.624, which was 100% of the closing bid price on the trading day
immediately preceding the closing date of the agreement. The transaction was
accomplished pursuant to a Convertible Debenture and Private Equity Line of
Credit Agreement (the "Credit Agreement") between the Company and a group of
five unaffiliated investors. In addition to the sale of the Convertible
Debentures, the Company also obtained the right to use a "put" mechanism to
periodically draw down up to $10,000,000 of additional equity capital. Under the
terms of the Credit Agreement, a minimum of $1,000,000 must be drawn, and all
amounts must be drawn in increments of not less than $50,000. In return for the
payment of additional capital upon such put exercises, the Company is required
to issue shares of its common stock at a per share purchase price equal to 80%
of the average of the three lowest closing bid prices of the common stock during
a six day valuation period commencing three days before the put date and ending
two days after the put date. The put mechanism cannot be utilized, and the
Company has no obligation to exercise any portion of the put mechanism, until
after the effective date of the registration statement for the underlying stock
of the Credit Agreement. Additionally, upon registration of the underlying
shares which may be issued upon conversion of the Convertible Debentures, the
Company is obligated to issue an additional $500,000 of Convertible Debentures
(see Note 8 to the 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.
December 31, 1998 Compared to December 31, 1997
As of December 31, 1998, the Company had liquid assets (cash and cash
equivalents, accounts receivable - trade and other) of $2,231,000, a decrease of
3.4%, or $78,000, from December 31, 1997 when liquid assets were $2,309,000.
Cash decreased $331,000, or 99.4%, to $2,000 at December 31, 1998 from $333,000
at December 31, 1997. This decrease in cash was primarily the result of the
procedures involving use of the Company's revolving credit facility, under which
collections of outstanding accounts receivable are swept daily and re-applied
against outstanding draws. Accounts receivable - trade increased $679,000, or
43.8%, to $2,229,000 at December 31, 1998 from $1,550,000 at December 31, 1997.
This increase is primarily the result of increased sales during December 1998,
offset in part by improved collections. Accounts receivable - other decreased
$426,000 to $-0- at December 31, 1998. This decrease is the result of the
Company's receipt of payment in full for the sale of land held by the Company
during 1998.
Current assets increased by $2,313,000, or 45.4%, to $7,405,000 at
December 31, 1998 from $5,092,000 at December 31, 1997. Of this increase,
$679,000 was primarily the result of an increase in accounts receivable - trade
discussed above and $2,335,000 was the result of increased inventory levels
related to the Company's new telephone headset and flashlight lines in addition
to the increase in crayon inventory as a result of the deferral of orders from
Dolgencorp, Inc. The increase in current assets was offset in part by a decrease
in cash and accounts receivable-other as discussed above.
<PAGE>
Long-term assets decreased $183,000, or 4.2%, to $4,134,000 at December
31, 1998 from $4,317,000 at December 31, 1997. This decrease was primarily the
result of the Company's decision to write-off deferred loan costs related to the
Company's Convertible Debenture and Equity Line-of-Credit executed in May 1998
due to the "call" provision of the debenture, in addition to normal recurring
depreciation of fixed assets and amortization of deferred loan costs and other
intangibles.
Current liabilities increased by $1,940,000, or 48.1%, to $5,974,000 at
December 31, 1998 from $4,034,000 at December 31, 1997. Of this increase,
$440,000 was primarily the result of an increase in accrued expenses related to
legal fees. Additionally, the Company reclassed the Convertible Debentures from
long-term to short-term liabilities due to the "call" provision of the
debenture, offset in part by the reclassification of a $1,000,000 deposit for
stock issuance from short-term to long-term liabilities. On February 4, 1999 the
Company entered into a deposit payable conversion agreement, whereby the
$1,000,000 liability was cancelled in return for which the Company issued
500,000 shares of restricted common stock. These increases were offset, in part,
by decreases in accrued salaries and benefits, accrued advertising and the
current portion of long-term debt.
The Company's working capital increased by $1,045,000, or 98.7%, to
$2,103,000 at December 31, 1998 from $1,058,000 at December 31, 1997, for the
reasons described above.
The Company used cash of $2,079,000 from operating activities during
the year ended December 31, 1998, resulting primarily from increased inventory
levels relating to anticipated sales of miscellaneous/mass market products to
Dolgencorp, Inc. and the Company's telephone headset and flashlight businesses.
The Company used cash of $331,000 from investing activities during the
year ended December 31, 1998, primarily for capital expenditures relating to the
Company's new accounting and material resource planning integrated software
system implemented in early 1998.
The Company received $2,079,000 of cash from financing activities
during the year ended December 31, 1998, due in part to a private placement of
Convertible Debentures completed in May 1998 as well as borrowings under the
Company's revolving line-of-credit, less payments made on long-term debt during
the period.
Inflation
Most of the Company's products are purchased in finished form and
packaged by the supplier or at the Company's headquarters. The Company uses a
premixed plastisol (a petroleum based raw material) to manufacture certain of
its telephone accessory products at its headquarters. The Company anticipates
usual inflationary increases in the price of its plastic products and does not
intend to pass these increases along to its customers, primarily as a result of
other operating efficiencies gained through changing the sourcing of certain of
its flashlight manufacturing from the United States to Asia. Significant
increases in the cost of plastisol in the future could materially affect the
Company's profitability if these costs cannot be passed on to customers. In
general, the Company does not believe that inflation has had a material effect
on its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future. The
Company purchases corrugated packaging materials from several suppliers. These
suppliers source raw materials from Asia and have indicated to the Company that
they anticipate a price increase of between 10% and 14% in the second quarter of
1999, and have indicated that they will be passing this increase on to all
customers. The Company does not believe that this increase will have a material
adverse affect on results of operations in 1999.
Seasonality
The Company's business is seasonal. The Company typically experiences
its highest sales volume in the fourth quarter of each year as a result of the
retail environment in which most of its customers conduct business. Because the
Company sells its products primarily to major retailers, the Company's sales
performance is significantly dependent on the performance of those retailers.
Accordingly, the fourth quarter is a key determinate to overall profitability
for the year.
<PAGE>
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 90% 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 March 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, conducted on-site reviews of certain of its key Asian suppliers to
ascertain, to the extent possible, the Company's exposure to manufacturing
delays or stoppages as a result of those suppliers' failure to remediate their
Year 2000 problems. Based on those efforts, the Company does not presently
anticipate that its operations will be adversely affected as a result of the
Year 2000 problem as it may affect the Company's key suppliers' internal
systems. However, there can be no guarantee that the systems of other companies
on which the Company relies for products and services will be timely assessed
and, where appropriate remediated, or that other companies' failure to become
Year 2000 compliant would not have a material adverse effect on the Company.
The Company presently believes that with modifications to existing
software and conversions to new software for those systems which it believes may
be affected, the Year 2000 issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material adverse impact on the operations and
financial condition of the Company.
<PAGE>
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based upon management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in Year 2000 consulting and
remediation, the ability to locate and correct all relevant computer codes and
similar uncertainties. As testing and assessment of third parties is completed,
the Company intends to develop contingency plans for possible Year 2000
problems.
Forward Looking Statements
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1936, as amended, which are
intended to be covered by the safe harbors created thereby. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements will
prove to be accurate. Factors that could cause actual results to differ from
results discussed in forward-looking statements include, but are not limited to,
potential increases in inventory costs, competition, and the Company's ability
to obtain additional working capital to fund future growth.
<PAGE>
Item 7. Financial Statements
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>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
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>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
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>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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>
<TABLE>
<CAPTION>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
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>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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.
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
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be settled or recovered. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized 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>
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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
<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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) SHORT-TERM NOTE PAYABLE (Continued)
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 -
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
</TABLE>
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) LONG -TERM DEBT (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
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:
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
===========
(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>
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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) $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 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 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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
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.
(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>
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (Continued)
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-
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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCKHOLDERS' EQUITY (Continued)
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 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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) BUSINESS SEGMENT INFORMATION (Continued)
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>
<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
================ ==================
<FN>
(1) Amortization includes all amortization relating to product license rights,
non-competes and purchased patents.
</FN>
</TABLE>
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) BUSINESS SEGMENT INFORMATION (Continued)
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>
<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
================ =================
<FN>
(1) Includes Canada, Europe and other miscellaneous.
</FN>
</TABLE>
<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>
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 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>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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..
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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14).....STOCK OPTIONS (Continued)
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>
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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
1998 1997
---------------- -------------
<S> <C> <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.
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.
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) SUBSEQUENT EVENTS (Continued)
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 contained 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>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) CONTINGENCIES
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>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
In December 1997, the Company appointed KPMG LLP ("KPMG") to replace
Jones, Jensen & Company ("Jones") as independent auditors of the Company for the
fiscal year ended December 31, 1997. Jones resigned as the Company's independent
auditors on December 16, 1997. Management believed at the time of such change
that the Company had reached a level of financial complexity which demanded the
resources of a major public accounting firm. The decision to engage KPMG as the
Company's independent auditors was approved by the Company's Board of Directors.
PART III
Item 9. Directors and Officers of the Registrant
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 U.S. 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., were 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'
<PAGE>
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
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.
Board Compensation
Board members, other than officers 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), Newbold and Berman. The purpose of this committee is to
act on the behalf of the entire Board of Directors between Board Meetings.
<PAGE>
Compensation Committee. The Compensation Committee is composed of Messrs.
Berman (Chairman) and Newbold. 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.
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.
<PAGE>
Item 10. 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.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
----------------------------------- --------------------- ------------------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP All Other
Name and Salary 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 - - - - -
<FN>
- -----------------
(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.
