<PAGE>
As filed with the Securities and Exchange Commission on December 8, 1999
Registration Statement No. 333-57921
U.S. Securities and Exchange Commission
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
(Amendment No. 3)
DYNATEC INTERNATIONAL, INC.
(Name of small business issuer in its charter)
UTAH 3661 87-0367267
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
3820 Great Lakes Drive Salt Lake City, UT 84120
(801) 973-9500
(Address and telephone number of principal executive offices
and principal place of business)
Michael L. Whaley, Chief Financial Officer
DYNATEC INTERNATIONAL, INC.
3820 Great Lakes Drive
Salt Lake City, Utah 84120
(801) 973-9500
(Name, address, and telephone number of agent for service)
-----------------------------------------
Approximate date of proposed sale to the public: As soon as practicable after
the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
------------
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
---------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box.
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------- ---------------------- ---------------------- ------------------- -----------------
Title Of Each Class Of Amount To Be Proposed Maximum Proposed Maximum Amount Of
Securities To Be Registered Offering Price Per Aggregate Registration Fee
Registered Share Offering Price (1)
- ------------------------- ---------------------- ---------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Common stock, $.01 par 1,652,667 (1) $1.063 (2) $1,756,547 (2) $ 488(2)
value per share
- ------------------------- ---------------------- ---------------------- ------------------- -----------------
Common stock, $.01 par 300,000 (3) $6.50 (4) $1,950,000 (4) $ 542(4)
value per share
- ------------------------- ---------------------- ---------------------- ------------------- -----------------
Common stock, $.01 par 450,000 (5) $7.15 (4) $3,217,500 (4) $ 894(4)
value per share
- ------------------------- ---------------------- ---------------------- ------------------- -----------------
Totals 2,402,667 $ 6,924,047 $1,924
- ------------------------- ---------------------- ---------------------- ------------------- -----------------
</TABLE>
(1) Issuable upon conversion of $1,239,500 principal amount of convertible
debentures ("Convertible Debentures") issuable pursuant to a
Convertible Debenture and Private Equity Line of Credit Agreement dated
as of May 22, 1998 ("Credit Agreement"). For purposes of estimating the
number of shares of common stock issuable upon conversion of the
Convertible Debentures and to be covered by this Prospectus, Dynatec
has assumed that the entire $1,239,500 aggregate principal amount of
Convertible Debentures hypothetically has been converted into common
stock as of November 3, 1999. Solely for purposes of this hypothetical
conversion, the conversion price of the Convertible Debentures would
have been $0.75, which constitutes 75% of the average of the three
lowest closing bid prices of Dynatec's common stock during the 22
trading day period immediately preceding the hypothetical conversion
date.
(2) The fee is estimated pursuant to Rule 457(c) under the Act on the basis
of the average of the closing bid and closing asked price of Dynatec's
common stock as reported on the Nasdaq SmallCap Market on December 2,
1999, which average was $1.0625.
(3) Represents shares issuable upon exercise of "A" warrants to purchase up
to an aggregate amount of 300,000 shares of Dynatec's common stock at
an exercise price of $6.50 per share, expiring three years after the
issue date thereof.
(4) Fee calculated pursuant to Rule 457(g)(3).
(5) Represents shares issuable upon exercise of "B" warrants to purchase up
to an aggregate amount of 450,000 shares of Dynatec's common stock at
an exercise price of $7.15 per share, expiring three years after the
issue date thereof.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
<PAGE>
2,402,667 Shares
DYNATEC INTERNATIONAL, INC.
Common Stock
This Prospectus relates to the offer and sale of up to 2,402,667 shares
of common stock, par value $.01, of Dynatec International, Inc., a Utah
corporation (the "Company" or "Dynatec"). All of the shares covered by this
prospectus are to be offered and sold by or on behalf of certain persons who are
or may become shareholders of the Company (the "Selling Shareholders"). The
Company will not receive any of the proceeds from the sale of shares of common
stock by the Selling Shareholders. See "Summary of the Offering." All of the
securities offered by this Prospectus are offered for resale only.
The common stock of the Company trades on the Nasdaq SmallCap Stock
Market and is quoted under the symbol DYNX. On November 30, 1999, the closing
bid and asked prices of the Company's common stock as reported by the Nasdaq
SmallCap Stock Market were $1.00 and $1.125, respectively. The shares of common
stock to be offered by the Selling Shareholders may be offered and sold by them
from time to time on terms not yet determined. Sales, which may or may not
involve cash consideration or sales on the Nasdaq SmallCap Stock Market, may be
made directly to other purchasers or through one or more underwriters or
broker-dealers. In addition, the Selling Shareholders may be deemed to be
underwriters of such shares pursuant to Section 2(11) of the Securities Act of
1933, as amended (the "Securities Act"), and become subject to the rules and
regulations promulgated thereunder and the rules and regulations promulgated
under the Securities Exchange Act of 1934, as amended ("Exchange Act"),
including, without limitation, the restrictions and limitations contained in
Regulation M thereunder. See "Plan of Distribution."
The shares of common stock offered by this Prospectus include the
following:
No. Shares Description
1,652,667 Issuable upon conversion of $1,239,500 principal amount of
convertible debentures ("Convertible Debentures") issued under
a Convertible Debenture and Private Equity Line of Credit
Agreement dated as of May 22, 1998 ("Credit Agreement"). For
purposes of estimating the number of shares of common stock
issuable upon conversion of the Convertible Debentures and to
be covered by this Prospectus, Dynatec has assumed that the
entire $1,239,500 aggregate principal amount of Convertible
Debentures hypothetically has been converted into common stock
as of November 30, 1999. Solely for purposes of this
hypothetical conversion, the conversion price of the
Convertible Debentures would have been $0.75, which
constitutes 75% of the average of the three lowest closing bid
prices of Dynatec's common stock during the 22 trading day
period immediately preceding the hypothetical conversion date.
300,000 Issuable upon exercise of "A Warrants" issued in connection
with the Credit Agreement.
450,000 Issuable upon exercise of "B Warrants" issued or issuable in
connection with the Credit Agreement.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING AT PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
-------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
3
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------- -------------------------- -------------------------- --------------------------
Price to Public Underwriting Discounts Proceeds to the Company Proceeds to Selling
and Commissions (1) Shareholders
- ---------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
(1) (2) (3) (4)
- ---------------------------- -------------------------- -------------------------- --------------------------
</TABLE>
(1) The securities offered by this Prospectus may be offered to the public
on the Nasdaq Smallcap Market or pursuant to private negotiated
transactions, at prevailing market prices or at negotiated prices.
(2) Although the Selling Shareholders may engage underwriters to assist
with offers and sales of the securities offered by this Prospectus, the
Company is not aware of any such arrangements. The Selling Shareholders
will be responsible for payment of any commissions on or discounts of
their sales of shares and such amounts may vary.
(3) The Company will receive no portion of the proceeds from the sale of
shares by the Selling Shareholders. The Company will, however, receive
proceeds from exercises of the A Warrants and B Warrants.
(4) The prices at which the registered shares may be sold will be dependent
upon market prices and other factors on the date of any such sale. The
Selling Shareholders may sell such securities at prevailing market
prices or at negotiated prices, through public sales or privately
negotiated transactions. The Selling Shareholders are not obligated to
sell any of the shares covered by this Prospectus. The Company is
paying the cost of the preparation and filing of the registration
statement of which this Prospectus is a part. The cost paid by the
Company includes professional fees, filing fees, printing and engraving
expenses, transfer agent fees, listing fees and other expenses. The
total of such expenses associated with the registration of the shares
is estimated at approximately $300,000.
The date of this Prospectus is , 1999.
----------- --
4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in the Prospectus. Each prospective purchaser of the
securities offered by this Prospectus is encouraged to read this Prospectus in
its entirety and to carefully consider, among other things, the information
under the heading "RISK FACTORS." THE SECURITIES OFFERED HEREBY INVOLVE A HIGH
DEGREE OF RISK.
Securities Offered. The securities and transactions that are the
subject of this Prospectus include the following:
(1) Resales of up to 1,652,667 shares (the "Debenture Shares") issuable
upon conversion of $1,292,500 principal amount of convertible debentures
("Convertible Debentures") issued under a Convertible Debenture and Private
Equity Line of Credit Agreement dated as of May 22, 1998 ("Credit Agreement").
Because there is no fixed price at which the principal amount of the Convertible
Debentures may be converted into common stock, it is not possible to predict the
maximum number of shares that may be issued pursuant to the Convertible
Debentures. See "Description of Securities" and "Risk Factors" for a discussion
of the risks associated with potential dilution resulting from such
transactions, including the possibility that the common stock will be issued in
a sufficient number of shares as to result in a change of control of the Company
and the significant dilution that will occur as a result of such issuances. For
purposes of estimating the number of shares of common stock issuable upon
conversion of the Convertible Debentures and to be covered by this Prospectus,
Dynatec has assumed that the entire $1,239,500 aggregate principal amount of
Convertible Debentures hypothetically has been converted into common stock as of
November 30, 1999. Solely for purposes of this hypothetical conversion, the
conversion price of the Convertible Debentures would have been $0.7035, which
constitutes 75% of the average of the three lowest closing bid prices of
Dynatec's common stock during the 22 trading day period immediately preceding
the hypothetical conversion date. The investors that purchased and presently
hold the Convertible Debentures, and that will receive shares of common stock
upon conversions of the Convertible Debentures are Selling Shareholders as
described in this Prospectus. See "Selling Shareholders." These investors are
Balmore Funds S.A., TLG Realty, Austost Anstalt Schaan, Ellis Enterprises and
Hewlett Fund (collectively, "Investors").
(2) Resales of shares of 750,000 shares of common stock (the "Warrant
Shares") issuable upon the exercise of common stock purchase warrants
("Warrants") issued with the Convertible Debentures. There are two series of
Warrants, the A Warrants, which may be exercised to purchase a total of 300,000
shares of common stock, and the B Warrants, which may be exercised to purchase a
total of 450,000 shares of common stock. The exercise prices of the A Warrants
and the B Warrants is $6.50 and $7.15, respectively. The holders of the Warrants
are the Investors, Settondown Capital International, Ltd. (the "Placement
Agent") and certain of its assignees (collectively, with Settondown Capital
International, Ltd. the "Placement Agents").
Overview of the Company
Dynatec is a Salt Lake City, Utah based manufacturer and distributor of
consumer products. The Company has four wholly owned subsidiaries: Softalk,
Inc., Arnco Marketing, Inc., Nordic Technologies, Inc. and SofTalk
Communications, Inc. During the year ended December 31, 1998, the Company
conducted most of its operations through its subsidiaries.
The Company is engaged primarily in the manufacture and distribution of
the following consumer product lines: telecommunication headsets and amplifiers
and other telephone accessories, home storage and organization and premium
flashlights. The Company also from time to time has distributed 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."
The Company's corporate offices and principal place of business is 3820
Great Lakes Drive, Salt Lake City, Utah 84120. The Company's telephone number is
(801) 973-9500. See "Business."
5
<PAGE>
Background of Transaction
On May 22, 1998, the Company entered into a Convertible Debenture and
Private Equity Line of Credit Agreement ("Credit Agreement") with the Investors
and the Placement Agents, none of which previously had been affiliated with or a
shareholder of the Company. See "Selling Shareholders." Under the Credit
Agreement, the Investors purchased Convertible Debentures in the aggregate
principal amount of $1,500,000. The Investors also agreed to purchase additional
Convertible Debentures in the aggregate face amount of $500,000 within five
trading days of the effective date of the registration statement, of which this
Prospectus is a part ("Registration Statement"). The Convertible Debentures have
a term of three years and pay interest, payable in cash or common stock, at the
rate of 12% per annum during the period between issuance and the date of
effectiveness of the Registration Statement, and 6% thereafter. The principal
and accrued interest under the Convertible Debentures is convertible, at the
option of the Convertible Debenture holders, into shares of Dynatec common stock
at the lesser of (a) 75% of the average of the three lowest closing bid prices
of the common stock during the 22 trading-day-period preceding the conversion
date; or (b) $6.50.
The Credit Agreement also established a private equity line of credit
for Dynatec (the "Line of Credit"), under which Dynatec could receive from the
Investors additional capital funding up to an aggregate amount of $10,000,000.
Under the Line of Credit, the Investors were obligated to purchase additional
shares of common stock (the "Line of Credit Shares") at a discount to the market
price of the common stock around the date Dynatec chose to draw against the Line
of Credit. Under the Line of Credit, the Company could have drawn down up to
$10,000,000 of additional funding. In all events, Dynatec was required to draw
at least $1,000,000 on the Line of Credit during the two year period commencing
on the date the effective date of the Registration Statement. The number of
shares of common stock issuable upon Dynatec's draws under the Line of Credit
would have been determined by dividing the dollar amount of the draw by a per
share dollar amount that was 80% of the average of the three lowest closing bid
prices of Dynatec's common stock during the six trading day period commencing
three days before the put exercise date and concluding two trading days after
that date.
On June 25, 1999, Dynatec and the Investors entered into a Modification
Agreement ("Modification Agreement"), under which the parties agreed to cancel
the Line of Credit. They also agreed to cancel the Investors' obligation to
purchase and Dynatec's obligation to sell the additional $500,000 principal
amount of Convertible Debentures upon the effectiveness of the Registration
Statement.
Under a Registration Rights Agreement executed simultaneously with the
Credit Agreement, Dynatec agreed that it would register the shares of common
stock underlying the Convertible Debentures and Warrants on a registration
statement that would be filed by June 22, 1998 and declared effective on or
before August 20, 1998. The Registration Rights Agreement further required
Dynatec to pay cash penalties if the Registration Statement was not effective on
or before August 20, 1998. Under the terms of the Credit Agreement, the Company
paid liquidated damages from September 23, 1998 through and including February
23, 1999 in the aggregate amount of $210,000. As of the date of the Modification
Agreement, June 25, 1999, the Company was required to pay the Investors, pro
rata, $45,000 per month for every month, or portion thereof, until the
Registration Statement became effective.
The Modification Agreement provides for the modification and temporary
abatement of the Company's obligation to pay cash liquidated damages of $45,000
per month resulting from the Company's obligation to have the Registration
Statement declared effective on or before August 28, 1998. Under the
Modification Agreement, the Company is to accrue a total of $225,000 of
liquidated damages for the period from February 24, 1999 through and including
June 23, 1999, which accrued amount is payable at any time after October 1,
1999, upon request by the Investors, in shares of the Company's common stock.