</FN>
</TABLE>
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.
<PAGE>
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.
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 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.
<PAGE>
Item 11. 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:
<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 Partnership 162,000 5.6%
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 (2) 5.5%
3078 American Saddler Dr.
Park City, UT 84060
<FN>
- -------------------------
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.
</FN>
</TABLE>
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. 800,000 additional non-qualified stock options 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. Subsequent to the issuance of these
options, the strike price was adjusted from $2.00 to $2.50 per share to reflect
the market value on the date of grant. In January 1999, upon his resignation
from the Company, Mr. Wood agreed to the cancellation of all of the Muito Bem
options.
<PAGE>
The following table sets out the beneficial ownership of the Company's
common stock of all of the Company's directors and officers.
<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 227,016 7.9%
officers as a group (5
persons)
<FN>
- ----------------------
(1) This reflects the 2,007 shares owned by Annalee G. Wood, wife of Donald M.
Wood; 162,000 shares held by Muito Bem LTD of which Donald M. Wood is
deemed a beneficial owner; and 24,000 shares subject to options exercisable
under the incentive stock option plan.
(2) This number includes 19,000 shares subject to options exercisable under the
incentive stock option plan.
(3) 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.
</FN>
</TABLE>
Item 12. 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 treasury stock was used to pay off $154,000 on
the note and accrued interest and $26,000 of other WAC related receivables.
<PAGE>
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 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, Donald M. Wood resigned and retired from the Company. 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. In connection with the
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.
During 1997 the Board of Directors authorized grants of various options
under both non-qualified and incentive stock options programs. These options are
described in detail in Note 15. 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 a strike price of $2.50 per share. The shareholder and former
executive officer of the Company who owns Muito Bem, Ltd. agreed in 1999 to
cancel all stock options issued to Muito Bem, Ltd.. Additionally, in 1997,
200,000 options were granted to WAC, at a strike price of $2.50 per share in
consideration for certain royalty reductions and travel expense reimbursements.
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.
Item 13. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Exhibits
The exhibits filed with or incorporated by reference in this
report are listed in the Exhibit Index beginning on page 50.
(b) Reports on Form 8-K
None
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Restated Articles of Incorporation of the Company. (Incorporated by
reference from Form SB-2 (File No. 333-57921) filed by the Company with the
Commission on June 25, 1998).
3.2 Amended and Restated Bylaws of the Company. (Incorporated by reference from
Form SB-2 (File No. 333-57921) filed by the Company with the Commission on
June 25, 1998).
4.1 Specimen Common Stock Certificate (Incorporated by reference from the
Registration Statement on Form 10 filed by the Company with the
Commission).
10.1 Convertible Debenture and Equity Line of Credit Agreement. (Incorporated by
reference from Form 8-K filed by the Company with the Commission on June 8,
1998).
10.2 Form of Convertible Debenture. (Incorporated by reference from Form 8-K
filed by the Company with the Commission on June 8, 1998).
10.3 Form of A Warrants. (Incorporated by reference from Form 8-K filed by the
Company with the Commission on June 8, 1998).
10.4 Form of B Warrants.(Incorporated by reference from Form SB-2 (File No.
333-57921) filed by the Company with the Commission on June 25, 1998).
10.5 Registration Rights Agreement (Incorporated by reference from Form SB-2
(File No. 333-57921) filed by the Company with the Commission on June 25,
1998).
10.6 Escrow Agreement (Incorporated by reference from Form SB-2 (File No.
333-57921) filed by the Company with the Commission on June 25, 1998).
10.7 Employment Agreement between the Company and Frederick W. Volcansek, dated
as of February 5, 1999
10.8 Employment Agreement between the Company and Paul A. Boyer, dated as of
October 19, 1998
11 Computation of Per Share Earnings for the Year Ended December 31, 1998; and
for the Year Ended December 31, 1997.
21 List of Subsidiaries of the Registrant (See, "Subsidiaries of the Company"
at page 25).
27 Financial Data Schedule (for SEC use only)
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DYNATEC INTERNATIONAL, INC.
/s/Frederick W. Volcansek, Sr. March 31, 1999
- ----------------------------- --------------
Frederick W. Volcansek, Sr. Date
Chief Executive Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ------ -----
<S> <C> <C>
/s/Frederick W. Volcansek, Sr. Chairman of the Board of Directors March 31, 1999
- ------------------------------ and Chief Executive Officer (Principal Executive
(Frederick W. Volcansek, Sr.) Officer)
/s/Paul A. Boyer Senior Vice President, Chief Financial March 31, 1999
- ------------------------------ Officer, Director and Secretary (Principal
(Paul A. Boyer) Accounting Officer)
/s/Wayne L. Berman Director March 31, 1999
- ------------------------------
(Wayne L. Berman)
/s/Reed Newbold Director March 31, 1999
- ------------------------------
(Reed Newbold)
</TABLE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
effective as of February 5, 1999 (the "Effective Date"), by and between Dynatec
International, Inc., a Utah corporation (the "Company"), and Frederick W.
Volcansek, an individual (the "Employee"). The Company and the Employee are
sometimes referred to herein, collectively, as the "parties" and, individually,
as a "party."
RECITALS:
A. WHEREAS, the Employee has been an outside director of the Company
for in excess of ten (10) years and, in that capacity, has acquired an in depth
knowledge of the Company and its business, operations, customers, suppliers and
products;
B. WHEREAS, the Employee has substantial knowledge and experience in
business and international commerce and finance, which knowledge and experience
has been and will continue to be valuable to the Company as it grows and expands
its operations;
C. WHEREAS, the Company is in the business of developing,
manufacturing, marketing, and distributing various consumer products, including,
but not limited to, telephone accessories, hardware and houseware products,
flashlights and telecommunications headsets; and
D. WHEREAS, the Company desires to establish its rights to the services
of the Employee in the capacity described below, on the terms and conditions and
subject to the rights of termination hereinafter set forth, and the Employee is
willing to accept such employment on such terms and conditions.
NOW THEREFORE, in consideration of the mutual agreements, promises and
covenants described herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Employee and the
Company have agreed and do hereby agree as follows:
<PAGE>
1. Employment. The Company hereby employs the Employee and the Employee hereby
accepts such employment, upon the terms and conditions set forth herein. The
Company understands that the Employee currently resides in The Woodlands, Texas
and intends to retain his residence in The Woodlands, Texas for personal and
family reasons for a presently unascertainable period of time after the
Effective Date but not to exceed six (6) months (the "Transition Period")
without the prior approval of the Company's Board of Directors. The term
"Transition Period" for purposes of this Agreement will be interpreted to
include any extension thereof that may be approved by the Board of Directors.
Notwithstanding the duration of the Transition Period set forth above, the
Employee intends to permanently relocate to the Salt Lake City, Utah area as
soon after the effective date of this Agreement as the Employee's personal and
family circumstances will allow, which determination shall be made by the
Employee in his sole and absolute discretion. The parties further understand and
agree that the Employee intends to travel from The Woodlands, Texas to Salt Lake
City, Utah each week during the Transition Period and expects to generally spend
several days of each business week working at the Company's headquarters in Salt
Lake City, Utah during the Transition Period, but at all times during the
Transition Period to devote his full time and professional expertise to the
discharge of the Employee's duties and responsibilities hereunder.
1.1 During Transition Period. During the Transition Period, the Company
shall furnish the Employee with (a) an office and secretarial and other
facilities and services at the Company's headquarters in Salt Lake City, Utah,
and (b) reimbursement for all actual expenses incurred in connection with all
reasonably necessary and appropriate office equipment for use by the Employee at
his residence in The Woodlands, Texas during the Transition Period, including,
but not limited to, all necessary computer hardware and software, computer
printer, facsimile machine and supplies, cellular telephone, Internet access,
scanner and all related peripheral equipment as reasonably necessary and
appropriate for the Employee to perform his duties and responsibilities under
this Agreement during the Transition Period and consistent with the Employee's
position as Chief Executive Officer of the Company.
1.2 After Transition Period. After the expiration of the Transition
Period, the Company shall furnish the Employee with an office and secretarial
and other facilities and services at the Company's headquarters in Salt Lake
City, Utah as are reasonably necessary and appropriate for the performance of
the Employee's duties and responsibilities hereunder and consistent with the
Employee's position as Chief Executive Officer of the Company.
<PAGE>
2. Duties. The Company does hereby employ and engage the Employee as Chief
Executive Officer of the Company and each of its subsidiaries and divisions, or
such other title as the Company's Board of Directors shall specify from time to
time, and the Employee does hereby accept and agree to such engagement and
employment. The Employee's duties shall be such executive and managerial duties
and responsibilities as the Board of Directors shall specify from time to time
and as provided in the Bylaws of the Company, as the same may be amended from
time to time, and shall entail those duties customarily performed by a Chief
Executive Officer of a company with a sales volume and number of employees
commensurate with those of the Company. The Employee shall diligently and
faithfully execute and perform such duties and responsibilities, subject to the
general supervision and control of the Company's Board of Directors. The
Employee shall be responsible and report only to the Company's Board of
Directors. The Board of Directors, in its sole and absolute discretion, shall
determine the Employee's duties and responsibilities and may assign or reassign
the Employee to such executive and managerial duties, responsibilities or
positions as it deems in the Company's best interest. The Employee shall devote
his full-time attention, energy and skill during normal business hours to the
business and affairs of the Company and shall not, during the Employment Term
(as that term is defined below), be actively engaged in any other business
activity, except with the prior written consent of the Company's Board of
Directors; provided, however, that in any event any such other business activity
will not: (a) adversely affect or materially interfere with the performance of
the Employee's duties and responsibilities hereunder, (b) involve a conflict of
interest with the Company or (c) involve activities competitive with the
business of the Company. Notwithstanding the foregoing, the Employee shall be
permitted to (i) engage in charitable and community affairs, (ii) act as a
director of any corporation or organization outside of the Company, not to
exceed three (3) in number, that is not in competition with the Company, and
(iii) make investments of any character in any business not in competition with
the Company or any of its subsidiaries or divisions and manage such investment
(but not be involved in the day-to-day operations of any such business),
provided, however, no such business shall place the Employee in a conflict of
interest with the Company or interfere with the performance of the Employee's
duties and responsibilities under this Agreement.
3. Compensation and Benefits. As the entire consideration for the services to be
performed by the Employee hereunder and the duties and responsibilities assigned
to and the obligations incurred by the Employee hereunder, and subject to the
terms and conditions hereof, during the Employment Term the Employee shall be
entitled to the following:
3.1 Base Salary. Subject to Section 5 below, during the Employment Term
the Company shall pay the Employee an annual base salary of One Hundred
Ninety-Five Thousand Dollars ($195,000). The Company will pay the Employee said
base salary in equal semi-monthly installments or at more frequent intervals in
accordance with the Company's customary policies and pay schedule. An upward
adjustment to the Employee's base salary shall be considered by the Company's
Board of Directors not less frequently than annually. The Employee and the
Company agree that any expenses that are paid for by the Company or reimbursed
to the Employee pursuant to Sections 3.7 or 3.8 below will be accounted for by
the Company as compensation to the Employee and subject to normal withholding by
the Company on an as-paid basis.
3.2 Additional Benefits. The Employee shall be entitled to participate,
to the extent of his eligibility, in any employee benefit plans made generally
available by the Company to its other senior management personnel during the
Employment Term, including, without limitation, such bonus plans, pension or
profit sharing plans, incentive stock option plans, retirement plans, and
health, life, hospitalization, dental, disability or other insurance plans or
programs as may be in effect from time to time, subject, however, to any
restrictions specified in such plans. Such participation shall be in accordance
with the terms established from time to time by the Company for individual
participation in any such plans or programs.
<PAGE>
3.3 Vacation, Sick Leave and Holidays. The Employee shall be entitled
to such amounts of paid vacation and other leave, up to three (3) weeks of paid
vacation per each twelve (12) month period of employment, as from time to time
may be generally allowed to the Company's senior management personnel, with such
vacation to be scheduled and taken in accordance with the Company's standard
vacation policies applicable to such personnel. In addition, the Employee shall
be entitled to such sick leave and holidays at full pay in accordance with the
Company's policies established and in effect from time to time for its senior
management personnel.
3.4 Vehicle. The Employee shall be entitled to the use of one (1)
Company owned or leased vehicle and full reimbursement for all expenses
associated with the operation and maintenance of such vehicle, which vehicle
shall be comparable to the vehicles of the other senior management personnel and
executives of the Company. The Company will reimburse the Employee for such
expenses in accordance with the Company's normal accounting procedures upon the
presentation of vouchers and documentation for such operational and maintenance
expenses.
3.5 Bonus. The Company's Board of Directors may at any time, but shall
have no obligation to do so, pay the Employee such bonuses and/or other
supplemental or special payments and benefits as the Board of Directors
determines in its sole and absolute discretion.
3.6 Stock Options. The Employee shall be granted options to purchase
shares of the Company's Common Stock in an amount and with terms and conditions
to be determined by the Board of Directors. All such options will be granted
pursuant to and governed by any executive stock option plan then in effect (or
such other similar plan as determined by the Board of Directors) and shall be
evidenced by a separate option grant agreement with the Employee.
3.7 Relocation Expenses. Upon the expiration of the Transition Period,
the Company will pay for and on behalf of the Employee, or reimburse the
Employee for, all reasonable costs and expenses associated with the Employee
permanently relocating his permanent residence from The Woodlands, Texas to the
Salt Lake City, Utah area, which costs and expenses shall include, but shall not
be limited to, the services of a moving company to pack and transport the
Employee's household items and personal belongings and transportation of the
Employee and his family members to Salt Lake City, Utah; provided, however, that
such expenses shall not exceed Twenty Thousand Dollars ($20,000) in the
aggregate without the prior approval of the Company's Board of Directors;
provided further, however, that the Company shall have no obligation to pay for
or reimburse the Employee for any of the costs associated with the sale of the
Employee's residence in The Woodlands, Texas.
<PAGE>
3.8 Expenses During Transition Period. During the Transition Period,
the Company will provide the Employee with, or reimburse the Employee for the
cost of, an apartment, executive suite or other suitable dwelling in the Salt
Lake City, Utah area and all items of personal property reasonably necessary for
the Employee to reside in the Salt Lake City, Utah area during the Transition
Period. In addition, during the Transition Period the Company will pay for or
reimburse the Employee for all reasonable travel and transportation costs
related to the Employee commuting between The Woodlands, Texas and Salt Lake
City, Utah. The parties understand and agree that the Employee generally intends
to travel from The Woodlands, Texas to Salt Lake City, Utah each week during the
Transition Period. The Company will also pay for or reimburse the Employee for
all ordinary and necessary communication and business expenses, including, but
not limited to, telephone, telecopy and overnight delivery charges, incurred by
the Employee during the Transition Period when his is working from his home
office in The Woodland, Texas.
3.9 No Other Benefits or Compensation. The Employee, as a result of his
employment by the Company as provided by this Agreement, shall only be entitled
to the compensation and benefits provided for in this Agreement, subject to the
terms as set forth herein, and to no other benefits or compensation.
4. Business Expenses. During both the Transition Period and after the expiration
thereof, the Company shall promptly reimburse the Employee for all reasonable
out-of-pocket business expenses incurred in performing the Employee's duties and
responsibilities hereunder in accordance with the Company's policies with
respect thereto in effect from time to time, provided that the Employee promptly
furnishes to the Company adequate records and other documentary evidence
required by all federal and state statutes, rules and regulations issued by the
appropriate taxing authorities for the substantiation of each such business
expense as a deduction on the federal and state income tax returns of the
Company.
5. Term and Termination.
5.1 Employment Term. Subject to earlier termination as provided
hereinbelow (and except for the provisions of this Agreement that, by their
terms, continue in force beyond the termination thereof), the term of this
Agreement shall be for a four (4) year period, commencing on the Effective Date
and ending on February 5, 2003 (the "Employment Term"). Upon mutual written
consent of the parties, this Agreement may be extended or renewed for such
successive term or terms beyond the Employment Term as the parties agree in a
written document executed by both parties. If the Employment Term is so extended
or renewed as provided in this Section 5.1, the term "Employment Term" will be
interpreted herein to include such successive extension or renewal term or
terms.
5.2 Voluntary Termination. The Company shall only be able to
voluntarily terminate this Agreement without cause (as that term is defined
below) prior to the expiration of the Employment Term as provided by Section 5.1
above. The Employee may voluntarily terminate this Agreement and his employment
hereunder at any time during the Employment Term, in which event the conditions
of Section 5.5.1 below shall apply.
5.3 Termination for Cause. This Agreement, and the Employee's
employment hereunder, shall automatically terminate upon the Employee's death
and is otherwise immediately terminable by the Company for cause at anytime
(except as otherwise set forth hereinbelow) upon written notice from the Company
to the Employee. As used in this Agreement, "cause" shall mean the following:
5.3.1 refusal by the Employee to implement or adhere to lawful
policies or directives of the Board of Directors;
<PAGE>
5.3.2 habitual neglect of or deliberate or intentional refusal
by the Employee to perform his duties, responsibilities or obligations under
this Agreement;
5.3.3 the Employee's conviction of or entrance of a plea of
nolo contendere to (a) a felony, (b) any crime punishable by incarceration for a
period of one (1) year or longer, or (c) other conduct of a criminal nature that
may have a material adverse impact on the Company's reputation and standing in
the community;
5.3.4 breach of fiduciary duty, breach of the Employee's
common law duty of loyalty, deliberate breach of the Company's rules resulting
in loss or damage to the Company, or unauthorized disclosure of any of the
Company's trade secrets, confidential information or Proprietary Information (as
that term is defined below) by the Employee; and
5.3.5 theft, embezzlement or other criminal misappropriation
of funds by the Employee from the Company;
provided, however, that cause pursuant to Sections 5.3.1 and 5.3.2 above shall
not be deemed to exist unless the Company shall have first given the Employee a
written notice thereof specifying in reasonable detail the facts and
circumstances alleged to constitute "cause," and thirty (30) days after such
notice such conduct has, or such circumstances have, as the case may be, not
entirely ceased or been entirely remedied. The determination of whether the
Employee's actions justify termination for cause and the date such termination
shall be effective shall be made by the Company's Board of Directors, in good
faith, in its sole and absolute discretion. If the Company terminates the
Employee's employment pursuant to this Section 5.3 but it is ultimately
determined that the Company lacked "cause," the provisions of Section 5.5.2
below shall apply.