The number of shares of common stock issuable upon such payment shall be
determined by dividing the total amount of damages accrued by 100% of the
average of the closing bid prices of the Company's common stock during the five
trading day period immediately preceding the date of such payment. Additionally,
under the Modification Agreement, the Company's obligation to pay liquidated
damages under the Credit Agreement was abated from June 24, 1999 through
September 23, 1999, provided that the Registration Statement is declared
effective on or before October 31, 1999. However, because the Registration
Statement was not declared effective by October 31, 1999, the Company, is
negotiating for an extension of the abatement period. If such negotiations are
unsuccessful, the Company's obligation to pay liquidated damages could be
reinstated in part or in full until the Registration Statement is delcared
effective. Except to the extent specifically
6
<PAGE>
modified by the Modification Agreement, the terms and conditions of the Credit
Agreement and the documents and instruments incorporated in the Credit Agreement
shall continue in force.
Although the Company filed an amendment to the registration statement
on July 2, 1999, the registration statement was not effective by the October 31,
1999 deadline set forth in the Modification Agreement. Moreover, because the
Company's pending preliminary proxy statement is being reviewed by the
Securities and Exchange Commission in tandem with the pending registration
statement, the Company was not able to hold its annual meeting of shareholders
by the October 31, 1999 deadline. On November 12, 1999, the Company and the
Investors executed an amendment to the Modification Agreement that substituted
February 15, 2000 for the October 31, 1999 deadline originally in the
Modification Agreement. Consequently, the accrual of liquidated damages will be
deferred from June 24, 1999 until February 15, 2000, provided that the
registration statement becomes effective and shareholder approval of the
transaction is obtained on or before that date. Liquidated damages from February
24, 1999 through June 23, 1999 have been accrued and continue to be payable by
the Company as specified in the Modification Agreement. The November 12, 1999
agreement also amended the Convertible Debentures such that, even if the
Convertible Debentures are still outstanding at their maturity date, May 22,
2001, the Convertible Debentures will not be automatically converted into common
stock unless the holders so elect.
Under the Credit Agreement, in May 1998 Dynatec issued a total of
80,000 shares of common stock to the Placement Agents. Of that amount, 20,000
shares were delivered to the Placement Agents on May 22, 1998 as partial
compensation for their efforts in introducing Dynatec to the Investors. The
remaining 60,000 shares were issued but deposited with an escrow agent for
delivery to the Placement Agent at the rate of 6,000 shares for every $1,000,000
drawn under the Line of Credit. Because the Modification Agreement terminated
the Line of Credit, Dynatec has retrieved and cancelled the 60,000 shares issued
to the Placement Agents and deposited in escrow.
Additionally, under the Credit Agreement, Dynatec issued Warrants to
the Investors and the Placement Agents, which allow the holders thereof to
purchase common stock of the Company. The A Warrants were to have included
warrants to purchase a total of 400,000 shares of common stock. Dynatec issued A
Warrants to purchase 300,000 shares of common stock in May 1998, which have a
per share exercise price of $6.50. The remaining A Warrants to purchase 100,000
additional shares were to have been issued with the additional $500,000 of
Convertible Debentures. Because the Modification Agreement cancelled the parties
obligations with respect to such additional Convertible Debentures, however, the
A Warrants to purchase the additional 100,000 shares will not be issued.
In addition to the A Warrants, in May 1998, Dynatec issued B Warrants
to purchase a total of 450,000 shares of common stock at a per share exercise
price of $7.15.
The Investors and the Placement Agents may be deemed to be statutory
underwriters under applicable federal securities laws in connection with the
resale, if any, of the shares of common stock issued by the Company upon
conversion of the Convertible Debentures or upon exercise of the Warrants.
RISK FACTORS
AN INVESTMENT IN DYNATEC COMMON STOCK INVOLVES A HIGH DEGREE OF RISK
AND SHOULD NOT BE MADE BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW IN ADDITION
TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS BEFORE DECIDING TO INVEST.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, DYNATEC'S BUSINESS, FINANCIAL
CONDITION, OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
SUCH CASE, THE TRADING PRICE OF DYNATEC COMMON STOCK COULD DECLINE AND YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT.
Holders of Dynatec common stock are subject to the risk of substantial dilution
to their interests as a result of the conversion of the Convertible Debentures,
the issuance of the Damages Shares and exercise of the Warrants.
Introduction
The Convertible Debentures are convertible at prices or according to
formulas that are based on the market price of Dynatec common stock at and
around the time of conversion or issuance. Additionally, any interest accruing
on the Convertible Debentures is payable in shares of the Company's common stock
under the same formula as the principal amount of the Convertible Debentures is
convertible. Such formulas are described in more detail in the section of this
Prospectus entitled "Selling Shareholders". There effectively is no limitation
on the number of shares of Dynatec common stock into which the Convertible
Debentures, and interest accrued thereon, may be converted.
In addition to the shares of common stock issuable upon conversion of
the Convertible Debentures and payment of interest accrued thereon, under the
Modification Agreement, Dynatec is obligated to pay in common stock ("Damages
Shares") a total of $225,000 of liquidated damages payable under the Credit
Agreement. The number of Damages Shares issuable is determined by reference to
the market price of the common stock during the five trading-day period prior to
the date of payment. Therefore, if the market price of Dynatec common stock
7
<PAGE>
decreases, the number of shares of Dynatec common stock issuable upon conversion
of the Convertible Debentures, payment of interest accrued thereon, or issuance
of Damages Shares would increase.
The following table identifies the total number of shares of
common stock that would be issued assuming the hypothetical conversion, exercise
or issuance of all of the Convertible Debentures, Warrants and the Damages
Shares as of November 30, 1999, and the payment in shares of common stock for
all interest accrued on the Convertible Debentures as of such date. For purposes
of estimating the number of Damages Shares issuable Dynatec has assumed that the
entire $225,000 of liquidated damages hypothetically has been accrued and has
been converted into common stock as of August 31, 1999. Solely for purposes of
this hypothetical conversion, the conversion price of the Convertible Debentures
would have been $1.025, which constitutes 100% of the average of the closing bid
prices of Dynatec's common stock during the five trading day period immediately
preceding the hypothetical payment date. For purposes of the assumed
hypothetical conversion of the Convertible Debentures, the conversion price is
$0.75. The table excludes the dilutive effect of conversions of $260,500
principal amount of Convertible Debentures and interest accrued thereon into a
total of 265,284 shares of common stock before November 30, 1999.
<TABLE>
<CAPTION>
Debenture Shares of Common
Principal or Stock Issuable % of Common
Interest/ Number Upon Conversion, Stock Owned By
of Warrants / Exercise or Holders After
Amount of Damages Issuance Conversion
Convertible Security
- ------------------------------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C>
Convertible Debentures $1,239,500 1,652,667 30.6%
Convertible Debenture Interest $ 230,134 306,845 7.6%
A and B Warrants 750,000 750,000 16.6%
Damages Shares $ 225,000 219,512 5.5%
------------------
Total 2,929,024 43.8%
================== =================
</TABLE>
The following table describes the number of shares of Dynatec common
stock that would be issuable assuming all of the presently issued and
outstanding Convertible Debentures were converted into common stock, along with
any interest accrued thereon, and the Damages Shares were issued at the
following assumed conversion or issuance prices. The table does not include any
adjustment for differences between the formula for calculating the conversion
price for the Convertible Debentures and interest thereon and for calculating
the issue price for the Damages Shares:
8
<PAGE>
<TABLE>
<CAPTION>
Shares Issuable upon Conversion or Issuance of
----------------------------------------------------------------
$1,239,500 $230,134
Principal Amount Accrued
Hypothetical of Convertible Interest on $225,000
Conversion/ Debentures Convertible Liquidated Damages Total Common
Exercise Price Debentures Stock Issuable
- --------------------- ------------------ ----------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
$0.50 2,479,000 460,268 450,000 3,389,268
$0.75 1,652,667 306,845 300,000 2,259,512
$1.00 1,239,500 230,134 225,000 1,694,634
$1.25 991,600 184,107 180,000 1,355,707
$1.50 826,333 153,423 150,000 1,129,756
</TABLE>
Given the structure of the conversion formulas applicable to the
Convertible Debentures, interest accrued thereon and the Damages Shares, there
effectively is no limitation on the number of shares of Dynatec common stock
into which such convertible securities may be converted. As the market price of
Dynatec common stock decreases, the number of shares of Dynatec common stock
underlying the Convertible Debentures and the Damages Shares continues to
increase. The following specific risk factors relative to this dilution should
be considered before deciding to purchase the common stock offered by this
prospectus.
Overall Dilution to Market Price and Relative Voting Power of
Previously Issued Common Stock
The conversion of the Convertible Debentures, the issuance of the
Damages Shares and the exercise of the Warrants may result in substantial
dilution to other holders of Dynatec common stock. Specifically, the issuance of
a significant amount of additional Dynatec common stock resulting from those
transactions would result in a decrease of the relative voting control of
Dynatec common stock issued and outstanding before the conversion of the
Convertible Debentures, the issuance of the Damages Shares and the exercise of
the Warrants. Furthermore, public resales of Dynatec common stock following the
conversion of the Convertible Debentures, the issuance of the Damages Shares and
the exercise of the Warrants likely would depress the prevailing market price of
Dynatec common stock. Even before actual conversions, exercises or issuances,
the market "overhang" resulting from Dynatec's obligation to honor such
conversions, exercises and issuances could depress the market price of Dynatec
common stock.
Increased Dilution with Decreases in Market Price of Common Stock
The Convertible Debentures are convertible and the Damages Shares are
issuable at a floating price that will be determined by reference to the
prevailing market price of Dynatec common stock at the time of conversion or
issuance. As a result, the lower the market price of Dynatec common stock at and
around the time of such conversions or issuances, the more common stock will be
issuable. Any increase in the number of shares of common stock issued upon
conversion or issuance as a result of decreases in the prevailing market price
would compound the risks of dilution described in the preceding paragraph.
Increased Potential for Short Sales
Downward pressure on the market price of Dynatec common stock that
likely would result from any resales of Dynatec common stock issued on
conversion of the Convertible Debentures, issuance of Damages Shares or exercise
of the Warrants could encourage short sales of common stock by the Investors or
others. Material amounts of such short selling could place further downward
pressure on the market price of Dynatec common stock.
9
<PAGE>
Nasdaq SmallCap Market Delisting
Dynatec's common stock is listed on the Nasdaq SmallCap Market. To keep
the common stock listed on this market, Dynatec must meet Nasdaq's listing
maintenance standards and abide by Nasdaq's rules governing listed companies. If
the price of Dynatec's common stock falls below $1.00 per share for an extended
period, or if Dynatec fails to meet other Nasdaq standards or violates Nasdaq
rules, its common stock could be delisted from the Nasdaq SmallCap Market.
Nasdaq has established certain rules regarding the issuance of "future
priced securities." These rules would apply to the Convertible Debentures
because such securities are convertible into common stock at a conversion price
based on a future price of the common stock. Nasdaq's concerns regarding the
Convertible Debentures include the following:
Shareholders Must Approve Significant Issuances Of Listed Securities At
A Discount To Market Or Book Value.
Nasdaq rules prohibit an issuer of listed securities from issuing 20%
or more of its outstanding capital stock at less than the greater of book value
or then current market value without obtaining prior stockholder consent.
Dynatec did not obtain stockholder consent prior to selling the Convertible
Debentures in May 1998. However, the terms of the Convertible Debentures require
that Dynatec obtain the approval of its shareholders before it issues 20% or
more of its outstanding shares of common stock at a discount to the market price
prevailing at the time of the issuance of the Convertible Debentures. Such
issuances would occur upon conversion of the total principal amount of the
Convertible Debentures. If Dynatec's shareholders do not approve the
transactions involving the Convertible Debentures, and 20% or more of the
outstanding shares would otherwise be issuable upon one or more conversions of
the Convertible Debentures at a discount to the price at the time of issuance of
the Convertible Debentures, under the terms of the Purchase Agreement, Dynatec
must seek a waiver from the Nasdaq Stock Market of the shareholder approval
requirement. If the Nasdaq Stock Market will not grant such a waiver within ten
(10) days after the shareholder meeting, Dynatec would have to pay the "Economic
Benefit" of such shares to the holder or holders of the Convertible Debentures
who desire to, but are prevented from, converting all or a portion of their
Convertible Debentures. The "Economic Benefit" is defined as the number of
shares of common stock issuable upon conversion of the Convertible Debentures in
excess of 20% of the outstanding common stock as of May 22, 1998 multiplied by
the closing bid price of the common stock on the 10th trading day after the
shareholder meeting at which the shareholders refuse to approve the
transactions.
Bid-Price Requirement
As mentioned above, the maintenance requirements of the Nasdaq SmallCap
Market require that the minimum bid price per share of listed securities must be
at least $1.00. If this minimum bid price is not maintained for the specified
period of time, the security may be delisted. Dilution from the discounted
conversion of future priced securities such as the Convertible Debentures may
result in a significant decline in the price of the common stock. Furthermore,
there is a substantial risk of short selling by the holders of future priced
securities in advance of conversions of their future priced securities which is
likely to have the effect of substantially decreasing the market price of the
common stock. These factors could lead to the market price of Dynatec's common
stock falling below the $1.00 threshold for continued listing on the Nasdaq
SmallCap Market.
Public Interest Concerns.
Nasdaq may terminate the listing of a security if necessary to prevent
fraudulent and manipulative acts and practices or to protect investors and the
public interest. With respect to future priced securities, Nasdaq has indicated
that it may delist a security if the returns with respect to the future priced
security become excessive compared to the returns being earned by public
investors in the issuer's securities.
10
<PAGE>
Change of Control and Change in Financial Structure
If an issuer with a listed class of securities consummates a
transaction that results in a change of control, Nasdaq rules require that the
issuer must comply with the requirements for initial inclusion on the Nasdaq
SmallCap Market. These initial inclusion standards are more strict than the
continued maintenance requirements. For example, for initial inclusion, the
listed security must have a minimum bid price of $4.00. Nasdaq has indicated
that the dilution resulting from conversions or exercises of future priced
securities can be so severe as to result in a change in control or could be
deemed by Nasdaq to be a merger or consolidation with the holders of the future
priced securities. Therefore, if the holders of the Convertible Debentures
convert their future priced securities into enough common stock, Nasdaq could
determine that a change of control or financial structure has occurred and
require Dynatec to comply with the initial inclusion requirements. Dynatec may
not be able to comply with such inclusion standards, resulting in a delisting.