<PAGE>
5.4 Termination for Disability. The Company's Board of Directors may
terminate this Agreement and the Employee's employment hereunder, upon written
notice to the Employee and certification of the Employee's "disability" (as that
term is defined below) by a Qualified Physician (as that term is defined below)
or a panel of Qualified Physicians, as set forth below, if the Employee becomes
disabled for either (a) one hundred-twenty (120) continuous days or (b) one
hundred-eighty (180) days during any continuous twenty-four (24) month period
during the Employment Term. The Company's Board of Directors shall initially
determine that the Employee's disability will prevent the Employee from
substantially performing the Employee's duties, responsibilities or obligations
hereunder. As used in this Agreement, "disability" shall be defined as (i) the
Employee's inability, by reason of physical or mental illness or other cause, to
substantially perform the Employee's duties, responsibilities or obligations
hereunder, or (ii) disability as defined in any disability insurance policy of
the Company in effect at the time in question. The Employee's disability, as
initially determined by the Board of Directors, shall then be certified by a
Qualified Physician or, if requested by the Employee, by a panel of three (3)
Qualified Physicians. If the Employee requests such a panel, the Employee and
the Company shall each select one (1) Qualified Physician who together shall
then select a third Qualified Physician. The determination of the individual
Qualified Physician or a majority of the panel of Qualified Physicians, as the
case may be, shall be binding and conclusive for all purposes. As used in this
Section 5.4, the term "Qualified Physician" shall mean any medical doctor who is
licensed to practice medicine in the State of Utah and who is reasonable
acceptable to the Employee and the Company. The Employee and the Company may, in
any instance, and in lieu of a determination by a Qualified Physician or a panel
of Qualified Physicians, agree between themselves that the Employee is disabled
for purposes of this Section 5.4, in which event the parties understand and
agree that any such determination shall only be applicable for purposes of this
Agreement. The Employee shall receive full compensation, benefits and
reimbursement of expenses pursuant to the terms of this Agreement from the date
disability begins until the date the Employee receives written notice that the
Qualified Physician or the panel of Qualified Physicians, as the case may be,
has certified the Employee's disability or until the Employee begins to receive
disability benefits pursuant to any disability insurance policy of the Company,
whichever occurs first.
5.5 Effect of Termination.
5.5.1 Termination for Cause or Voluntary Termination by the
Employee. In the event this Agreement and the Employee's employment is
terminated for cause hereunder or the Employee voluntarily terminates this
Agreement pursuant to Section 5.2 above, all obligations of the Company and all
duties, responsibilities and obligations of the Employee shall cease except as
provided in Section 5.5.3 below. Upon such termination, the Employee or the
Employee's representative or estate shall be entitled to receive only the
compensation, benefits and reimbursement earned by or accrued to the Employee
under the terms of this Agreement prior to the date of termination, but shall
not be entitled to any further compensation, benefits or reimbursement after
such date.
<PAGE>
5.5.2 Voluntary Termination by the Company; Severance
Compensation. In the event the Company voluntarily terminates this Agreement and
the Employee's employment hereunder during the Employment Term other than for
cause (and other than as allowed pursuant to Section 5.2 above), the Employee
will be entitled to the following severance benefits: (a) two (2) years' base
salary (as the Employee's base salary is set forth in Section 3.1 above or as
subsequently increased by the Company), fifty percent (50%) of which shall be
paid in a lump sum on the date of the Employee's termination and the other fifty
percent (50%) of which shall be paid in three (3) equal quarterly installments
commencing on the date that is one-hundred eighty (180) days after the date of
the Employee's termination; and (b) two (2) years of Company-paid health,
hospitalization and dental coverage, which insurance coverage shall be
substantially on the same terms and conditions as was offered to the Employee
during the Employment Term. Other than the items set forth in clauses (a) and
(b) above in this Section 5.5.2, the Employee shall not be entitled to any
further compensation, benefits or reimbursement after the date of his
termination. In the event the Employee voluntarily terminates this Agreement and
his employment hereunder pursuant to Section 5.2 above, the Employee shall not
be entitled to any severance pay and shall not be entitled to any further
compensation, benefits or reimbursement after such termination date. Except for
the severance pay provided in this Section 5.5.2, and except as otherwise
provided herein, all obligations of the Company will cease upon the Company's
voluntary termination of this Agreement and the Employee's employment hereunder.
No severance compensation will be paid to the Employee in the event he is
terminated for cause.
5.5.2.1 This Agreement shall not be terminated by the voluntary or
involuntary dissolution of the Company resulting from either a merger or
consolidation in which the Company is not the consolidated or surviving company,
or a transfer or all or substantially all of the assets of the Company, or the
sale of all or substantially all of the Company's equity capital (a "change of
control"). In the event of any such merger, consolidation, sale or change of
control, the Company's rights hereunder shall be assigned to the surviving or
resulting company, which company shall then honor this Agreement with the
Employee or purchase this Agreement from the Employee for an amount equal to
three (3) years' base salary (as the Employee's base salary is set forth in
Section 3.1 above or as subsequently increased by the Company), which amount
shall be paid to the Employee in one (1) lump sum upon the closing of such
merger, consolidation, sale or change of control.
5.5.3 Survivability.
5.5.3.1 Upon the termination of this Agreement pursuant to Section 5.4 or
Section 5.5.1 above and upon the expiration of the Employment Term, this
Agreement shall thereupon be and become void and of no further force or effect,
except that (a) the covenant not to compete set forth in Section 6 below and (b)
the proprietary information provision contained in Section 7 below shall survive
any such termination or expiration and shall continue to bind the Employee for
the period of time stated therein, and, in addition, the attorneys' fees
provisions, governing law and jurisdiction and venue provisions, and
indemnification provisions set forth in Sections 13, 14 and 16 below,
respectively, shall continue to govern any disputes arising under this
Agreement.
5.5.3.2 Upon the termination of this Agreement
pursuant to Section 5.5.2 above, this
Agreement shall thereupon be and become void and of no further force or effect,
except that (a) the severance pay provisions of Section 5.5.2 above, (b) the
covenant not to compete set forth in Section 6 below and (c) the proprietary
information provision contained in Section 7 below shall survive any such
termination and shall continue to bind the Employee for the period of time
stated therein, and, in addition, the attorneys' fees provisions, governing law
and jurisdiction and venue provisions, and indemnification provisions set forth
in Sections 13, 14 and 16 below, respectively, shall continue to govern any
disputes arising under this Agreement.
<PAGE>
5.5.4 Full Calendar Month. To the extent permitted by
applicable law, the calendar month in which the Employee's employment is
terminated shall be counted as a full month in determining all amounts hereunder
and the vesting of any benefits under any of the Company's benefit plans or
programs.
6. Covenant Not to Compete.
6.1 Non-Compete Covenant. The Company and the Employee agree that the
Company's successful operation depends, to a great extent, on the Employee's
special knowledge and expertise in business and international commerce and
finance. Consequently, during the Employment Term and for a period of two (2)
years after the date of termination of the Employee's employment with the
Company (for any reason whatsoever) or the expiration of this Agreement at the
expiration of the Employment Term, the Employee, in further consideration of the
Company's agreement to employ the Employee as provided herein, agrees not (a) to
engage, directly or indirectly, personally or as an employee, agent, consultant,
partner (whether general or limited), member, manager, officer, director,
shareholder or otherwise, in any business activities that are the same as or
similar to those in which the Company engages or proposes to engage (as
indicated by the Company's business plan on the date of the expiration of the
Employment Term) for or on behalf of himself or any other person, firm, company,
corporation or business organization or entity that competes with the Company in
the consumer products industry, (b) to engage in such activities with any other
person, firm, company, partnership, corporation or business organization or
entity engaged in or about to become engaged in such activities for or on behalf
of such other person, firm, company, partnership, corporation or business
organization or entity, or (c) to entice, induce or encourage any of the
Company's other employees or any of its officers, directors or consultants to
engage in any activity that, were it done by the Employee, would violate any
provision of this Section 6.1; provided, however, that notwithstanding the
immediately preceding restrictions set forth in clauses (a), (b) and (c) of this
Section 6.1, the Employee shall be allowed to own up to five percent (5%) of the
issued and outstanding voting stock or interests of any company or mutual fund
that competes directly or indirectly with the Company if such stock or interests
are traded on a national securities market or on the NASDAQ Stock Market. The
restrictions set forth in this Section 6.1 shall only apply in the State of
Utah. The Employee expressly agrees and acknowledges that (i) this covenant not
to compete is reasonable as to time and geographic scope and area and does not
place any unreasonable burden on the Employee, (ii) the general public will not
be harmed as a result of the enforcement of this covenant not to compete, (iii)
the Employee's personal legal counsel has reviewed this covenant not to compete,
and (iv) the Employee understands and hereby agrees to each and every term and
condition of this covenant not to compete.
<PAGE>
6.2 Violation of Covenants. The Employee expresses, agrees and
acknowledges that the covenant not to compete contained in this Section 6 is
necessary for the Company's protection because of the nature and scope of the
Company's business and the Employee's position with and the scope of the duties,
responsibilities and obligations delegated to the Employee by the Company. If
any of the covenants or agreements contained in this Section 6 are violated, the
Employee agrees and acknowledges that any such violation or threatened violation
will cause irreparable injury to the Company and that the remedy at law for any
such violation or threatened violation will be inadequate and that the Company
will be entitled to injunctive relief and other equitable remedies without the
necessity of proving actual damages. This non-competition period shall be
extended by any period of time during which the Employee is in breach or
violation of this covenant.
7. Proprietary Information.
7.1 Return of Proprietary Information. Upon the termination of this
Agreement for any reason whatsoever or the expiration of the Employment Term,
the Employee shall immediately turn over to the Company any and all Proprietary
Information (as that term is defined below). The Employee shall have no right to
retain any copies of any material qualifying as Proprietary Information for any
reason whatsoever after the termination of his employment hereunder or the
expiration of the Employment Term, without the express written consent of the
Company.
7.2 Non-Disclosure. It is understood and agreed that, in the course of
his employment hereunder and through his prior activities for and on behalf of
the Company and the contemplated future activities for and on behalf of the
Company pursuant hereto, the Employee will receive, deal with and have access
to, the Company's Proprietary Information and that the Employee holds and will
hold all of the Company's Proprietary Information in trust and confidence for
and on behalf of the Company. The Employee agrees that he will not, during the
Employment Term or thereafter, in any fashion, form or manner, directly or
indirectly, retain, make copies of, divulge, disclose or communicate to any
person, firm company, partnership, corporation or business organization or
entity, in any manner whatsoever, except when necessary or required in the
normal course of the Employee's employment hereunder and for the benefit of the
Company or with the express prior written consent of the Company, any of the
Company's Proprietary Information or any information of any kind, nature or
description whatsoever concerning any matters affecting or relating to the
Company's business or affairs or any of its Proprietary Information.
<PAGE>
7.3 Proprietary Information Defined. For purposes of this Agreement,
"Proprietary Information" shall include, but shall not be limited to, the
following: (a) identity of clients, customers, suppliers, retailers,
distributors, distribution channels or investors in, of or to the Company, or
potential clients, customers, suppliers, retailers, distributors, distribution
channels or investors in, of or to the Company; (b) any written, typed or
printed lists or other materials identifying the clients, customers, suppliers,
retailers, distributors or investors in, of or to the Company, or potential
clients, customers, suppliers, retailers, distributors or investors in, of or to
the Company; (c) any financial or other information supplied to the Company by
its clients, customers, suppliers, retailers, distributors or investors; (d) any
and all data or information involving the processes, security codes, flowcharts,
techniques, programs, marketing materials, personnel information, methods,
suppliers or contacts employed by the Company in the conduct of its business;
(e) any lists, documents, manuals, records, forms or other materials used by the
Company in the conduct of its business; (f) any descriptive materials describing
the processes, methods or procedures employed by the Company in the conduct of
its business; (g) any processes for or involving any of the Company's products
or contemplated or proposed products, processes or services or any in-process
patent applications or trade secrets relating to the Company's products,
processes or services; and (h) any other secret or confidential information or
material concerning the Company's business, affairs or products or services,
including, but not limited to, non-public financial information such as budgets
and business plans. The terms "list," "document" or their equivalent, as used in
this Section 7.3, are not limited to a physical writing or compilation, but also
include any and all information whatsoever regarding the subject matter of the
"list" or "document" whether or not such compilation has been reduced to writing
and regardless of the medium in which the same exists (whether electronic,
digital, magnetic, optical or otherwise).
8. Termination of Prior Agreements. This Agreement terminates and supersedes any
and all prior negotiations, correspondence, agreements, proposals and
understandings between the parties hereto with respect to employment or with
respect to the compensation of the Employee by the Company, and all such
negotiations, correspondence, agreements, proposals and understandings shall be
deemed to be merged into this Agreement and, to the extent inconsistent
herewith, such negotiations, correspondence, agreements, proposals and
understandings shall be deemed to be of no force or effect. There are no
representations, warranties or agreements, whether express or implied, oral or
written, with respect to the subject matter hereof, except as set forth herein.
9. Assignment. This Agreement is for the unique personal services of the
Employee and is not assignable or delegable, in whole or in part, by the
Employee without the prior written consent of the Company. This Agreement may be
assigned or delegated, in whole or in part, by the Company and, in such case,
shall be assumed by and become binding upon the person, firm, company,
corporation or business organization or entity to which this Agreement is
assigned.
10. Waiver or Modification. Any waiver, change, modification, extension,
discharge or amendment of any provision of this Agreement shall be effective
only if in writing in a document that specifically refers to this Agreement and
is signed by the party against whom enforcement of such waiver, change,
modification, extension, discharge or amendment is sought. The waiver by either
party of a breach of any provision of this Agreement by the other party shall
not operate or be construed as a waiver of any other provision hereof or any
subsequent breach of the same provision hereof.
<PAGE>
11. Severability; Interpretation. In the event that any term or portion,
including any part of a Section or subsection, of this Agreement is invalid or
unenforceable for any reason, the remaining terms or portions of this Agreement,
including the remaining Sections or subsections, if any, shall be severable and
shall remain in full force and effect. The parties to this Agreement agree that
the court making a determination that any term or provision of this Agreement is
unenforceable shall modify the scope, duration, geographic area or application
of the term or provision so that the term or provision is enforceable to the
maximum extent permitted by applicable law. Notwithstanding any rule or maxim of
construction to the contrary, any ambiguity or uncertainty in this Agreement
shall not be construed against either of the parties based upon authorship of
any of the provisions hereof. The above Recitals are deemed to be incorporated
herein by reference.
12. Notices. Any notice required or permitted hereunder to be given by either
party shall be in writing and shall be delivered personally or sent by certified
or registered mail, postage prepaid, or by private courier, or by telex,
telegram or telecopy to the party to the address set forth below or to such
other address as either party may designate from time to time according to the
terms of this Section 12:
To the Employee at: Frederick W. Volcansek
10 Moss Bluff Court
The Woodlands, Texas 77382
Fax: (409) 273-4705
With a copy to: David M. Connors, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1000 Kearns Building
136 South Main Street
Salt Lake City, Utah 84101-1685
Fax: (801) 359-8256
To the Company at: Dynatec International, Inc.
3820 Great Lakes Drive
Salt Lake City, Utah 84120
Attention: Paul A. Boyer, Chief Financial Officer
Fax: (801) 972-2112
With a copy to: N. Todd Leishman, Esq.
Durham Jones & Pinegar
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
Fax: (801) 538-2425
<PAGE>
A notice delivered personally shall be effective upon receipt. A notice
sent by telex, telegram or telecopy shall be effective twenty-four (24) hours
after the dispatch thereof. A notice delivered by private courier shall be
effective on the day delivered or if delivered by mail, the third (3rd) business
day after the day of mailing.
13. Attorneys' Fees. In the event of any action at law or in equity to enforce
or interpret the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees, court costs and disbursements in addition to any
other relief to which such party may otherwise be entitled.
14. Governing Law; Jurisdiction and Venue. This Agreement shall be governed by
and construed in accordance with the laws of the State of Utah without giving
effect to any applicable conflicts of law provisions. The parties consent to the
exclusive jurisdiction and venue of the federal and state courts residing in
Salt Lake City, Salt Lake County, Utah for the resolution of any disputes
arising under or out of this Agreement.
15. Business Opportunities. During the Employment Term the Employee agrees to
bring to the attention of the Company's Board of Directors all written business
proposals that come to the Employee's attention and all business or investment
opportunities of whatever nature that are created or devised by the Employee and
that relate to areas in which the Company conducts business and might reasonably
be expected to be of interest to the Company or any of its subsidiaries or
divisions.
16. Employee's Representations and Warranties. The Employee hereby represents
and warrants that he is not under any contractual obligation to any other
company, entity or individual that would prohibit or impede the Employee from
performing his duties and responsibilities under this Agreement and that he is
free to enter into and perform the duties and responsibilities required by this
Agreement. The Employee hereby agrees to indemnify and hold the Company and its
officers, directors, employees, shareholders and agents harmless in connection
with the representations and warranties made by the Employee in this Section 16.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
effective as of the Effective Date.
THE COMPANY: THE EMPLOYEE:
DYNATEC INTERNATIONAL, INC.,
a Utah corporation
/s/Frederick W. Volcansek, Sr.
Frederick W. Volcansek, Sr.
By: /s/Paul A. Boyer
Paul A. Boyer
Its: Chief Financial Officer
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
19th day of October, 1998, by and between PAUL A. BOYER ("Employee") and DYNATEC
INTERNATIONAL, INC and SOFTALK, INC. (the "Company").
RECITAL
This Agreement is made and entered into with reference to the following
facts and objectives:
The Company desires to establish its right to the services of Employee
in the capacities described below, on the terms and conditions hereinafter set
forth, and Employee is willing to accept such employment on such terms and
conditions.
Therefore, in consideration of the mutual agreements hereinafter set
forth, Employee and the Company have agreed and do hereby agree as follows:
<PAGE>
AGREEMENT
1. DUTIES.
The Company does hereby hire, engage, and employ the Employee as the Senior
Vice President, Chief Financial Officer and Secretary of the Company and
Employee does hereby accept and agree to such hiring, engagement, and
employment. Employee shall serve the Company in such position fully, diligently,
competently, and in conformity with provisions of this Agreement and the
corporate policies of the Company as they presently exist, and as such policies
may be amended, modified, changed, or adopted during the Period of Employment,
as hereinafter defined.
During the Period of Employment Employee shall also serve as the Senior
Vice President Chief Financial Officer and Secretary of each subsidiary or
affiliate of the Company that is now or that becomes a part of Dynatec
International, Inc. As used in this Agreement, the term "Dynatec" shall mean and
refer to the Company and the Company's subsidiaries and affiliates from time to
time.
Subject to specific elaboration by the Board of Directors of the Company
as to the duties (which shall be consistent herewith and with Employee offices
provided for hereunder) that are to be performed by Employee and the manner in
which such duties are to be performed, the duties of Employee shall entail those
duties customarily performed by a Senior Vice President, Chief Financial Officer
and Secretary of a company with a sales volume and the number of employees
commensurate with those of the Company. Provided, however, that at all times
during the Period of Employment, Employee shall perform those duties and fulfill
those responsibilities and refrain from those activities that are reasonably
prescribed or proscribed by the Board of Directors of the Company to be
performed or refrained from by his consistent with his positions with the
Company.