Even if Dynatec's shareholders approve the Convertible Debenture transactions,
the change in control provisions would still apply.
Dynatec believes that issuing the Convertible Debentures did not
violate any rule governing companies listed on the Nasdaq SmallCap Market.
Moreover, Dynatec's sale of the Convertible Debentures pre-dated by several
months Nasdaq's issuance of its release on future priced securities in which it
indicated that it may consider the relative rate of return obtained by investors
purchasing future priced securities as a delisting factor. However, Dynatec
cannot be certain that Nasdaq SmallCap Market staff will not apply its rules
relating to future priced securities such that Dynatec's common stock may be
delisted.
If Dynatec's common stock were to be delisted from the Nasdaq SmallCap
Market, it would likely continue to be traded in the over-the-counter market on
an electronic bulletin board established for unlisted securities or in what are
commonly referred to as the "pink sheets." As a result, an investor would find
it more difficult to dispose of, or to obtain accurate quotations for the price
of, Dynatec's common stock. Therefore, such delisting could adversely affect the
prevailing market price of the common stock or the general liquidity of an
investment in Dynatec common stock.
In addition, delisting from the Nasdaq SmallCap Market and failure to
obtain listing or quotation on such other market or exchange would subject
Dynatec's securities to so-called "penny stock" rules. These rules impose
additional sales practice and market-making requirements on broker-dealers who
sell and/or make a market in such securities. Consequently, if Dynatec's common
stock were to be delisted from the Nasdaq SmallCap Market, broker-dealers may be
less willing or able to sell and/or make a market in Dynatec's common stock and
purchasers of common stock may have more difficulty selling their securities in
the secondary market, resulting in a decrease in the market liquidity of
Dynatec's common stock.
Possible Adverse Effect of Pending Litigation and Administrative Proceedings
The Company is engaged in litigation outside the ordinary course of its
business, the effect of which on its business condition or results of operations
could be materially adverse. See "Legal Proceedings." Specifically, the Company
is involved in the following legal proceedings:
11
<PAGE>
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"), accusing 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. During the
quarter ended June 30, 1999, Mag and the Company agreed to pursue their efforts
to settle the dispute and, pending such discussions, the complaint would be
dismissed without prejudice upon the joint stipulation of the parties. The
Company has expressly agreed with Mag, however, that if the pending disputes are
not settled, Mag may refile the complaint in the same court and venue.
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 September 30, 1999, the Company had received no response
from the Enforcement Division about whether the SEC plans to name the Company in
any administrative action.
In addition, the Company has previously disclosed that it has been
informed of an investigation by the Enforcement Division of the Securities and
Exchange Commission. The Company believes this investigation concerns certain
trading activity in the Company's common stock and other transactions involving
the Company's securities, however, the Company has not been informed of the
specifics of such investigation. The Company is cooperating fully with these
administrative proceedings. Any finding or order of the Commission adverse to
the Company or any judgment against the Company in any of the pending litigation
matters, would have an adverse effect on the business, financial condition or
results of operations of the Company, or the market for its common stock.
Recent Net Losses
The Company had significant net operating losses in fiscal years 1996,
1997 and 1998. Specifically, the Company reported a net loss for the year ended
December 31, 1998 of $2,245,427. As a result, the Company had an accumulated
deficit of approximately $1,380,329 at December 31, 1997 and $3,625,755 at
December 31, 1998. For the nine months ended September 30, 1999, the Company had
net loss of $1,607,823. In early 1999, the Company experienced a change of
management and continues its efforts to adopt or implement a variety of business
practices designed to improve the financial condition and operating results of
the Company. Nevertheless, there can be no assurance that the Company will be
able to achieve growth, that net losses will not be incurred in future operating
periods, or that the Company will become profitable in the foreseeable future,
if at all.
12
<PAGE>
Need for Additional Funding
The Company has operated with negative cash flow for several fiscal
years and has substantial accumulated operating deficits. To finance its
operations, the Company may require additional financing. In light of the
Modification Agreement, the Company will not receive any additional debt or
equity financing under the Credit Agreement, except to the extent of the payment
of exercise prices upon exercise of the Warrants. The exercise of the Warrants
in the near future is unlikely, however, because the exercise prices are
considerably higher than the prevailing market price. In November 1999, the
Company completed a sale and lease transaction of the building that houses its
corporate headquarters, which transaction yielded to the Company approximately
$831,000 of proceeds, which have been used for operating capital. This amount is
not enough, however, to offset operational expenses for fisdal 1999. The Company
may and likely will be required to seek additional sources of financing through
future offers and sales of its equity or debt securities. Securities issued in
such offerings would substantially dilute the holdings of other shareholders,
including purchasers of the shares offered by this Prospectus. There can be no
assurance that the Company will be successful in obtaining such financing or
that financing will be available to the Company on terms and at rates that are
favorable to the Company. Absent such funding, however, the Company's ability to
continue its operations may be adversely affected.
Foreign Operations Risks
The Company out-sources most of its manufacturing to manufacturers
located outside the United States. There are numerous risks associated with
conducting business in foreign countries, including the distance from corporate
headquarters, problems associated with possible political risks, instability of
local governments, safety of personnel and equipment, the lack of spare parts or
adequate service assistance, the need for skilled labor and supervision, lack of
infrastructure and accessibility to sources of power and other supplies
necessary for operations, tariff restrictions, currency control regulations,
competing or conflicting manufacturing and production standards, governmental
approval, licensing and permit requirements and procedures, high inflation and
currency fluctuations which may erode profitability levels, and the difficulty
of obtaining and enforcing judgments in foreign courts and under foreign legal
systems that differ substantially from the United States all add to the risk of
foreign operations. Difficulties arising out of any of these risks could
adversely affect the Company's financial condition and operations.
Competition
The Company's current products are divided into three primary product
lines: telecommunications amplifiers, headsets and other telephone accessories,
flashlights and home storage and organization products. Although certain of the
Company's products in these product lines are subject to patent or other
intellectual property protections, barriers to entry for competing manufacturers
and distributors are relatively low for the majority of the Company's products.
Accordingly, there can be no assurance that competitors of the Company, many of
which are likely to have substantially greater financial resources, experience
and marketing ability will not be able to successfully compete with the Company,
which successful competition could adversely affect the Company's operations and
financial condition.
Dependence on Licensed Technology
The Company is dependent upon licenses granted by third parties for
certain key elements of its product line. Some of these license agreements
require that the Company achieve minimum sales in order to retain the license
rights. There can be no assurance that the Company will meet the minimum sales
requirements to avoid cancellation of the licenses or a change in its rights or
that such license rights will continually be available to the Company. The
Company's failure to observe or perform any of the covenants, terms, conditions
or provisions contained in the license agreements or in the event of a breach of
any representation or warranty made by the Company, may result in a termination
or restriction of the Company's rights. Termination of such licenses or any
restriction or limitation of the Company's rights under such licenses may
adversely affect the Company's operations and financial condition.
Dependence on Third-Party Manufacturers and Suppliers
For the majority of its products, the Company is dependent on
third-party manufacturers to manufacture its products. Most of these third-party
manufacturers are located in foreign countries, primarily Hong Kong, Taiwan and
13
<PAGE>
China. If any manufacturer fails to supply any or all of the Company's
requirements for product, or if the Company's or its manufacturer's suppliers of
raw materials or parts fail to fulfill the Company's requirements, there can be
no assurance that alternate sources of supply will be available to the Company
at reasonable cost or at all, and, if available at a reasonable cost, whether
the Company will be able to secure such alternate sources in a timely manner. If
such alternate sources of supply or manufacturing are not available on a timely
basis or on reasonable economic terms, the Company's results of operations could
be severely and adversely affected.
Government Regulation
Various aspects of the Company's business are subject to both domestic
and foreign government regulation by such agencies as the Federal Trade
Commission, the Federal Communications Commission and taxing authorities, such
as the Internal Revenue Service. In addition, as a public company, the Company
is subject to reporting requirements and other regulations promulgated and
enforced by the Securities and Exchange Commission. The Company's failure to
comply with such laws, rules and regulations could have a material adverse
effect on the Company, its business, financial condition and results of
operations. For example, if the Company were found to be in violation of
regulations or other laws governing its business, it could be assessed with
substantial penalties, fees and expenses, temporary or permanent suspension of
trading in its shares, or ultimately interruption or shutdown of some or all of
its operations. The Company may also from time to time obtain and comply with
local, state, provincial and federal permits or other authorizations. Obtaining
these permits can be very costly and take significant amounts of time. Although
the Company foresees no material problems or delays, there can be no assurance
that the Company can obtain the necessary permits or continue existing
operations or that the Company can maintain economic operation in compliance
with the necessary permits. There can be no assurance that future changes in
existing law or new legislation will not limit or adversely impact the Company's
business operations.
Limited Market and Volatility of Stock Price
The Company has a limited public market and resales of the shares of
common stock covered by this Prospectus may adversely affect the prevailing
market price of shares currently issued and outstanding, or adversely affect the
ability of the Company to raise future capital through equity offerings. The
trading price of the Company's common stock has been and is likely to continue
to be subject to wide fluctuations in response, among other things, to
variations in the Company's operating results, material announcements by the
Company or its competitors, governmental regulatory actions, conditions in the
Company's industry, or other events or factors, many of which are beyond the
Company's control. The Company's operating results in future periods may be
below the expectations of investors. In such event, the price of the common
stock would likely decline, perhaps substantially. In addition, the stock market
has historically experienced extreme price and volume fluctuations which have
particularly affected the market prices of many public companies and which often
have been unrelated to the operating performance of such companies. Moreover,
the Company's common stock may be even more prone to volatility than the
securities of other businesses in similar industries because of the relatively
small number of shares of common stock not held by affiliates. Given such a
small "public float," there can be no assurance that the prevailing market price
of common stock will not be artificially inflated or deflated by trading even of
relatively small amounts of common stock. See "Price Range of Common Stock."
Year 2000 Compliance
The Year 2000 problem relates to the inability of many computer
programs and microchip-based products and equipment to operate properly on dates
approaching and following December 31, 1999. This inability to operate correctly
results from the use in many computer programs and embedded microchip code of a
two-digit rather than a four-digit date field. Thus, non Year 2000 compliant
software and firmware may misinterpret a date entry of "00" as 1900, rather than
2000, resulting in, among other things, a temporary inability to process
transactions, send invoices, or engage in similar business transactions. The
Company does not presently anticipate that its operations or financial
conditions will be materially adversely affected by the Year 2000 problem.
Nevertheless, there can be no assurance that the Company will not be adversely
affected by Year 2000 problems, either as a result of problems affecting its
internal systems and operations, or as a result of the failure of third parties
upon which the Company depends to address their respective internal Year 2000
issues. See "Management's Discussion and Analysis - Year 2000 Compliance."
14
<PAGE>
No Dividends
The Company has never declared or paid any cash dividends on its shares
and does not anticipate paying cash dividends in the foreseeable future.
Effect of Certain Anti-Takeover Provisions of Utah Law
Utah, the state in which the Company was organized, has adopted a
"Control Shares Acquisition Act" (the "Control Shares Act"). This act provides
that any person or entity that acquires 20% or more of the outstanding voting
shares of a publicly held Utah corporation is denied voting rights with respect
to the acquired shares, unless a majority of the disinterested stockholders of
the corporation elects to restore such voting rights. The provisions of the
Control Shares Act may discourage companies or persons interested in acquiring a
significant interest in or control of the Company, regardless of whether such
acquisition may be in the interest of the Company's stockholders. See
"Description of Securities."
USE OF PROCEEDS
The shares offered hereby are offered and sold exclusively by the
Selling Shareholders. No portion of the proceeds from the sale of shares by the
Selling Shareholders will be paid to the Company. See "Plan of Distribution."
The Company intends to use the proceeds, if any, from exercises of the Warrants
to provide working capital for its operations. The Company cannot require the
exercise of the Warrants.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its common
stock and does not anticipate declaring or paying cash dividends in the
foreseeable future. The Company's existing credit facilities prohibit the
payment of dividends. The Company intends to retain future earnings, if any, to
finance the operation, development and further expansion of its business.
DETERMINATION OF OFFERING PRICE
The offering price, conversion price, issuance price and exercise price
of the Debenture Shares, the Damages Shares and the Warrant Shares were
determined by negotiations between the Company and the Investors, and such
prices do not necessarily reflect the actual value of the Company's shares based
upon net worth. See "Description of Securities." The shares of common stock
covered by this Prospectus may be sold by the Selling Shareholders from time to
time at prices and on terms not yet determined and solely within the discretion
of the Selling Shareholder. Sales, which may or may not involve cash
consideration or transactions on the Nasdaq SmallCap Stock Market may be made
directly to other purchasers or through one or more underwriters or
broker-dealers at prices quoted on the Nasdaq SmallCap Stock Market at the time
of sale or on other terms as agreed with such underwriters or broker-dealers, as
the case may be. See "Plan of Distribution."
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information and Number of Stockholders. The Company's common
stock is listed on The Nasdaq SmallCap Market under the symbol "DYNX". As of
November 30, 1999, there were approximately 1,236 shareholders of the Company's
common stock and 3,756,903 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.
15
<PAGE>
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
- ---------------------- -------------------- --------------------
Quarter & Year Market High Market Low
- ---------------------- -------------------- --------------------
<S> <C> <C>
1st 1997 $ 5.75 $2.63
- ---------------------- -------------------- --------------------
2nd 1997 $11.00 $5.75
- ---------------------- -------------------- --------------------
3rd 1997 $10.69 $4.00
- ---------------------- -------------------- --------------------
4th 1997 $ 8.81 $4.50
- ---------------------- -------------------- --------------------
1st 1998 $ 7.88 $6.06
- ---------------------- -------------------- --------------------
2nd 1998 $ 8.25 $4.75
- ---------------------- -------------------- --------------------
3rd 1998 $ 6.25 $2.25
- ---------------------- -------------------- --------------------
4th 1998 $ 5.75 $1.38
- ---------------------- -------------------- --------------------
1st 1999 $ 4.31 $2.25
- ---------------------- -------------------- --------------------
2nd 1999 $ 3.00 $1.63
- ---------------------- -------------------- --------------------
3rd 1999 $ 1.86 $0.81
- ---------------------- -------------------- --------------------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the information set forth in the consolidated financial statements and the
notes thereto appearing elsewhere in this Prospectus.