Employee shall be responsible and report only to the Company's
Chairman/Chief Executive Officer and President.
Throughout the Period of Employment, Employee shall devote his full
time, energy, and skill to the performance of his duties for the Company and for
the benefit of the Company. The foregoing notwithstanding, Employee shall be
permitted to (i) engage in charitable and community affairs, (ii) act as a
director of any corporations or organizations outside of Dynatec not in
competition with the Company and to manage such investments, not to exceed three
(3) in number, and receive compensation therefore, and (iii) to make investments
of any character in any business or businesses not in competition with the
Company or any member of Dynatec and to manage such investments (but not be
involved in the day to day operations of any such business), provided, in each
case and collectively, that the same does or do not constitute or involve
Employee in a conflict of interest vis-(-vis the Company or interfere with the
performance of Employee's duties under this Agreement.
Employee shall exercise due diligence and care in the performance of his
duties for and the fulfillment of his obligations to the Company under this
Agreement.
The Company shall furnish Employee with office, secretarial and other
facilities and services as are reasonably necessary or appropriate for the
performance of Employee's duties hereunder and consistent with his position as
the Senior Vice President, Chief Financial Officer and Secretary of the Company.
<PAGE>
2. PERIOD OF EMPLOYMENT.
The Period of Employment (as defined below) shall, unless sooner terminated
as provided herein, be the four (4) year period commencing on the date of
execution of this Agreement.
Unless the Company gives notice of termination as provided under this
Agreement, this Agreement will automatically renew at the end of the initial
four (4) year period described above from the execution of this Agreement for a
successive three (3) year period.
3. COMPENSATION.
(a) BASE SALARY. During the Period of Employment, the Company shall pay
Employee, and Employee agrees to accept from the Company, in payment for his
services a base salary of One Hundred Forty Thousand Dollars ($140,000.00) per
year ("Base Salary"), payable in equal semi-monthly installments or at such
other time or times as Employee and the Company shall agree. In addition, the
Company shall pay Employee, and Employee agrees to accept from the Company, in
payment for his services as Secretary to the Board of Directors, compensation,
an amount which equals Ten Thousand Dollars ($10,000.00) per year, payable in
equal quarterly installments. Upward adjustment to the Base Salary shall be
considered by the Company's Board of Directors not less frequently than
annually. The Company's Board of Directors at any time or times may, but shall
have no obligation to, supplement Employee's salary by such bonuses and/or other
special payments and benefits as the Board of Directors of the Company in its
sole and absolute discretion may determine.
(b) INCENTIVE COMPENSATION. During the Period of Employment, Employee
shall: (i) Immediately participate in any incentive compensation plan, including
but not limited to, the Company's stock option plan(s) adopted by the Company;
or
4. FRINGE BENEFITS. During the Period of Employment, Employee shall be
entitled to the following fringe benefits.
(a) BENEFIT PLANS. Employee shall be entitled to participate in all benefit
plans and programs generally available to all other senior management employees
of the Company or to all employees of the Company working in Salt Lake City,
Utah, subject to any restrictions specified in such plans and to receive such
other benefits and conditions of employment as are provided to all other senior
officers or executives of the Company as of the date of this Agreement,
including, but not limited t 100% paid health insurance, life insurance, 401(k)
and qualified sick plans.
(c) VACATION AND OTHER LEAVE. Employee shall be entitled to such amounts of
paid vacation and other leave, but not less than three (3) weeks vacation per
twelve-month period of employment, as from time to time may be allowed to the
Company's senior management personnel generally, with such vacation to be
scheduled and taken in accordance with the Company's standard vacation policies
applicable to such personnel.
<PAGE>
(d) VESTING ON DEATH OR DISABILITY. Upon any termination of this Agreement
and Employee's employment hereunder by reason of Employee's death or Permanent
Disability, as defined in Section 7(b) ("Death or Disability - Definition of
Permanently Disabled and Permanent Disability"), provided that the terms and
provisions of such plan and applicable law permit, any theretofore deferred or
unvested portion of any award made to Employee in respect of any retirement,
pension, profit sharing, l term incentive, and similar plans automatically shall
become fully vested in Employee and shall be nonforfeitable, and shall continue
in effect and be redeemable by or payable to Employee (or his designated
beneficiary or estate) at the time and on the same conditions as would have
applied had Employee's employment not been so terminated. It is expressly
provided, however, that nothing in this Section 4(d) shall obligate the Company
to provide full vesting upon death or disability in connection with
participation by Employee in the equity plan or arrangement contemplated under
Section 4(b) ("Fringe Benefits-Equity Plan"), further, the provisions governing
payment of any incentive compensation payable to Employee pursuant to the
incentive compensation plan(s) referred to in Section 3(b)
("Compensation-Incentive Compensation") shall govern any payment of incentive
compensation due thereunder in the event of Employee's death or disability.
5. BUSINESS EXPENSES AND AUTOMOBILE ALLOWANCE. During the Period of
Employment, the Company shall pay, or in case paid by Employee in the first
instance, reimburse Employee for, any and all necessary, customary, and usual
expenses incurred by him in connection with the performance of his duties
hereunder, including, without limitation, all traveling expenses, and
entertainment expenses, upon submission of appropriate vouchers and
documentation.
During the Period of Employment, Employee shall be entitled to receive
an automobile allowance and reimbursement for expenses associated with the
operation and maintenance of an automobile which is comparable to that of the
other senior officers or executives automobiles'. The Company will reimburse
Employee upon presentation of vouchers and documentation for any such
operational and maintenance expenses that are consistent with the usual
accounting procedures of the Company.
6. NO OTHER BENEFITS OR COMPENSATION. Employee, as a result of his
employment by the Company, shall be entitled to only the compensation and
benefits provided for in this Agreement, subject to the terms thereof, and no
others, to the extent that additional future benefits or compensation is
provided to all other senior officers or executives of the Company.
<PAGE>
7. DEATH OR DISABILITY.
(a) TERMINATION OF EMPLOYMENT. If Employee dies during the Period of
Employment, Employee's employment shall automatically cease and terminate as of
the date of Employee's death.
If Employee becomes Permanently Disabled (as hereinafter
defined) while employed by the Company, (i) Employee's employment and the
Company's obligations hereunder, including the payment of Base Salary pursuant
to Section 3(a) ("Compensation-Base Salary") shall continue for a period of
one-hundred twenty (120) days from the date on which the Employee is determined
to be Permanently Disabled ("Employee s Disability Date"), and (ii) one hundred
twenty (120) days after the Employee's Disability Date, Employee's employment
and all obligations of the Company hereunder shall automatically cease and
terminate.
In the case of Employee's death or Permanent Disability (as hereinafter
defined), the Company shall be obligated to pay to Employee (or to Employee s
estate in the case of Employee's death) any Base Salary and any incentive
compensation accrued to Employee as of the date of the Employee's death, or in
the case of Employee's Permanent Disability, as of the Employee's Disability
Date. In the event Employee's employment is terminated on account of Employee's
Permanent Disability, he shall, so long as his Permanent Disability continues,
remain eligible for all benefits provided under any long-term disability
programs of the Company in effect at the time of such termination, subject to
the terms and conditions of any such programs, as the same may be changed,
modified, or terminated for or with respect to all senior management personnel
of the Company.
(b) DEFINITION OF PERMANENTLY DISABLED AND PERMANENT DISABILITY. For
purposes of this Agreement (other than Sections 4 (a) ("Fringe Benefits-Benefit
Plans"), 4 (d) ("Fringe Benefits-Vesting on Death or Disability"), and the
provisions relating to disability insurance contained in the last sentence of
Section 7(a) ("Death or Disability-Termination of Employment"), the terms
"Permanently Disabled" and "Permanent Disability" shall mean Employee's
inability, because of physical or mental illness or injury, to perform
substantially all of his customary duties pursuant to this Agreement, and the
continuation of such disabled condition for a period of one hundred twenty (120)
continuous days, or for not less than one hundred eighty (180) days during any
continuous twenty-four (24) month period. Whether Employee is Permanently
Disabled shall be certified to the Company by a Qualified Physician (as
hereinafter defined), or if requested by Employee a panel of three Qualified
Physicians. If Employee requests such a panel, Employee and the Company shall
each select a Qualified Physician who together shall then select a third
Qualified Physician. The determination of the individual Qualified Physician or
the panel, as the case may be, shall be binding and conclusive for all purposes.
As used herein, the term "Qualified Physician" shall mean any medical doctor who
is licensed to practice medicine in the State of Utah and is reasonably
acceptable to each of Employee and the Company. Employee and the Company may in
any instance, and in lieu of a determination by a Qualified Physician or panel
of Qualified Physicians, agree between themselves that Employee is Permanently
Disabled. The terms Permanent Disability and Permanently Disabled as used herein
may have meanings different from those used in any disability insurance policy
or program maintained by Employee or the Company.
<PAGE>
8. TERMINATION BY THE COMPANY:
(a) TERMINATION FOR CAUSE. The Company, by action of its Board of
Directors, may, by providing written notice to Employee, terminate the
employment of Employee under this Agreement for "cause" at any time. The term
"cause" for purpose of this Agreement shall mean:
(i) The refusal of Employee to implement or adhere to lawful policies or
directives of the Board of Directors of the Company consistent with this
Agreement; or
(ii) Employee's conviction of or entrance of a plea of nolo contendere to (A) a
felony, (B) to any other crime, which other crime is punishable by
incarceration for a period of one (1) year or longer, or (C) other conduct
of a criminal nature that may have an adverse impact on the Company s
reputation and standing in the community; or
(iii)conduct that is in violation of Employee's common law duty of loyalty to
the Company; or
(iv) theft, embezzlement, or other criminal misappropriation of funds by
Employee from the Company; or
(v) any breach of or Employee's failure to fulfill any of Employee's
obligations, covenants, agreements, or duties under this Agreement.