Year Ended December 31, 1998 Compared to December 31, 1997
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in dollars
(rounded) and percentage changes from period to period. Data in the table
reflects the consolidated results of the Company for the twelve-month periods
ended December 31, 1998 and 1997, respectively. As supplemental information, the
table also segregates the Company's revenues by product line type.
16
<TABLE>
<CAPTION>
For the Year Ended % OF
---------------------------
CHG
FROM
December December 1997 TO
31, 1998 31, 1997 1998
------------ ------------ ---------
Statement of Operations Data:
<S> <C> <C> <C>
Product sales............... $16,579,000 $14,566,000 13.8 %
Cost of sales............... 10,973,000 10,174,000 7.9
------------ ------------
Gross margin............ 5,606,000 4,392,000 27.6
------------ ------------
Operating Costs and Expenses:
Selling expenses................ 2,874,000 2,379,000 20.8
Research and development........ 143,000 508,000 (71.9)
General and administrative...... 3,029,000 1,730,000 75.1
------------ ------------
Total operating costs and
Expenses.......... 6,046,000 4,617,000 31.0
------------ ------------
Other Income (Expense), net:
Interest expense................ (1,773,000) (427,000) 315.2
------------ ------------
Interest income................. 3,000 9,000 (66.7)
------------ ------------
Other expense................... (35,000) (61,000) 42.6
------------ ------------
Other income.................... - 295,000 -
------------ ------------
Net loss........................ $(2,245,000) $ (409,000) 448.9%
============ ============
Supplemental Information:
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories.......... $ 7,640,000 $ 6,146,000 24.3%
Home storage and organization 4,444,000 3,387`000 31.2
Miscellaneous/mass market 3,506,000 4,140,000 (15.3)
Flashlights.................... 989,000 893,000 10.8
------------ -------------
Total product sales 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 for the 1999 year. The Company cannot
currently quantify the effect of the additional distribution of its
telecommunications product through office supply catalogues, however, the
Company does believe that there will be some level of increased revenues as a
result of this change.
Home Storage and Organization. Home storage and organization revenues
increased $1,057,000, or 31.2%, from $3,387,000 to $4,444,000 for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The increase in
home storage and organization revenues was primarily attributable to the
introduction of several new products, including drawer organization products,
namely "Expand-A-Drawer", which accounted for approximately $1,042,297 of the
revenue increase, and several wire basket rollout products which made up
approximately $66,000 of the increase. These increases were offset in part by a
decrease in sales of the "Expand-a-shelf" product line of approximately $88,000.
17
<PAGE>
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
inordinate strain that servicing Dolgencorp's orders placed on the Company's
physical and financial resources. In addition, the Company determined that,
strategically, it should focus on its other product categories which produce
greater gross margins and have the most growth potential. Therefore, the Company
anticipates a significant drop in revenues from this segment of its business in
1999. The Company believes that this change was necessary to allow the Company
to focus on its core businesses. The Company also believes that the future
impact on gross margin contribution will be negligible given that the Company
recognized a loss of approximately $178,000 after all costs associated with this
segment in 1998. Overall gross margins for products in this category decreased
to 13.5% for the year ended December 31, 1998 from 17.6% for the year ended
December 31, 1997. This decrease in gross margins resulted from the additional
warehouse space leased to store the crayon inventory. Substantially all sales in
1998 in this category were to Dolgencorp, Inc.
On December 24, 1998, the Company entered into an inventory and single
customer purchase agreement with Grandway China ("Grandway"), a Hong Kong
enterprise. The agreement provided for the transfer of inventory, distribution
and sales rights of products that the Company was then supplying to Dolgencorp.
Upon execution, Grandway agreed to purchase the approximately $1,800,000 of
Dolgencorp inventory then owned by the Company, on the following terms: (i) at
the closing date, the Company transferred to Grandway approximately $800,000 of
unpaid crayon liability, and (ii) at the closing date Grandway purchased
$103,000, or cost plus three percent, of additional inventory. Additionally,
Grandway agreed to continue to make guaranteed minimum monthly inventory draws
of $103,000 or cost plus three percent until the remaining approximately
$1,000,000 of inventory is purchased. As of March 31, 1999, Grandway had
purchased all but approximately $339,124 of the remaining inventory. Finally,
for a period of two years, Grandway will pay a two percent (2%) royalty to the
Company on all orders shipped to Dolgencorp, in addition, the Company can still
sell other types of products to Dolgencorp.
Other revenue decreased $55,000, or 17.5%, from $315,000 to $260,000
for the year ended December 31, 1998 compared to the year ended December 31,
1997. The decrease in other revenue was primarily attributable to a decline in
other miscellaneous products sold by the Company, namely, closet hangers and
tote bags.
Flashlights. Flashlight revenues increased $96,000, or 10.8%, from
$893,000 to $989,000 for the year ended December 31, 1998 compared to the year
ended December 31, 1997. The increase in flashlight revenues was primarily
attributable to increased military sales. In addition, gross margins for
flashlights improved significantly, from 0.4% for the year ended December 31,
1997 to 24.9% for 1998. This improvement resulted from the Company's decision to
change the source of manufacturing from the United States to certain Asian
countries.
On December 2, 1996, the Company acquired substantially all of the
assets of Nordic Lights, Inc., a Texas corporation, doing business as Nordic
Lites, Inc. This closing and acquisition took place pursuant to an Asset
Purchase Agreement effective as of December 1, 1996. In connection with that
transaction, the assets of Nordic Lights were transferred to a newly
incorporated, wholly owned subsidiary of the Company, Nordic Technologies, Inc.
("Nordic Technologies"), a Utah corporation. After the acquisition, Nordic
Technologies began selling a broad range of flashlight products and accessories
under the trademark "Nordic Lites."
The initial purchase of the assets of Nordic Lights, Inc. was
accomplished through the issuance of 550,000 shares of the Company's common
stock to the shareholders of Nordic Lights. A value of $1.60 per share was
determined based upon subsequent sales of stock by shareholders of Nordic
Lights, Inc. for a total purchase price of $880,000. In addition to the stock
issued, warrants to purchase 250,000 shares of common stock at an exercise price
of $1.00 were issued to the shareholders of Nordic Lights, Inc. Those warrants
are exercisable only if and when certain gross sales requirements have been
18
<PAGE>
reached over a five year period beginning January 1, 1999. In April 1997,
several third parties agreed to purchase portions of the shares issued in
connection with the acquisition transaction from the shareholders of Nordic
Lights, Inc. The April 1997 agreement also nullified a repurchase agreement
which was originally included as part of the 1996 Nordic acquisition.
In July 1997, the Company sold the tangible assets acquired from Nordic
Lights and non-exclusive rights to certain patents in exchange for 73,515 shares
of the Company's common stock and $106,850 in cash. The majority of the assets
sold represented various fixed assets which had previously been used by the
Company to manufacture flashlights. The shares received in exchange for these
assets were recorded as treasury stock at the fair market value of $10.00 per
share. Because the market value of the stock received into treasury on the sale
of these assets equaled the current book value of the assets sold, no gain or
loss was recognized for this sale. Instead of producing the flashlights
domestically, the Company has arranged with overseas vendors that are providing
product at reduced costs leading to healthier margins on the flashlight
products.
Operating Costs and Expenses
Selling Expenses. Selling expenses increased $495,000, or 20.8%, from
$2,379,000 to $2,874,000 for the year December 31, 1998 compared to the year
December 31, 1997. The increase in selling expenses was primarily attributable
to an increase in advertising expense of approximately $128,000, related to the
Company securing pages in several office products providers' catalogues. In
addition, the Company experienced an increase of approximately $220,000 in the
cost of shipping products to its customers. Management is addressing this issue
by sourcing competitive bids from carriers. These increases were partially
offset by a decrease of approximately $46,000 in travel and entertainment
expense.
Research and Development. Research and development decreased by
$365,000, or 71.9%, from $508,000 to $143,000 for the year ended December 31,
1998 compared to the year ended December 31, 1997. This decrease was primarily
attributable to the completion of the research and development related to the
introduction of the Company's new line of telecommunication headset products.
The Company anticipates that research and development costs will increase in
calendar year 1999 as a result of the addition of a full-time Vice president.
General and Administrative Expenses. General and administrative
expenses increased $1,299,000, or 75.1%, from $1,730,000 to $3,029,000 for the
year ended December 31, 1998 compared to the year ended December 31, 1997. Of
this increase, approximately $450,000 was incurred by the Company to defend
itself in patent infringement lawsuits, approximately $300,000 related to legal
and accounting fees related to the Company's effort to register securities on a
registration statement on Form SB-2 in connection with a Convertible Debenture
and Equity Line-of-Credit financing agreement between the Company and private
investors which was put into place in May 1998, and approximately $500,000 in
legal expense was incurred as a result of certain internal investigative and
general corporate matters.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $1,429,000, or 31.0%, from $4,617,000 to $6,046,000 for the year
ended December 31, 1998 compared to the year ended December 31, 1997, for the
reasons discussed above.
Interest Expense. Interest expense increased $1,346,000, or 315.2%,
from $427,000 to $1,773,000 for the year ended December 31, 1998 compared to the
year ended December 31, 1997. This increase was primarily related to the
recognition of a one-time, non-cash charge for the fair value of common stock
warrants and a beneficial conversion premium, totaling $500,000 and $137,000,
respectively, both associated with the issuance of $1,500,000 of the Convertible
Debentures in May 1998. Additionally, normal non-cash interest was recognized on
the Convertible Debentures, as well as the amortization of the fair value of
other common stock warrants issued in connection with the debt. Also, liquidated
damages were assessed against the Company in the amount of $110,000 due to the
Company's failure to have effective a registration statement covering the shares
of common stock issuable upon conversion of the Convertible Debentures within
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
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<PAGE>
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 for the year ended December 31, 1997
resulted from the recovery of a note receivable which had been previously
written off ($70,000), income tax refunds from net operating losses carried back
to prior periods ($112,000), and a gain on the sale of land held for possible
expansion of the Company's facilities ($90,000).
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.
Income Taxes. Income tax expense totaled $15,000 and $61,594 for the
years ended December 31, 1998 and 1997, respectively. Although the Company
generated pretax losses of $2.2 and $.3 million in 1998 and 1997, no income tax
benefit was recorded for these periods because the Company can not generate
immediate tax savings by offsetting current losses against taxes paid in prior
years, nor can it project future earnings with enough confidence to ensure its
ability to offset future taxable income with current losses.
Three Months and Nine Months Ended September 30, 1999 Compared to September 30,
1998
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in dollars
(rounded) and percentage changes from period to period. Data in the table
reflects the consolidated results of the Company for the three and nine-month
period ended September 30, 1999 and 1998, respectively. As supplemental
information, the table also segregates the Company's revenues by product line
type.
20
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
---------------------------------------- ---------------------------------------------
% OF % OF
CHG CHG
FROM FROM
SEPTEMBER SEPTEMBER 1998 TO SEPTEMBER SEPTEMBER 1998 TO
30, 1999 30, 1998 1999 30, 1999 30, 1998 1999
------------- ---------- ------- ----------- ------------ --------
Unaudited Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Product sales................... $ 3,540,000 $4,382,000 (19.2)% $10,874,000 $ 12,166,000 (10.6)%
Cost of sales................... 2,082,000 2,788,000 (25.3) 6,460,000 7,424,000 (13.0)
------------- ---------- ----------- ------------
Gross margin............ 1,458,000 1,594,000 (8.5) 4,414,000 4,742,000 (6.9)
------------- ---------- ----------- ------------
Operating Costs and Expenses:
Selling expenses................ 1,110,000 903,000 22.9 2,774,000 2,586,000 7.3
Research and development........ 37,000 12,000 208.3 101,000 48,000 110.4
General and administrative...... 834,000 694,000 20.2 2,451,000 1,786,000 37.2
------------- ---------- ----------- ------------
Total operating costs and
Expenses 1,981,000 1,609,000 23.1 5,326,000 4,420,000 20.5
------------- ---------- ----------- ------------
Other Income (Expense), net:
Interest expense................ (155,000) (244,000) (36.5) (701,000) (1,138,000) (38.4)
------------- ---------- ----------- ------------
Interest income................. - - - - 3,000 -
------------- ---------- ----------- ------------
Other (expense)................. - (1,000) - - (23,000) -
------------- ---------- ----------- ------------
Other income.................... 3,000 - - 5,000 - -
------------- ---------- ----------- ------------
Net income (loss)............... $ (675,000) $ (260,000) (159.6)% $(1,608,000) $ (836,000) ( 92.3)%
============= ========== =========== ============
Unaudited Supplemental Information:
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories $ 1,700,000 $1,855,000 (8.4)% $ 5,472,000 $ 5,977,000 (8.4)%
Home storage and organization 1,339,000 1,302,000 2.8 3,510,000 3,498,000 0.3
Miscellaneous/Mass market - 1,023,000 - 992,000 1,854,000 (46.5)
Flashlights 501,000 202,000 148.0 900,000 837,000 7.5
------------- ---------- ----------- ------------
Total product sales $ 3,540,000 $4,382,000 (19.2)% $10,874,000 $ 12,166,000 (10.6)%
============= ========== =========== ============
</TABLE>
The following are explanations of significant period to period changes for
the three months ended September 30, 1999 and 1998:
Revenues
Total Product Sales. Total product sales decreased by $842,000, or
19.2%, from $4,382,000 to $3,540,000 for the three months ended September 30,
1999 compared to the three months ended September 30, 1998. Discussion of sales
in the various product lines follows.
Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of telecommunication headsets and amplifiers and telephone accessories
decreased $155,000, or 8.4%, from $1,855,000 to $1,700,000 for the three months
ended September 30, 1999 compared to the three months ended September 30, 1998.
This decrease was primarily attributable to a $156,000 decrease in sales of
telephone shoulder rests as well as a decrease in sales of $25,000 in telephone
accessories. This decrease was partially offset by an increase in sales of
telephone headsets and amplifiers of $24,000. Overall gross margins in this
category increased to 55.1% for the three months ended September 30, 1999 from
54.8% for the three months ended June 30, 1999, as a result of the sales mix and
more efficient production processes.