Provided, however, that "cause" pursuant to clause (i) or (v) shall not be
deemed to exist unless the Company has given Employee written notice thereof
specifying in reasonable detail the facts and circumstances alleged to
constitute "cause", and thirty (30) days after such notice such conduct or
circumstances has not entirely ceased or been entirely remedied. If Employee's
employment is terminated for "cause," the termination shall take effect upon the
effective date (pursuant to Section 24 ("Notices")) of written notice of such
termination to Employee. In the event Employee's employment is terminated for
"cause," then except for unpaid accrued vacation, the Company shall have no
obligation to pay Employee any amounts, including, but not limited to Base
Salary, for or with respect to any period after the effective date of the
termination of Employee's employment for "cause."
If the Company attempts to terminate Employee's employment pursuant to
this Section 8(a) and it is ultimately determined that the Company lacked
"cause," the provisions of Section 8(b) ("Termination by the Company-Termination
Without Cause") shall apply, and Employee's sole and exclusive remedy for such
breach of this Agreement by the Company and/or any other damages that Employee
shall have suffered or incurred of any nature whatsoever, shall be to receive
the payments expressly called for by Section 8(b) ("Termination by the
Company-Termination Without Cause") with interest on any past due payments at
the rate of eight percent (8%) per year from the date on which the applicable
payment would have been made pursuant to Section 8(b) ("Termination by the
Company-Termination Without Cause") plus Employee's costs and expenses
(including but not limited to reasonable attorneys' fees) incurred in connection
with such dispute.
(b) TERMINATION WITHOUT CAUSE. The Company may, with or without reason,
terminate Employee's employment under this Agreement without "cause" at any
time, by providing Employee sixty (60) days prior written notice of such
termination. If Employee's employment is terminated pursuant to this Section
8(b), Employee shall not be obligated to render services to the Company
following the effective date of such notice (the "Notice Date") except such
services as are requested by the Co pursuant to Section 11 ("Transition Period
Services"), and as its sole and exclusive obligation and duty to Employee
<PAGE>
resulting directly or indirectly from the termination of Employee's employment
with the Company and in full and complete settlement of any and all claims that
Employee may have or claim to have arising directly or indirectly out of the
termination of his employment with the Company, the Company shall pay Employee,
as severance pay, an amount (the "Severance Amount") equal to the product of
multiplying the then current monthly base salary by twelve (12) monthly periods
(the "Severance Period"). The Severance Amount shall be payable by the Company
to Employee in an amount equal to the Base Salary on the Notice Date. The
Company shall also pay to the Employee a portion of any discretionary bonus (the
"Bonus Portion"), as determined by the Company's Board of Directors, referred to
in Section 3(a) ("Compensation-Base Salary"), that, but for the termination of
Employee's employment, would have been paid to Employee for or with respect to
the calendar year in which Employee's employment is terminated. The Bonus
Portion shall consist of that percentage of the said discretionary bonus
determined by dividing the number of full or partial calendar months during the
calendar year in which Employee's employment is terminated that Employee was in
the employ of the Company by twelve (12). Until the end of the Severance Period
or until Employee is gainfully employed by another employer, which ever time
period is less, the Company shall allow Employee to continue participation in
the Company s group health insurance plan at the Company's expense. In
accordance with all applicable laws, Employee shall be extended all COBRA rights
and benefits at the end of the Severance Period.
9. TERMINATION BY EMPLOYEE.
(a) TERMINATION-WITHOUT GOOD REASON. Employee shall have the right to terminate
this Agreement and his employment hereunder at any time upon thirty (30)
days prior written notice of such termination to the Company. Except as
expressly set forth in Section 11 ("Transition Period Services"), upon the
effective date of any such termination all obligations and rights of
Employee and the Company hereunder shall terminate and cease.
(b) TERMINATION-WITH GOOD REASON. If the Company:
(i) fails to provide Employee with the compensation and benefits called for by
this Agreement; or
(ii) assigns Employee to a lower organizational level than the level at which he
is on the date of this Agreement assigned, or substantially diminishes
Employee's assignment, duties, responsibilities, or operating authority
from those specified in Section 1 ("Duties"); or
(iii) fails to implement an incentive compensation plan required by Section
3(b) ("Compensation-Incentive Compensation"); or
(iv) breaches this Agreement and such breach continues for a period of thirty
(30) days after written notice thereof given by Employee to the Company,
then any one or more of such circumstances shall constitute "Good Reason",
and, subject to the provisions of Section 11 ("Means and Effect of
Termination"), Employee shall have the right to terminate this Agreement
and his employment hereunder for Good Reason, if, sixty (60) days after the
effective date of Employee's notice to the Company of such circumstances
constituting Good Reason, such circumstances continue to exist, and for all
purposes of this Agreement any such termination of this Agreement by
Employee shall have the same effects under this Agreement as the
termination of the Employee's employment under this Agreement by Company
without "cause."
<PAGE>
10. TERMINATION BY EFFECTIVE MERGER, TRANSFER OF ASSETS, DISSOLUTION OR
CHANGE OF CONTROL. This agreement shall not be terminated by voluntary or
involuntary dissolution of the Company resulting from either merger or
consolidation in which the Company is not the consolidated or surviving
corporation, or a transfer of all or substantially all of the assets of the
Company, or the sale of all or substantially all of the stock (change of
control) of the Company. In the event of any such merger, consolidation, sale or
change of control as described above; Company's rights are assigned to the
surviving or resulting corporation, which may then honor the contract with
Employee or purchase the contract from the Employee for a sum equal to four (4)
years base salary as provided by in Section 3(a) ("Compensation - Base Salary");
adjusted for the then current base salary amount.
11. MEANS AND EFFECT OF TERMINATION. Any termination of Employee's
employment under this Agreement shall be communicated by written notice of
termination from the terminating party to the other party. The notice of
termination shall indicate the specific provision(s) of this Agreement relied
upon in effecting the termination and shall set forth in reasonable detail the
facts and circumstances alleged to provide a basis for termination, if any such
basis is required by the applicable provision(s) of this Agreement. Any notice
of termination by the Company shall be approved by a resolution duly adopted by
a majority of the directors of the Company then in office. The burden of
establishing the existence of "cause" or Good Reason shall be upon the
terminating party. If Employee's employment is terminated by either party, then
promptly after the effective date of such termination or in the manner and at
the time or times provided in the relevant Section of this Agreement, the
Company promptly shall provide and pay to Employee, or in case of his death his
estate or heirs, all compensation, benefits, and reimbursements due or payable
to Employee for the period to the effective date of the termination. To the
extent permitted by applicable law, the calendar month in which Employee's
employment is terminated shall be counted as a full month in determining amount
and vesting of any benefits under benefit plans of the Company.
12. TRANSITION PERIOD SERVICES. In the event Employee's employment is
terminated by the Company pursuant to section 8(b) ("Termination by the
Company-Termination Without Cause") or by Employee pursuant to Section 9(a)
("Termination by Employee-Without Good Reason"), if requested by the Company in
writing, Employee shall render such services, on a part-time basis for a period
not to exceed thirty (30) days after the effective date of the notice of
termination (whether given by the Company or by Employee), as the Company's
Board of Directors reasonably requests for transition purposes. Employee shall
receive no compensation for such services, other than the payment of Base Salary
as provided in Section 8(b) ("Termination by the Company-Termination Without
Cause") and reimbursement for expenses incurred by Employee in providing such
services as provided in, and subject to the provisions of, Section 5 ("Business
Expenses and Automobile Allowance")
13. ASSIGNMENT. This Agreement is personal in its nature and neither of
the parties hereto shall, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; provided, however, that,
in the event of the merger, consolidation, or transfer or sale of all or
substantially all of the assets of the Company with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of
the Company hereunder, also provided by Section 10 ("Termination - Effective
Merger, Transfer of Assets, Dissolution or Change of Control").
<PAGE>
14. GOVERNING LAW. This Agreement and the legal relations hereby created
between the parties hereto shall be governed by and construed under and in
accordance with the internal laws of the State of Utah, which internal laws
exclude any law or rule of the State of Utah, or any interpretation
thereof, that would require or call for the application of the laws of any
other state or jurisdiction hereto.
15. ENTIRE AGREEMENT. Except with respect to final agreement regarding
those open incentive compensation matters described in Section 3(b)
("Compensation-Incentive Compensation") and the equity plan or arrangement
contemplated under Section 4(b) ("Fringe Benefits-Equity Plan"), this Agreement
embodies the entire agreement of the parties hereto respecting the matters
within its scope. This Agreement supersedes all prior agreements of the parties
hereto on the subject matter hereof. Any prior negotiations, correspondence,
agreements, proposals, or understandings relating to the subject matter hereof
shall he deemed to be merged into this Agreement and to the extent inconsistent
herewith, such negotiations, correspondence, agreements, proposals, or
understandings shall be deemed to be of no force or effect. There are no
representations, warranties, or agreements, whether express or implied, or oral
or written, with respect to the subject matter hereof, except as set forth
herein.
This Agreement shall not be modified by any oral agreement, either express
or implied, and all modifications hereof shall be in writing and be signed by
the parties hereto. The provisions of this and the immediately preceding
sentence themselves may not be modified, either orally or by conduct, either
express or implied, and it is the declared intention of the parties hereto that
no provision of this Agreement, including said two sentences, shall be
modifiable in any way or manner whatsoever other than through a written document
signed by the parties hereto.