Home Storage and Organization. Home storage and organization revenues
increased $37,000, or 2.8%, from $1,302,000 to $1,339,000 for the three months
ended September 30, 1999 compared to the three months ended September 30, 1998.
The increase is primarily attributable to an increase of $47,000 in the
"Expand-A-Shelf" product line, offset in part by a decrease of $10,000 in
several of the Company's other organizational products, namely the
"Expand-A-Drawer product line, shoe organizers and ironing boards. Overall gross
margins for products in this category decreased from 36.4% to 32.3% for the
three months ended June 30, 1999.
Miscellaneous and Mass Market. Miscellaneous and mass market revenues
decreased $1,023,000, from $1,023,000 to -0- for the three months ended
September 30, 1999 compared to the three months ended September 30, 1998. This
decrease was the result of the Company's December 24, 1998 agreement with
Grandway China ("Grandway"), a Hong Kong enterprise. The agreement provided for
the transfer of inventory, distribution and sales rights of products that the
Company was then supplying to Dolgencorp. Upon execution, Grandway agreed to
21
<PAGE>
purchase the approximately $1,800,000 of inventory earmarked for sale to
Dolgencorp. As of June 30, 1999, Grandway had purchased the entire remaining
inventory. Management does not presently anticipate future significant sales in
this product line.
Flashlights. Flashlight revenues increased $299,000, or 148.0%, from
$202,000 to $501,000 for the three months ended September 30, 1999 compared to
the three months ended September 30, 1998. This increase was primarily the
result of a successful increase in the Company's selling and marketing efforts
in this product line. Overall gross margins for products in this category
decreased from 30.2% to 17.6% for the three months ended June 30, 1999, as a
result of various changes made to certain flashlight products to increase the
quality of these products and increased air freight costs necessitated by
production difficulties resulting from an earthquake in Taiwan during the third
quarter. Management is addressing this decrease by working with its Asian
supplier to effectively source various components from more reliable
sub-assembly vendors and to address the difficulties encountered by the
Company's Asian suppliers as a result of the earthquake.
Operating Costs and Expenses
Selling Expenses. Selling expenses increased $207,000, or 22.9%, from
$903,000 to $1,110,000 for the three months ended September 30, 1999 compared to
the three months ended September 30, 1998. This increase is due in part to an
increase in advertising expense as the result of the Company securing additional
pages in certain office product catalogues, trade show expenditures due to the
Company participating in more regional trade shows , the hiring of two marketing
consultants to assist the company in it's campaign to upgrade its packaging of
products , and an increase in freight costs. The increase was offset in part by
a decrease in royalty and commission payments due to lower sales on
commissionable and royalty based products.
Research and Development. Research and development costs increased by
$25,000, or 208.3%, from $12,000 to $37,000 for the three months ended September
30, 1999 compared to the three months ended September 30, 1998. This increase
was primarily attributable to the addition of a full time Vice President of
Research and Development.
General and Administrative Expenses. General and administrative
expenses increased $140,000, or 20.2%, from $694,000 to $834,000 for the three
months ended September 30, 1999 compared to the three months ended September 30,
1998. The increase in general and administrative expenses was the result of
approximately $34,000 in insurance premiums paid for the company's health and
dental insurance, $38,000 in employee recruitment and relocation, and $21,000 in
consulting fees. Additionally, the Company incurred $49,000 in travel related
expenses for increased international travel associated with strengthening Asian
supplier relationships.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $372,000, or 23.1%, from $1,609,000 to $1,981,000 for the three
months ended September 30, 1999 compared to the three months ended September 30,
1998, for the reasons discussed above.
Interest Expense. Interest expense decreased $89,000, or 36.5%, from
$244,000 to $155,000 for the three months ended September 30, 1999 compared to
the three months ended September 30, 1998. This decrease was the result of debt
issuance costs in connection with the value of the warrants and beneficial
conversion premium allocated to the debt that were recognized in the three
months ended September 30, 1998, and not applicable in the three months ended
September 30, 1999.
Net Loss. The net loss increased by $415,000, or 159.6%, from $260,000
to $675,000 for the three months ended September 30,1999 compared to the three
months ended September 30, 1998 due to a combination of the factors described
above.
22
<PAGE>
The following are explanations of significant period to period changes for the
nine months ended September 30, 1999 and 1998:
Revenues
Total Product Sales. Total product sales decreased by $1,292,000,
or 10.6% from $12,166,000 to $10,874,000 for the nine months ended September 30,
1999 compared to the nine months ended September 30, 1998. Discussion of sales
in the various product lines follows.
Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of telecommunication headsets and amplifiers and telephone accessories
decreased $505,000, or 8.4%, from $5,977,000 to $5,472,000 for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998.
Of this decrease, $320,000 is attributable to the loss of a private label
customer for the Company's "Twisstop" product. Additionally, sales of the
Company's shoulder rest products decreased approximately $200,000. Sales of
telephone amplifiers and headsets decreased by $237,000. These decreases were
offset in part by increases in sales of the Cord Manager and other Twisstop
sales of $254,000. Overall gross margins for telephone accessories increased to
55.4% from 47.0% for the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998, as a result of the sales mix and more
efficient production processes.
Home Storage and Organization. Home storage and organization revenues
increased $12,000, or 0.3%, from $3,498,000 to $3,510,000 for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998.
The increase is primarily attributable to an increase of $81,000 in the
"Expand-A-Drawer" product line and an increase of $40,000 in the
"Expand-A-Shelf" product line, offset in part by a decrease of $104,000 in
several of the Company's other miscellaneous organizational products, namely
shoe organizers, ironing boards and wire baskets.
Miscellaneous and Mass Market. Miscellaneous and mass market revenues
decreased $862,000, or 46.5%, from $1,854,000 to $992,000 for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998.
This decrease was primarily the result of the Company's December 24, 1998
agreement with Grandway China ("Grandway"), a Hong Kong enterprise. The
agreement provided for the transfer of inventory, distribution and sales rights
of products that the Company was then supplying to Dolgencorp. Upon execution,
Grandway agreed to purchase the approximately $1,800,000 of inventory earmarked
for sale to Dolgencorp. As of September 30, 1999, Grandway had purchased the
entire remaining inventory. Overall gross margins for products in this category
decreased from 27.0% to 0.6% for the nine months ended September 30, 1999 as a
result of the "pass-through" effect. Management does not presently anticipate
future significant sales in this product line.
Flashlights. Flashlight revenues increased $63,000, or 7.5%, from
$837,000 to $900,000 for the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998. This increase was primarily the result
of a successful increase in the Company's selling and marketing efforts in this
product line. Overall gross margins for products in this category decreased from
36.5% to 19.9% for the nine months ended September 30, 1999, as a result of
various changes made to certain of its flashlight products to increase the
quality of these products and increased air freight costs necessitated by
production difficulties resulting from an earthquake in Taiwan during the third
quarter. Management is addressing this decrease by working with its Asian
supplier to effectively source various components from more reliable
sub-assembly vendors and to address the difficulties encountered by the
Company's Asian suppliers as a result of the earthquake.
Operating Costs and Expenses
Selling Expenses. Selling expenses increased $188,000, or 7.3%, from
$2,586,000 to $2,774,000 for the nine months ended September 30, 1999 compared
to the nine months ended September 30, 1998. This increase is due in part to an
increase in advertising expense as the result of the Company securing additional
pages in certain office product catalogues, trade show expenditures due to the
Company participating in more regional trade shows , the hiring of two marketing
consultants to assist the company in it's campaign to upgrade it's packaging of
products , and an increase in freight costs. This increase was offset in part by
a decrease in royalty and commission payments due to lower sales on
commissionable and royalty based products.
Research and Development. Research and development costs increased by
$53,000, or 110.4%, from $48,000 to $101,000 for the nine months ended September
30, 1999 compared to the nine months ended September 30, 1998. This increase was
attributable to the addition of a full time Vice President of Research and
Development.
General and Administrative Expenses. General and administrative
expenses increased $665,000, or 37.2%, from $1,786,000 to $2,451,000 for the
nine months ended September 30, 1999 compared to the nine months ended September
30, 1998. The increase in general and administrative expenses was primarily the
result of payment in 1999 of approximately $120,000 in non-recurring legal
expense incurred as a result of the Company's internal investigation which
commenced in 1998 and concluded on January 14, 1999 as well as $85,000 in
additional legal expense related to various general corporate matters, as well
as payment of approximately $210,000 in combined severance paid to the Company's
former Chairman and CEO who resigned on January 14, 1999 and the former
President of the Company who resigned effective March 17, 1999. Additionally,
23
<PAGE>
travel expenditures increased by approximately $93,000 resulting from increased
international travel associated with strengthening Asian supplier relationships.
Additional increases were $66,000 in insurance premiums paid for the company's
health and dental insurance program, $58,000 in employee recruitment and
relocation, and $31,000 in consulting fees.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $906,000, or 20.5%, from $4,420,000 to $5,326,000 for the nine
months ended September 30, 1999 compared to the nine months ended September 30,
1998, for the reasons discussed above.
Interest Expense. Interest expense decreased $437,000, or 38.4%, from
$1,138,000 to $701,000 for the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998. This decrease 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 $137,000 and
$500,000, respectively, both associated with the issuance of $1,500,000 of
Convertible Debentures (the "Convertible Debentures") in May 1998. During the
nine months ended September 30, 1999, liquidated damages were assessed against
the Company in the amount of $258,000 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 $3,000, from $3,000 to $-0-
for the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998. This decrease was primarily the result of the Company
utilizing its revolving credit facility, under which "draws" are made by the
Company. After a draw is made a corresponding payable is established, when
collections of outstanding accounts receivable are received, collections are
swept, daily, and re-applied against outstanding draws. As a result the Company
does not keep excess cash on hand to invest.
Other Expense. Other expense decreased $23,000, from $23,000 to $-0-
for the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998. This decrease was primarily the result of a loss on the sale
of equipment sold by the Company in the nine months ended September 30, 1998
that did not occur in the nine months ended September 30, 1999.
Other Income. Other income increased $3,000, from $-0- to $3,000 for
the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998. This increase is due to gains on sales of equipment the
Company sold in the nine months ended September 30, 1999 that did not occur in
the nine months ended September 30, 1998.
Net Loss. The net loss increased by $772,000, or 92.3%, from $836,000
to $1,608,000 for the nine months ended September 30, 1999 compared to the nine
months ended September 30, 1998 due to a combination of the factors described
above.
Liquidity and Capital Resources
General
The Company's principal sources of liquidity are cash flows from
operations, cash on hand and borrowing under the Company's existing secured
revolving credit facilities. On May 27, 1998, the Company obtained a secured
revolving credit facility from a regional financing institution for up to
$5,000,000, bearing interest at a rate of prime plus one percent, with interest
payable monthly. The credit facility is secured by both the Company's accounts
receivable and inventories. The note underlying the revolving credit line is due
May 26, 2001. Under the terms of the loan agreement, the Company is required to
maintain financial covenants and ratios, including book net worth, net income
and debt service coverage. On June 30, 1999, the Company and its lending
institution entered into a Fourth Amendment to the Credit Agreement (the "Fourth
Amendment"). Pursuant to the Fourth Amendment, certain definitions have been
modified, as follows: (i) the maximum line decreased from $5,000,000 to
$3,000,000; (ii) the inventory advance rate decreases from 48% to 40% between
24
<PAGE>
July 1, 1999 and October 1, 1999; (iii) the accounts receivable advance rate
decreased from 85% to 78%; and (iv) the volume rebate accrual increased from
$15,000 on June 1, 1999 to $300,000 at January 1, 2000. This accrual goes to
$-0- when the volume rebates are paid in February 2000, and will begin to accrue
over the remainder of calendar year 2000 to the maximum $300,000 amount. On
September 23, 1999 the Company and its lending institution entered into a Fifth
(the "Fifth Amendment") to the Credit Agreement. The Fifth Amendment changed the
terms of certain of the financial covenants and ratios for the remainder of 1999
and the year 2000. At September 30, 1999, the Company was in default of certain
of these covenants, however, the Company presently is negotiating and
anticipates that it will be able to obtain a waiver from the lending
institution. The interest rate presently applicable to the revolving credit line
is prime plus three percent, with interest payable monthly. At September 30,
1999, the Company had $142,000 of cash and $497,000 of availability under its
credit facility.
On May 22, 1998, the Company closed a transaction that provided net
capital proceeds of $1,335,000. 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.
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) $6.50, which was 100% of the
closing bid price on the trading day immediately preceding the closing date of
the Credit Agreement. 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 the ("Equity Line"). Under
the terms of the Credit Agreement, the Company was obligated to draw down a
minimum of $1,000,000 under the Equity Line, and all amounts were to have been
drawn in increments of not less than $50,000. In return for the payment of
additional capital under the Equity Line, the Company would have been 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 draw date and ending
two days after the draw date. The Equity Line could not have been utilized, and
the Company had 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 was obligated to issue an additional $500,000 of Convertible Debentures
(see Note 4 to the condensed consolidated financial statements). The Company
filed a registration statement on Form SB-2 as required by the Credit Agreement
and has filed two pre-effective amendments to that registration statement.
However, the registration statement is not effective as of the date of this
report, and there can be no assurance that the registration statement will be
declared effective.
On June 25, 1999, the Company and the investors entered into a
Modification Agreement ("Modification Agreement"), under which the parties
agreed to cancel the Equity Line and all of the parties' respective obligations
thereunder. The parties to the Modification Agreement also agreed to cancel the
investors' obligation to purchase and the Company's obligation to sell the
additional $500,000 principal amount of Convertible Debentures upon the
effectiveness of the registration statement. Additionally, the Modification
Agreement provides for the modification and temporary abatement of the Company's
obligation to pay cash liquidated damages of $45,000 per month resulting from
the Company's obligation to have the registration statement declared effective
on or before August 28, 1998. Pursuant to the terms of the Credit Agreement, the
Company paid liquidated damages from September 23, 1998 through and including
February 23, 1999 in the aggregate amount of $210,000, of which $135,000 was
paid in the six-month period ended June 30, 1999. Under the Modification
Agreement, the Company is to accrue a total of $180,000 of liquidated damages
for the period from February 24, 1999 through and including June 23, 1999, which
accrued amount is payable at any time after October 1, 1999, upon request for
payment therefore by the Investors, in shares of the Company's common stock. The
number of shares of common stock issuable upon such payment shall be determined
by dividing the total amount of damages accrued by 100% of the average of the
closing bid prices of the Company's common stock during the five trading day
period immediately preceding the date of such payment. Additionally, under the
Modification Agreement, the Company's obligation to pay liquidated damages under
the Credit Agreement was abated from June 24, 1999 through September 23, 1999,
provided that the registration statement was declared effective on or before
October 31, 1999. Additional liquidated damages in the amount of $45,000 were to
have accrued for the period between September 24, 1999 and October 23, 1999 if
the Registration Statement is not declared effective before October 31, 1999. If
the registration statement was not declared effective on or before October 31,
1999, the Modification Agreement's provisions providing for the payment of
liquidated damages in stock and the abatement of liquidated damages from June
23, 1999 to September 23, 1999 and the provisions allowing the Company to pay
liquidated damages in common stock rather than cash may be rescinded at the
option of the Investors. Except to the extent specifically modified by the
Modification Agreement, the terms and conditions of the Credit Agreement and the
documents and instruments incorporated in the Credit Agreement continued in
force.
Although the Company filed an amendment to the registration statement
on July 2, 1999, the registration statement was not effective by the October 31,
1999 deadline set forth in the Modification Agreement. Moreover, because the
Company's pending preliminary proxy statement is being reviewed by the
Securities and Exchange Commission in tandem with the pending registration
statement, the Company was not able to hold its annual meeting of shareholders
by the October 31, 1999 deadline. On November 12, 1999, the Company and the
Investors executed an amendment to the Modification Agreement that substituted
February 15, 2000 for the October 31, 1999 deadline originally in the
Modification Agreement. Except for this modification, none of the terms of the
Credit Agreement or the Modification Agreement were changed in any way.
On November 4, 1999, the Company sold its corporate headquarters
facility for $2,900,000. Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The net proceeds to the
Company were $831,000, after paying long-term debt secured by the building,
broker and legal fees, and other ancillary charges. The proceeds from the sale
will be used for working capital purposes. The party that purchased the building
is not affiliated with or related to the Company or any of its officers or
directors.
The Company anticipates that its 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 during the next
twelve months.
September 30, 1999 Compared to December 31, 1998
As of September 30, 1999, the Company had liquid assets (cash and cash
equivalents and trade accounts receivable) of $2,370,000, an increase of 6.2%,
or $139,000, from December 31, 1998 when liquid assets were $2,231,000. Cash
increased $140,000, or 6,146.9%, to $142,000 at September 30, 1999 from $2,000
at December 31, 1998. This increase in cash was primarily the result of the
Company utilizing its revolving credit facility, under which the Company makes
"draws" to fund capital expenditures, purchase inventory and for general-purpose
use. After a draw is made a corresponding payable is setup, when collections of
outstanding accounts receivable are made the monies collected, are swept, the
next day, and re-applied against outstanding draws. The increase in cash
resulted from the fact that the amounts in the account as of September 30, 1999
were not yet swept and applied against outstanding draws. Trade accounts
receivable decreased $1,000, or 0.0%, to $2,228,000 at September 30, 1999 from
$2,229,000 at December 31, 1998.
Current assets decreased by $891,000, or 12.0%, to $6,514,000 at
September 30, 1999 from $7,405,000 at December 31, 1998. This decrease was
primarily the result of a decrease in inventory levels by $1,216,000 primarily
due to the Company's December 24, 1998 agreement with Grandway China
("Grandway"), a Hong Kong enterprise, whereby Grandway agreed to make guaranteed
minimum monthly inventory draws of $103,000 or cost plus three percent until the
25
<PAGE>
remaining approximately $1,000,000 of inventory is purchased. As of September
30, 1999, Grandway had purchased the entire remaining inventory. The decrease in
current assets was offset in part by an increase in cash as discussed above.
Long-term assets decreased $148,000, or 3.6%, to $3,986,000 at
September 30, 1999 from $4,134,000 at December 31, 1998. This decrease was
primarily the result of recurring depreciation of building and equipment, and
amortization of deferred loan costs, and other intangibles. Offset in part by
fixed asset and intangible additions.
Current liabilities increased by $471,000, or 7.9%, to $6,445,000 at
September 30, 1999 from $5,974,000 at December 31, 1998. This increase was
primarily due to an increase of $1,114,999 in short-term notes payable as a
result of additional borrowings under the Company's revolving line of credit.
The increase was offset in part by a decrease in accrued advertising of
$168,000, trade accounts payable of $134,000, and accrued expenses of $182,000.
The Company's working capital decreased by $1,363,000, or 95.2%, to
$68,000 at September 30, 1999 from $1,431,000 at December 31, 1998, for the
reasons described above.
The Company used net cash of $507,000 in operating activities during
the nine months ended September 30, 1999, primarily as a result of the net loss
incurred during the period, offset in part from decreased inventory levels.
The Company used net cash of $198,000 in investing activities during
the nine months ended September 30, 1999, primarily for the purhcase of
Transworld Products, Inc., a manufacturer of telephone shoulder rests and a main
competitor of the Company in that product line. The Company also incurred
additional expenditures for new computer equipment related to its Year 2000
preparations.
The Company provided net cash of $845,000 from financing activities
during the nine months ended September 30, 1999, primarily due to borrowings
under the Company's revolving line-of-credit, offset in part by payments made on
long-term debt during the period.
Inflation
Most of the Company's products are purchased in finished form and
packaged by the supplier or at the Company's headquarters. The Company uses a
premixed plastisol (a petroleum based raw material) to manufacture certain of
its telephone accessory products at its headquarters. The Company anticipates
usual inflationary increases in the price of its plastic products and does not
intend to pass these increases along to its customers, primarily as a result of
other operating efficiencies gained through changing the sourcing of certain of
its flashlight manufacturing from the United States to Asia. Significant
increases in the cost of plastisol in the future could materially affect the
Company's profitability if these costs cannot be passed on to customers. In
general, the Company does not believe that inflation has had a material effect
on its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future. The
Company purchases corrugated packaging materials from several suppliers. These
suppliers source raw materials from Asia and have indicated to the Company that
they anticipate a price increase of between 10% and 14% in the second quarter of
1999, and have indicated that they will be passing this increase on to all
customers. The Company does not believe that this increase will have a material
adverse affect on results of operations in 1999.
26
<PAGE>
Seasonality
The Company's business is seasonal. The Company typically experiences
its highest sales volume in the fourth quarter of each year as a result of the
retail environment in which most of its customers conduct business. Because the
Company sells its products primarily to major retailers, the Company's sales
performance is significantly dependent on the performance of those retailers.
Accordingly, the fourth quarter is a key determinate to overall profitability
for the year.
Year 2000 Compliance
The Year 2000 problem relates to the inability of many computer
programs and microchip-based products and equipment to operate properly on dates
approaching and following December 31, 1999. This inability to operate correctly
results from the use in many computer programs and embedded microchip code of a
two-digit rather than a four-digit date field. Thus, non Year 2000 compliant
software and firmware may misinterpret a date entry of "00" as 1900, rather than
2000, resulting in, among other things, a temporary inability to process
transactions, send invoices, or engage in similar business transactions.
The Company uses and is dependent upon computer systems and software
to conduct its business. In the fourth quarter of 1997, the Company began
implementing a new accounting and materials resource planning integrated
software system. The software system, Made2Manage, was purchased with the Year
2000 issue in mind, and is represented by its manufacturer to be Year 2000
compliant in all material respects. Consequently, the Company believes its core
enterprise resource planning and accounting systems will not be affected by the
Year 2000 problem. However, the Company uses many different software programs to
process and summarize business transactions. The Company has completed its Year
2000 evaluation and remediation of these various internal computer systems.
Based on its efforts to date, the Company presently believes that the Year 2000
problem will not materially affect the operation of its internal computer
systems, hardware, software or its internal operations that are dependent, in
material part, on embedded microchips or computer controllers, including the
HVAC, security and telephone systems located at the Company's headquarters.
There can be no assurance, however, that the Company's internal systems and
operations will not be adversely affected by the Year 2000 problem.
In its evaluation and remediation program, the Company utilized both
internal and external resources to reprogram or replace non-compliant software
for Year 2000 modifications. The total cost of the Year 2000 project to date is
approximately $193,000, which has been funded through operating cash flows and
the Company's existing $5,000,000 secured credit facility. Of this cost,
approximately $120,000 was attributable to the purchase of new software or
equipment that will be capitalized. The remaining $73,000 has been expensed as
incurred. The Company does not anticipate incurring additional material expenses
related to its Year 2000 remediation efforts in respect of its internal systems
and operations.
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. Additionally, in March 1999, the Company, through its own information
technology personnel and its Chief Financial Officer, conducted on-site reviews
of certain of its key Asian suppliers to ascertain, to the extent possible, the
Company's exposure to manufacturing delays or stoppages as a result of those
suppliers' failure to remediate their Year 2000 problems. Based on those
efforts, the Company does not presently anticipate that its operations will be
adversely affected as a result of the Year 2000 problem as it may affect the
Company's key suppliers' internal systems. However, there can be no assurance
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, its operations and financial condition. The
Company does not presently have a completed contingency plan to address
operational difficulties in the event the Company's Year 2000 evaluation and
remediation efforts to date prove to be unsuccessful.
27
<PAGE>
PROPERTIES
The Company 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. The Company is presently
negotiating the sale and subsequent leaseback of its facility.
The Company owned the building until November 4, 1999, on which date
the Company closed a transaction providing for the sale and leaseback of the
building. The buyer is an unaffiliated third party and the parties negotiated
the sale and leaseback as an arms- length transaction. The total purchase price
for the building was $2,900,000. The proceeds to the Company, after payment of
the existing mortgage, closing costs, and brokerage fees associated with the
sale, were approximately $830,000, which the Company will use for general
corporate purposes as operating capital. The lease is a triple net lease with a
term of 20 years. The initial base rent is $330,000 per year. In connection with
the sale and leaseback transaction, the Company issued 33,948 shares of
restricted common stock to the buyer.
The Company believes that the building and property are adequate for
its needs and currently has no plans to renovate the current facility or to find
additional or alternate facilities.
BUSINESS
Cautionary Note Regarding Forward-looking Statements.
This prospectus, in particular the "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections, contains forward-looking statements concerning the expectations and
anticipated operating results of the Company. All of these forward-looking
statements contained herein are intended to qualify for the safe harbor
protection provided by the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended. The reader should understand that
numerous factors govern whether any forward-looking statement made by the
Company will be or can be achieved. Any one of such factors could cause actual
results to differ materially from those projected by the forward-looking
statements made herein. These forward-looking statements include plans and
objectives of management for future operations, including plans and objectives
relating to the products and the future economic performance of the Company. The
forward-looking statements are based on current expectations that maybe affected
by a number of risks and uncertainties. Factors that could cause actual results
to differ from results discussed in forward-looking statements include, but are
not limited to, potential increases in inventory costs, competition, and the
Company's ability to obtain additional working capital to fund future growth.
Assumptions made by management for purposes of such forward looking statements
involve judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements in this Report are reasonable, any of
these assumptions could prove inaccurate. Therefore, there can be no assurance
that the results contemplated in any of the forward-looking statements will be
realized. Budgeting and other management decisions are subjective in many
respects and are susceptible to interpretations and periodic revision based on
actual experience and business developments, the impact of which may cause the
Company to alter its marketing capital expenditure plans or other budgets. This
will affect the Company's results of operations. In light of the significant
uncertainties inherent in the forward-looking statements, any such statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
General
Dynatec is a Salt Lake City, Utah based manufacturer and distributor of
consumer products. The Company has four wholly owned subsidiaries: Softalk,
Inc., Arnco Marketing, Inc., Nordic Technologies, Inc. and SofTalk
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 audited consolidated financial statements included as part of this
Prospectus, entitled "Business Segment Information."
28
<PAGE>
Seasonality
The Company's business is seasonal. The Company typically experiences
its highest sales volume in the fourth quarter of each year as a result of the
retail environment in which most of its customers conduct business. Because the
Company sells its products primarily to major retailers, the Company's sales
performance is significantly dependent on the performance of those retailers.
Accordingly, the fourth quarter is a key determinate to overall profitability
for the year.
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 so the 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 cord, but avoid the hassles of a
normal cord of that length.
The Company has invested significant capital in research and
development of its 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.
These products were launched in the fourth quarter of 1997 and currently are
distributed under the trade names of "Tele-Link (TM)", "Computer-Link (TM)",
"Power-Link (TM)", and "Power Phone (TM)".
For the year ended December 31, 1998, revenues from the telephone
accessories product line accounted for 46.1% of the Company's total revenues and
42.2% of total revenues for the year ended December 31, 1997. Major customers
for this product line include United Stationers, Lucent Technologies, Boise
Cascade, Radio Shack, Staples, Gemini Industries and Corporate Express. In
addition, the Company has secured pages in several catalogues of major providers
for various office products for all of these types of products, which pages
began circulating during the third and fourth quarters of 1998 and will continue
for 1999. These providers include SP Richards, Corporate Express, Boise Cascade
and B.T. Office Products.
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
29
<PAGE>
door stops. The products in this line are typically custom manufactured for
Dynatec by offshore, nonaffiliated manufacturers using proprietary third party
designs the Company licenses.
For the year ended December 31, 1998, the home storage and organization
product line accounted for 28.4% of the Company's total revenues, compared to
25.4% of Company revenues for the year ended December 31, 1997. These products
generally are distributed directly to retail stores, distributors, and catalogs
including National Manufacturing, Lechters, Container Store, Sams Club,
Wal-Mart, Target, Bed Bath & Beyond and others.
Flashlights
In December 1996, Dynatec acquired substantially all of the assets of
Nordic Lights, Inc., a Texas corporation. Prior to the acquisition, Nordic
Lights was engaged in the business of manufacturing and distributing a line of
battery-powered flashlight products. The Company transferred the assets acquired
from Nordic Lights to a wholly owned subsidiary of the Company, Nordic
Technologies, Inc., a Utah corporation ("Nordic Technologies"), which continues
to operate Dynatec's flashlight business. Nordic Technologies manufactures and
markets a broad range of specialty and premium flashlight products and
accessories under the trademark "Nordic Lites." These products include water and
impact resistant aluminum flashlights that operate on "AA", "C" and "D"
batteries, specialty flashlights that have such features as focusable beams and
flexible handles, and ordinary plastic flashlights. In 1998, the Company began
offering packages containing multiple flashlights and related accessories
bundled together in a convenient storage and display container. These package
units are being marketed to major retailers and warehouse shopping customers.