16. WAIVER. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition, nor shall any waiver or relinquishment of, or
failure to insist upon strict compliance with, any right or power hereunder
at any one or more times be deemed a waiver or relinquishment of such right
or power at any other time or times.
17. NUMBER AND GENDER. Where the context requires, the singular shall include
the plural, the plural shall include the singular, and any gender shall
include all other genders.
18. SECTION HEADINGS. The section headings in this Agreement are for the
purpose of convenience only and shall not limit or otherwise affect any of
the terms hereof.
19. DISPUTE RESOLUTION.
<PAGE>
(a) NEGOTIATION AND MEDIATION. In the event any dispute arises
hereunder, the parties shall first attempt to resolve the dispute by negotiation
in good faith. If the dispute cannot be timely resolved through negotiation, the
parties will, before resorting to any of their remedies at law or in equity, try
to settle the dispute in good faith by mediation in Salt Lake City, Utah or such
other location as the parties may agree, under the then operative mediation
rules of the American Arbitration Association or such other mediation tribunal
or private mediator or medication services provider as the parties agree. The
mediator shall be such person as the parties mutually agree, but if the parties
have failed to agree on a mediator within seven (7) days after the date on which
any party demands that the parties proceed to mediation, the mediator shall be
selected by the American Arbitration Association or such other mediation
services provider as the parties agree.
(b) OTHER REMEDIES. Failing settlement of the dispute by negotiation or
mediation, the parties shall, unless they mutually agree to resolve the
dispute finally by arbitration, be entitled to pursue their legal and
equitable remedies (subject to the provisions of Section 20 ("Liquidated
Damages-Breach by the Company") in any court having jurisdiction.
20. LIQUIDATED DAMAGES-BREACH BY THE COMPANY. Because the damages
suffered by Employee in such an event would be difficult or impossible to
estimate, establish, ascertain, or prove, and in order to provide Employee with
a remedy in such an event without the necessity and associated cost of Employee
having to establish or prove the damages suffered by Employee as a result
thereof (which remedy the parties hereto have and do agree would be appropriate
and adequate compensation to Employee in such event), in the event that this
Agreement and Employee's employment hereunder shall be terminated (whether by
the Company or Employee) and thereafter Employee shall prevail in any dispute
between Employee and the Company relative to, involving, or concerning the
legality of or justification for the termination of this Agreement and
Employee's employment hereunder and any other issues or matters directly or
indirectly arising out of or in connection with such termination and Employee's
employment by the Company, Employee shall be entitled to the continued payment
of the Base Salary as provided in Section 8(b) ("Termination by the
Company-Termination Without Cause") as liquidated and exclusive damages and not
as a penalty, and in such case this Agreement and Employee's employment
hereunder, shall for all purposes be treated as having been terminated by the
Company without "cause" pursuant to Section 8(b) ("Termination by the
Company-Termination Without Cause").
In the event Employee files any claim, complaint, charge, action, or
lawsuit against the Company or its employees, agents, officers, directors, or
any other person affiliated or associated with the Company, with any
governmental agency, any state or federal court, or any mediation or arbitration
body or group, for or with respect to a matter, claim, or incident, known or
unknown, which has occurred or arisen or which shall hereafter occur or arise
relative to, involving, or concerning the termination of this Agreement and
Employee's employment hereunder (whether as a result of action of Employee or
the Company) and any other issues or matters directly or indirectly arising out
of or in connection with such termination and Employee's employment by the
Company, and in such claim, complaint, action, charge, or lawsuit, Employee
alleges or asserts the right to recover, receive, or be awarded damages from the
Company or its employees, agents, officers, directors, or any other person
affiliated or associated with the Company in addition to or in lieu of the
liquidated damages expressly provided for in this Section 20, Employee hereby
stipulates, agrees, and consents to the dismissal or withdrawal, with prejudice,
of any such claim, complaint, action, charge, or lawsuit (collectively, a
"Dismissable Claim"). In the event that Employee files any Dismissable Claim,
Employee shall be liable to the party or parties against whom the Dismissable
Claim is filed (the "Nonfiling Party") and shall indemnify and save the
Nonfiling Party harmless from all costs and expenses, including, but not limited
to, attorneys fees, incurred by the Nonfiling Party and/or the Nonfiling Party s
officers, agents, employees, directors, and/or any other person affiliated or
associated with the Nonfiling Party, if any, in defending or responding to any
such Dismissable Claim, regardless of whether such defense or response is before
a state or federal court or administrative agency or a mediation or arbitration
body and regardless of who might ultimately be deemed to be the prevailing party
as to any such Dismissable Claim.
<PAGE>
21. ATTORNEY'S FEES. Employee and the Company agree that in any dispute
resolution proceedings arising out of this Agreement, the prevailing party shall
be entitled to its or his reasonable attorney's fees and costs incurred by it or
his in connection with resolution of the dispute in addition to any other relief
granted.
22. INDEMNIFICATION. If Employee is made a party to, is threatened to be
made a party to, or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding") by
reason of the fact that he is or was a director, officer, or employee of the
Company or is or was serving at the request of the Company as a director,
officer, employee, or agent of another corporation or of a partnership, joint
venture, trust, or other enterprise, including service with respect to employee
benefit plans, whether before, during or after expiration or termination of this
Agreement, the Company shall indemnify and hold Employee harmless to the fullest
extent authorized by the Utah General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Company to provide broader indemnification
rights than such law permitted the Company to provide prior to such amendment),
against all expense, liability, and loss (including attorneys fees, judgment
fines, ERISA excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by Employee in connection therewith, and such
indemnification shall continue after Employee ceases to be a director, officer,
employee, or agent of the Company and shall inure to the benefit of Employee's
heirs, executors, and administrators. The right to indemnification conferred
hereby shall include the right to be paid by the Company the reasonable expenses
incurred in defending any Proceeding in advance of its final disposition as such
expenses are incurred. The indemnification provided herein shall not be deemed
exclusive of any other rights to which Employee may be entitled under the
Certificate of Incorporation, Bylaws, any agreement, or vote of stockholders or
disinterested directors of the Company, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such office
or position, and shall continue with respect to action in such capacities even
if Employee has thereafter ceased to be a director, officer, employee, or agent
of the Company, and shall inure to the benefit of Employee's heirs, executors
and administrators. Except in the case of fraudulent conduct or theft,
embezzlement, or other criminal misappropriation of funds by Employee, then
nothing in this Agreement waives the Company's obligations under this paragraph,
even if Employee is terminated.
23. SEVERABILITY. In the event that a court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statute or
public policy, then only the portions of this Agreement which violate such
statute or public policy shall be stricken, All portions of this Agreement which
do not violate any statute or public policy shall continue in full force and
effect. Furthermore, any court order striking any portion of this Agreement
shall modify the stricken terms as narrowly as possible to give as much effect
as possible to the intentions of the parties under this Agreement.
24. NOTICES. All notices under this Agreement shall be in writing and
shall be either personally delivered or mailed postage prepaid, by certified
mail, return receipt requested, (a) if to the Company, to it at 3820 Great Lakes
Drive, Salt Lake City, Utah 84120 Attention: President or (b) if to Employee to
him at 3820 Great Lakes Drive, Salt Lake City, Utah 84120 by the same means, or
in either party's case to such other address or to the attention of such person
as the party has specified by prior written notice to the other party. Notice
shall be effective when personally delivered, or five (5) business days after
being so mailed.
25. COUNTERPARTS. This Agreement may be executed in counterparts
collectively containing the signatures of each of the parties.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its duly authorized officer, and Employee has hereunto signed this Agreement,
on the date first written above.
DYNATEC INTERNATIONAL, INC and SOFTALK, INC.(the "Company")
By:/S/F. Randy Jack
Its:President
/s/Paul A. Boyer
PAUL A. BOYER ("Employee")
EXHIBIT 11.1
Computation of Per Share Earnings
For the year ended December 31, 1998 and 1997, respectively.
Year-Ended Year-Ended
12/31/98 12/31/97
A NET LOSS FOR PERIOD $ (2,245,427) $ (409,172)
B BASIC WEIGHTED AVG # OF 2,792,738 2,284,419
SHARES
WEIGHTED AVG # OF COMMON N/A N/A
STK OPTIONS
C DILUTED WEIGHTED AVG # OF N/A N/A
SHARES
A/B BASIC EARNINGS PER SHARE $ (0.80) $ (0.18)
A/C FULLY DILUTED EARNINGS PER N/A N/A
SHARE
N/A= Anti-dilutive, therefore
reported the same as basic
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>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,268
<SECURITIES> 0
<RECEIVABLES> 2,259,347
<ALLOWANCES> (30,190)
<INVENTORY> 4,857,241
<CURRENT-ASSETS> 7,405,123
<PP&E> 6,134,049
<DEPRECIATION> 2,336,427
<TOTAL-ASSETS> 11,538,927
<CURRENT-LIABILITIES> 5,974,054
<BONDS> 0
0
0
<COMMON> 28,916
<OTHER-SE> 2,500,785
<TOTAL-LIABILITY-AND-EQUITY> 11,538,927
<SALES> 16,578,694
<TOTAL-REVENUES> 16,578,694
<CGS> 10,973,161
<TOTAL-COSTS> 17,019,190
<OTHER-EXPENSES> 1,789,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,773,079
<INCOME-PRETAX> (2,230,427)
<INCOME-TAX> 15,000
<INCOME-CONTINUING> (2,245,427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,245,427)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