Major customers for the flashlight products include Giga, Inc. (U.S. military
procurement) and Dixie Electric Supply Corp.
In July 1997, the Company sold the assets located at the Ft. Worth,
Texas facility at which Nordic Lights had operated in favor of more economical
and efficient manufacturing relationships with Asian sources. Presently,
although the Company does some packaging of its flashlight products, all
manufacturing is sourced from third parties. Sales of flashlight products for
the year ended December 31, 1998 amounted to $989,000 or 6.0% of the Company's
total revenues and 6.1% of revenues for the year ended December 31, 1997.
Miscellaneous/Mass Market
Miscellaneous products the Company has offered from time to time have
included the "Softalk Erasable Board", a soft wipe erasable planning board for
office and personal use, product packaging for AT&T and the Fuji Novel Battery
Line. The miscellaneous product segment accounted for less than one percent of
the Company's revenues for the year ended December 31, 1998.
Additionally, the Company sells commodity type products to national
mass-market merchandisers, such as Dolgencorp, Inc. Such products have included
single-use cameras, audiocassette tapes, three piece flashlights, and disposable
lighters, all of which products were distributed to Dolgencorp. Sales for these
types of products accounted for 19.6% and 26.3% of the Company's revenues for
the years ended December 31, 1998 and 1997, respectively.
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.
30
<PAGE>
<TABLE>
<CAPTION>
Date Date Acquired
Subsidiary Organized By Company
- ---------------------------------------- ----------------------- -------------------------------
<S> <C> <C>
Softalk, Inc. (1) 7/15/82 4/18/83
Arnco Marketing, Inc. (2) 7/22/86 9/30/91
Nordic Technologies, Inc. (3) 10/25/96 10/25/96
SofTalk Communications, Inc. (4) 12/23/96 12/23/96
</TABLE>
(1) Engaged in the manufacturing, sourcing and distribution of the
telephone accessory, home storage and organization, and mass
market products of the Company.
(2) Imports and markets Twisstop to SofTalk and others under a license
agreement with Recoton, Inc.
(3) Involved in the research, development and marketing of flashlight
products.
(4) Engaged in the research, development and marketing of
telecommunications products.
Raw Material and Supplies
The Company uses a premixed plastisol to manufacture the Softalk, Mini
Softalk, Universal Phone Rest, Sofstop, and Softalk II products. "Plastisol" is
a generic term for the petroleum based raw material from which the vinyl
substance forming the Softalk products is manufactured.
Other than the Softalk products, the Company's products are purchased
in finished form and packaged according to Dynatec's specifications by the
Company's various suppliers. In some cases, Dynatec purchases finished product
and packages the product for distribution at its Salt Lake City headquarters.
The Company, to date, has relied upon approximately fifteen primary suppliers
for plastic and other materials ordered to specification for its assembly,
manufacturing, and marketing processes. The Company has not experienced any
shortage of 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 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 who produce its products could be readily replaced if
necessary.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
31
<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>
32
<PAGE>
The Company owns or licenses the following U.S. and foreign patents.
<TABLE>
<CAPTION>
Patents Year of
Patent Patent
Product Country Granted/Filed Expiration
- --------------------------------------------------------------------------------------------------------------------
<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>
The Company believes its ownership of trademarks and patents is
important to success in its markets. The cost of prosecuting and defending
against claims for infringement may be prohibitive and there can be no assurance
that third parties will not violate the Company's proprietary rights or that the
Company will be successful in protecting its rights under applicable law.
Inventory Supply and Backlog Orders
The Company has followed a standard policy of shipping within 24 hours
of receipt of payment on orders, or within 48 hours of orders on approved credit
lines, with the exception of large home storage and organization orders, which
are filled within two to four weeks. The Company historically has been able to
ship within these guidelines on almost all occasions, however, due to a recent
earthquake in Taiwan, the Company anticipates that it may be forced to extend
some of these delivery guidelines, in particular with respect to its flashlight
line, in the fourth quarter of 1999. The Company keeps an inventory of
approximately two months of all products other than flashlights 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
33
<PAGE>
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.
For the year ended December 31, 1998, 16.5% of the telephone accessory
products were distributed through sales to United Stationers. Another 13.0% of
sales in this product line were to Boise Cascade, whose headquarters are at 800
West Bryn Mawr Road, Itasca, IL 60143. S.P. Richards, whose headquarters are at
P.O. Box 1266, Smyrna, GA 30081, accounted for another 12.7% of sales of
telephone accessory products.
Home Storage and Organization
For the year ended December 31, 1998, 12.8% of the home storage and
organization products were distributed through Target Stores, whose headquarters
are at 33 South 6th Street, P.O. Box 1392, Minneapolis, MN 55440. Another 10.9%
of these products were distributed to National Manufacturing, whose headquarters
are at 1 First Avenue, Sterling IL 61081. An additional 10.4% of the home
storage and organization products sales were to Wal-Mart, whose headquarters are
at 702 S.W. 8th Street, Bentonville, AR 72716. Bed, Bath and Beyond, whose
headquarters are at 110 Bi-County Blvd., Suite 114, Farmingdale, NY 11735,
accounted for another 10.2% of the distribution of houseware/hardware products.
Flashlights
For the year ended December 31, 1998, 38.3% of the flashlight products
were distributed through Giga, Inc. whose headquarters are at P.O. Box 4265,
Macon, GA 31208. Another 12.4% of the flashlight products sales were to Dixie
Electric Supply Corp., whose headquarters are at P.O. Box 6522, Richmond, VA
23230.
Miscellaneous/Mass Market
Dolgencorp, Inc. whose headquarters are at 427 Beech Street,
Scottsville, KY 42164, accounted for substantially all of the Company's
mass-market revenues of $3,246,000 for the year ended December 31, 1998.
Dolgencorp, Inc. was the only customer that accounted for more than 10%
of the total Company revenues. The loss of a single customer in any of the other
product lines of the Company would not have a significant adverse effect on the
Company's overall financial condition and operations.
Competitive Conditions in the Market
The Company believes that it is engaged in highly competitive market
segments for each of its products. The Company bases this conclusion on the fact
that the generic design or function of the telephone accessory products could
probably be functionally replicated without any great difficulty. Further, many
of the other products of the Company involve relatively easy assembly processes
which would allow for ease of entry into the marketplace by competitors.
The doorstop products, which are marketed as part of the home
organization product line, as with other hardware items, experience significant
competition with numerous other doorstop products, but are substantially
different than traditional doorstops. Competition with this product is largely
on the basis of price, although it is believed that the Company's products are
competitively priced. The majority of the other products could be easily
replicated, although the mold costs for such products could be substantial. The
Company also has legal protection on various products in the forms of various
trademarks and patents.
The Company believes that both the flashlight and telephonic headset
markets are also very competitive. However, the Company believes that its
proprietary rights for both flashlights and headsets, as well as the innovative
features of those products, enable the Company to compete in each of these
markets.
Environmental Regulation
The Company believes that it is in compliance with all environmental
quality regulations pertaining to such matters as emission, waste disposal,
safety equipment, and like procedures. The Company believes it is in compliance
34
<PAGE>
with all state and local environmental statutes. The Company also believes that
it is in compliance with all Occupational, Safety, and Health Administration
standards in its work place.
Employees
The Company employs a full-time executive, sales, administrative and
clerical staff of 28 people. The Company also has an average monthly assembly,
warehouse and distribution staff of approximately 45 people. The number of
assembly, warehouse and distribution employees is subject to adjustment based
upon production demand, and ranged from a high of approximately 56 employees to
a low of approximately 45 employees during the year ended December 31, 1998.
MANAGEMENT
The following table sets forth certain information regarding the
executive officers and directors of Dynatec as of October 15, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Title
Frederick W. Volcansek, Sr............ 53 Chairman of the Board of Directors and Chief Executive Officer
Lloyd M. Taggart...................... 55 Senior Vice President Sales
Michael L. Whaley .................... 43 Senior Vice President and Chief Financial Officer
Reed Newbold.......................... 52 Director
Wayne L. Berman....................... 42 Director
John P. Schmitz....................... 44 Director
</TABLE>
Mr. Volcansek was employed by the Company's Board of Directors as the
Company's Chief Executive Officer on February 6, 1999. On that same day he was
appointed Chairman of the Company's Board of Directors. Prior to that time, Mr.
Volcansek served as an outside director of the Company from 1988 to February 6,
1999. Before accepting full-time employment as the Chief Executive Officer of
the Company, from June 1996 to February 1999 Mr. Volcansek was the Vice
President of Development for TM Global Power, LLC and the President of Mosbacher
Power do Brasil Ltda. in Houston, Texas. Mr. Volcansek also has several years'
experience in international market development and as a political consultant for
several large multi-national corporations, including US West, Enron and Ogden
Corp. Mr. Volcansek served as Deputy Under Secretary of the U.S. Department of
Commerce (International Trade Administration) from June to October 1992. Prior
to that appointment, Mr. Volcansek after serving as Deputy Assistant Secretary
of Commerce for Trade and Development from June 1990. Mr. Volcansek received a
B.S. degree in 1967 from Texas Tech University.
Mr. Taggart joined the Company in April 1999. Prior to joining the Company,
from 1994 to 1999, Mr. Taggart was the President and CEO of Sweet Water Ranch,
Inc., a manufacturer of custom, handmade reproductions of the legendary western
style Molesworth furniture. Mr. Taggart expanded distribution of that company's
products from twenty-three states to all fifty states and eight foreign
countries. After service in the United States Navy, in 1972, Mr. Taggart joined
the Clorox Company's brand management team in Oakland, California. He also
served for three terms as a Commissioner of the Colorado River Commission, a
board that controls and markets $25,000,000 of hydro electrical power generated
by the Hoover Dam and 5,000,000,000 GPM of water allocated to Nevada from the
Colorado River. Mr. Taggart received a B.S. degree from Brigham Young University
in 1968.
Mr. Whaley joined the Company as Senior Vice President and Chief
Financial Officer on October 29, 1999. Prior to joining the Company, Mr. Whaley
worked for a year as an Engagement Manager for Prism Consulting International of
Bethesda, Maryland, a strategy and operations consulting firm. Before that, he
worked as the Director of Westinghouse Electric Corporation's Government
Privatization Activities Division from February 1997 though August 1998, and as
the Chief Financial Officer of Westinghouse's Commercial Nuclear Fuel Division
from January 1993 through February 1997. Mr. Whaley received his B.S. degree in
accounting from Norfolk State University in Norfolk, Virginia, and received a
Certificate of Completion of the Harvard Business School Program for Management
Development.
Mr. Newbold has been an outside Director of the Company since 1988. In
1991, Mr. Newbold founded Newbold Financial, a financial planning and mortgage
brokerage services company located in Salt Lake City, Utah. Since its founding,
Mr. Newbold has been the founding principal of Newbold Financial. Prior to his
founding of Newbold Financial, Mr. Newbold served as Vice President of Tracy
Collins Bank & Trust in Salt Lake City, Utah.
Mr. Berman was appointed to the Company's Board of Directors on March
5, 1999. Mr. Berman presently is Managing Director of Park Strategies, L.L.C.,
an international business consultancy he founded in 1999. In that capacity, he
advises companies including Lockheed Martin, American International Group, US
West, BMW Corporation, AON Corporation and Philip Morris on matters relating to
new business opportunities, international financing strategies and strategic
relationships. Mr. Berman also is currently a Fellow at the Center for Strategic
and International Studies and was recently appointed to the Library of Congress'
Board of Trustees. From 1993 to 1999, Mr. Berman was Managing Director of Berman
35
<PAGE>
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.
Mr. Schmitz was appointed to the Company's Board of Directors on September
16, 1999. Since 1993, he has been a partner at the Washington, D.C. office of
the law firm of Mayer, Brown & Platt where his practice specializes in the areas
of energy and environment, government and international. From 1989 to 1993 he
was Deputy Counsel to President George Bush, and from 1985 to 1989 was Deputy
Counsel to Vice President George Bush. From 1984 to 1985, he was an attorney at
the firm of Wilmer, Cutler & Pickering, Washington, D.C. In 1984 he was employed
at the Robert Bosch Foundation Fellowship, Office of Bundestag Member Matthias
Wissmann, Bonn, and Office of General Counsel, Robert Bosch, GmbH, Stuttgart,
Germany. From 1983 to 1984 he was law clerk to The Honorable Antonin Scalia,
U.S. Court of Appeals for the District of Columbia, Washington, D.C. Mr. Schmitz
received his J.D. from the Stanford Law School in 1981, his M.S. from the
California Institute of Technology in 1978, and his B.A. from Georgetown
University in 1976. His recent professional activities include, among other
activities, the Carnegie Endowment for International Peace, Study Group on
American-European Community Relations, 1993 to date; the International
Republican Institute, Rule of Law Advisory Board, 1993 to date; U.S.
Representative, Joint U.S.-Panama Commission on the Environment, 1993-1994;
Member, U.S. Delegation, United Nations Conference on Environment and
Development (UNCED), Rio de Janeiro, June 1992. He is admitted to the bars of
Pennsylvania and the District of Columbia.
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. Specifically, the investigation focused on the
propriety of Mr. Wood's conduct in causing the Company to employ certain of his
family members; his conduct with respect to his use of Company assets, such as
Company owned or leased vehicles, a houseboat timeshare interest; his conduct in
causing the Company to insure his personal watercraft; his conduct in causing
the Company to rent certain real property owned by Mr. Wood at rates that
potentially were in excess of fair market rates; the propriety of certain option
grants made to Mr. Wood or entities controlled by or affiliated with him; and
other miscellaneous transactions and matters. By January 1999, the third party
investigator had completed its review of available information pertinent to the
investigation. Although the investigator made certain conclusions and
representations, those conclusions and representations were strongly disputed by
Mr. Wood, were not legally conclusive, by their own terms were inconclusive in
certain respects, and, in some cases, involved situations that occurred as much
as twelve years prior to the investigation. In light of his health condition and
the pendency and status of the investigation, Mr. Wood agreed to retire and
resign from the Company, effective January 14, 1999. In return for his agreement
to retire and resign, the independent directors of the Company agreed not to
take further action with respect to the investigation, 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.
From October 1998 through October 8, 1999, Paul A. Boyer served as
Senior Vice President and Chief Financial Officer of the Company. Effective
October 8, 1999, he resigned from the Company for personal reasons. Mr. Boyer
also was a director of the Company from January 14, 1999 through September 18,
1999. Prior to joining the Company, from November 1996 to October 1998, Mr.
36
<PAGE>
Boyer served as Director of Finance for Mrs. Fields' Original Cookies, Inc.,
where he was responsible for mergers & acquisitions, corporate budgeting,
financial planning and strategic analysis. Mr. Boyer also served as Chief
Financial Officer of Wasatch Education Systems, an educational software
development company from October 1990 to November 1996 . Mr. Boyer received his
Masters in Accountancy from San Diego State University in 1987.
Compliance with Section 16(a) of the Exchange Act
During the year ended December 31, 1998, as far as the Company is
aware, all officers and directors prepared and timely filed all Forms 3, 4 and 5
required by Section 16(a) of the Exchange Act, except that a Form 3 for Mr.
Boyer inadvertently was not timely filed. This oversight was corrected. Mr.
Boyer has had no transactions in the Company's common stock.
Board Compensation
From March 1, 1999 until June 30, 1999, members of the Company's Board
of Directors, other than officers of the Company, were compensated $2,000 per
month for their services rendered. Before March 1, 1999, board members were
compensated in the amount of $10,000 annually. In June 1999, the Company issued
stock options to the non-employee members of the Board of Directors, which
option grants replace future cash compensation. As of July 1, 1999, Employee
directors are not compensated for their services on the Board of Directors,
although until July 1, 1999 they received compensation according to the
historical rate of $10,000 per annum.
Board Committees
Two functioning committees of the Company's Board of Directors have
been organized including (i) Compensation Committee and (ii) Audit Committee.
Following is a brief description of each of these committees.
Compensation Committee. The Compensation Committee is composed of
Messrs. Berman (Chairman) Newbold and Vo1cansek. 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.
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.
37
<PAGE>
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------------- ------------------------ -------------------------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP All Other
Name and Salary (1) Bonus (2) Compensation(3) Award(s) SARs (4) Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------ ---- --------------- ------------- -------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald M. Wood (5) 1998 $193,723 $1,624 $12,500 - - - -
Chairman and CEO 1997 194,433 3,249 14,000 - 14,000 - -
1996 194,640 1,421 8,000 - 10,000 - -
F. Randy Jack (6) 1998 140,333 1,725 10,000 - - - -
President and COO 1997 129,142 3,465 14,000 - 10,000 - -
1996 142,440 1,522 8,000 - 9,000 - -
Dale Gledhill (7) 1998 162,556 355 - - - - -
Vice President Sales 1997 143,029 541 - - - - -
1996 124,354 152 - - - - -
</TABLE>
- -----------------
(1) Total cash compensation shown above does not include the value of company
leased or owned vehicles and insurance payments made on behalf of officers.
Such items are included on the individual officers W-2's. The amounts shown
as other annual compensation are directors fees received during the fiscal
year.
(2) Bonus compensation includes time in service bonus.
(3) Other annual compensation includes compensation for service rendered as
an inside employee Director.
(4) An incentive stock option plan was implemented in November 1996. Options
were granted as approved by the Board of Directors on December 30, 1996 and
again on January 2, 1997.
(5) Resigned from Company on January 14, 1999.
(6) Resigned from Company on March 17, 1999.
(7) Not an Executive Officer, resigned in April 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARS at Options/SARS at
FY-End (#) FY-End($)
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise ($) Unexercisable Unexercisable
---- --------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
Donald M. Wood (1) - - 942,000(2) $5,000/
Chairman and CEO $250,000
F. Randy Jack (2) - - 249,000 $4,500/
President and COO $ 65,000
Dale Gledhill (3) - - 163,000 $3,500/
Vice President Sales $ 20,000
</TABLE>
(1) Resigned from Company on January 14, 1999.
(2) Excludes options to purchase 737,500 shares issued to two separate entities
affiliated with Mr. Wood. The value of such exercisable, in-the-money
options as of December 31, 1998, ws $368,750. After December 31, 1998, Mr.
Wood agreed to the cancellation of options to purchase 900,000 shares,
which options were granted to him individually in 1996 and 1997, and
options to purchase 537,500 shares of common stock that were issued to an
entity affiliated with him in 1996.
(3) Resigned from Company on March 17, 1999.
(4) Not an Executive Officer.
In November 1996, the Company's shareholders approved an Incentive
Stock Option plan for the benefit of the officers and employees of the Company.
No formal criteria have been established to determine the amount of benefits to
be granted pursuant to the 1996 plan, except that the Plan authorizes grants of
no more than 300,000 shares. The Plan provides that options are granted at
exercise prices equal to the market value as of the date the option is granted.
On January 2, 1997 and December 30, 1996, the Board of Directors approved the
issuance of 105,000 and 95,000 options to purchase stock pursuant to the 1996
Incentive Stock Option Plan. Further description of the Plan and the exercise
prices are provided in the Notes to the accompanying Consolidated Financial
Statements.
38
<PAGE>
Employment Agreements
Mr. Wood and Mr. Jack had employment contracts with the Company that
were terminated upon their respective resignations. In both cases, their
employment contracts were terminated upon their respective resignations.
Mr. Volcansek, Lloyd M. Taggart, the Company's Senior Vice President
Sales, and Michael L. Whaley, the Company's Senior Vice President and Chief
Financial Officer, each have employment agreements that provide for a period of
employment of four years from the date of the agreements, subject to termination
and extension provisions. The agreements permit each of them to participate in
any incentive compensation plan adopted by the Company and benefit and
equity-based plans or arrangements. If the Company terminates either of Mr.
Volcansek's, Mr. Taggart's, or Mr. Whaley's employment for cause, or if either
of them terminates their employment without good reason, the Company has no
further obligation to pay them under their respective agreements. If the Company
terminates either of them without cause, the terminated executive 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 employment agreements must then be honored by the
surviving entity or it must purchase the agreements for a sum equal to three (3)
years' base salary. The employment agreements prohibit each of Messrs.
Volcansek, Taggart, and Whaley for two years from the date of termination of
their respective employment under the agreements, from becoming an employee,
owner (except for investments in up to 5% of the equity securities of a company
listed or traded on a national securities exchange or the NASDAQ Stock Market),
officer, agent or director of a firm or person that competes with the Company in
the consumer products industry. The employment agreements have customary
provisions for vacation, fringe benefits, payment of expenses and automobile
allowances. Mr. Volcansek's base salary is $205,000, Mr. Taggart's base salary
is $167,500, and Mr. Whaley's base salary is $145,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 8, 1999, the number of
shares of Common Stock of the Company beneficially owned by all persons known to
be holders of more than five percent of the Company's Common Stock and by the
executive officers and directors of the Company individually and as a group.
Unless indicated otherwise, the address of the shareholder is the Company's
principal executive offices, 3820 West Great Lakes Drive, Salt Lake City, Utah
84120.
<TABLE>
<CAPTION>
Name, Title, and Address of Common Stock Percent of Class as of
Beneficial Owner Beneficially Owned September 30, 1999
---------------- ------------------ ------------------
<S> <C> <C>
Austost Anstalt Schaan (1) 1,155,555 (2) 23.5%
5% Beneficial Owner
733 Fuerstentum Liechtenstein
Landstrasse 163
Balmore Funds, S.A. (1) 1,155,555 (2) 23.5%
5% Beneficial Owner
Trident Chambers
P.O. Box 146
Roadstown, Tortula BVI
Touchstone Transport Services 457,660 12.2%
5% Beneficial Owner
c/o Oxford International Management, Inc.
Suite 1402, 14th Floor
PDCP Bank Centre, 8737 Paseo De Roxas
Cor. Makati Avenue, Makati City
Philippines
39
<PAGE>
Wilford A. Cardon 520,831 (3) 13.7%
5% Beneficial Owner
1819 East Southern Avenue, Suite B-10
Mesa, Arizona 85204-5219
Frederick W. Volcansek, Sr., 104,225 (4) 2.7%
Chairman and Chief Executive Officer
Lloyd M. Taggart 62,500 (5) 1.6%
Senior Vice President Sales
Michael L. Whaley 50,000 (6) 1.3%
Senior Vice President and
Chief Financial Officer
Reed Newbold 45,925 (7) 1.2%
Director
Wayne L. Berman 15,625 (5) *
Director
John P. Schmitz 12,500 (6) *
Directors and Officers as a group 290,775 7.2%
- -------------------------
</TABLE>
* Less than one percent.
(1) Ownership as described in the table represents estimate of
shares issuable upon conversion of
total of $531,000 principal amount of the Company's
convertible debentures held of record by the named shareholder
as of November 30, 1999. Solely for purposes of estimating
the number of shares of common stock that would be issuable to
and therefore beneficially owned by such person as set forth
in the table above, the Company has assumed that such person
has converted all of the convertible debentures issued to it
as of November 30, 1999, on which date the conversion price of
the convertible debentures would have been $0.75. The actual
conversion price and payment price and the number of shares of
common stock issuable upon such conversion or payment of
liquidated damages could differ substantially. The information
set forth in the table, above, is based on the Company's
estimation based on hypothetical conversions and is not
determinative of any person's beneficial ownership of the
Company's common stock pursuant to Rule 13d-3 or any other
provision under the Securities Exchange Act of 1934, as
amended.
(2) Includes: (a) 708,000 shares issuable upon the hypothetical
conversion as of November 30, 1999, of presently issued
convertible debentures in the aggregate principal amount of
$531,000; (b) 131,452 shares issuable as payment in stock of
$98,589 of accrued interest on $531,000 principal amount of
Convertible Debentures, assuming a hypothetical conversion on
November 30, 1999; (c) 62,500 shares issuable on exercise of
presently issued A Warrants; (d) 62,500 shares issuable on
exercise of presently issued B Warrants; (e) 99,640 shares
issued prior to the date hereof upon conversion of $94,000
principal amount of Convertible Debentures and interest
accrued thereon none of which are covered by this prospectus
and some or all of whcih may have been sold prior to November
30, 1999, under Rule 144 or otherwise; and (f) 90,931
potentially issuable shares.
(3) Includes 158,831 shares and 162,000 shares owned respectively
by two entities affiliated with Mr. Cardon, and presently
exercisable options to purchase 200,00 shares owned by another
entity as to which Mr. Cardon exercises voting control.
(4) Includes 10,000 shares issuable on exercise of options having
an exercise price of $2.00 per share; 15,000 shares issuable
on exercise of options having an exercise price of $2.50,
103,125 shares issuable on exercise of options having an
exercise price of $1.625 per share, and 1,100 shares.
(5) All shares issuable on exercise of options having an exercise
price of $1.625 per share.
(6) All shares issuable on exercise of options having an exercise
price of $1.03 per share.
(7) Includes 10,000 shares issuable on exercise of options having
an exercise price of $2.00 per share; 15,000 shares issuable
on exercise of options having an exercise price of $2,50,
15,625 shares issuable on exercise of options having an
exercise price of $1.625 per share, and 5,300 shares.
During 1996, the Company's Board of Directors authorized grants of
non-qualified stock options that are tied to the profitability of the Company
and based upon minimum years of employment. Options to purchase a total of
840,000 shares at an exercise price of $2.00 per share were granted. To vest,
the holder-employee must continue his employment with the Company through the
year 2001 and the Company must be profitable three out of four years commencing
January 1, 1998. Additional non-qualified stock options for 800,000 shares with
similar terms were granted on January 2, 1997. To vest, the holder-employee must
continue his employment with the Company through the year 2001 and the Company
must be profitable three out of four years commencing January 1, 1998.
In 1996, the Company granted 537,500 non-qualified stock options to
Muito Bem Ltd., an entity owned by Donald M. Wood, the Company's former Chief
Executive Officer, at an exercise price of $2.50 per share in consideration of
all knowledge, trade secrets and a continuing non-compete, regarding the
telephone headset product line, as well as personal real estate pledged as
collateral on Company debts by Mr. Wood. In addition, WAC Research, Inc., an
entity affiliated with Mr. Wood, was granted 200,000 options having terms
40
<PAGE>
identical to the Muito Bem options. These options are not exercisable until
December 30, 2000. In January 1999, upon his resignation from the Company, Mr.
Wood agreed to the cancellation of all of the Muito Bem options.
SELLING SHAREHOLDERS
The shares of common stock offered under this Prospectus include issued
and outstanding shares held by and shares to be issued in the future to those
persons identified in this prospectus as the Selling Shareholders. None of the
Selling Shareholders have held any position or office or had any other material
relationship with Dynatec during the prior three years.
The following table provides information about the present ownership of
shares of Dynatec common stock by the Selling Shareholders as of August 31,
1999, and the number of such shares included for sale in this Prospectus owned
or potentially owned by the Selling Shareholders.
<TABLE>
<CAPTION>
Number of Shares and
Shares of Common Stock Number of Shares of Percentage of Common
Beneficially Owned Prior Common Stock Offered Stock Beneficially Owned
Name of Selling Stockholder to Offering Hereby (1) After the Offering
- ------------------------------------ -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Austost Anstalt Schaan 1,155,555 (2) 964,452 (3) (4)
733 Fuerstentum Liechtenstein
Landstrasse 163
Balmore Funds S.A. 1,155,555 (5) 964,452 (6) (4)
Trident Chambers
P.O. Box 146
Roadstown, Tortula BVI
Ellis Enterprises 172,194 (7) 130,662 (8) (4)
12A Waterloo Road
London NW2 7UF, England
Hewlette Fund 79,540 (9) 49,522 (10) (4)
1615 Avenue I
Brooklyn, NY 11230
TLG Realty 181,462 (11) 150,423 (12) (4)
c/o Melo
525 West 52nd St.
New York, NY 10019
Settondown Capital International, 82,500 (13) 82,500 (4)
Ltd.
Charlotte House, Charlotte Street
P.O. Box N. 9204
Nassau, Bahamas
Manchester Asset Management Limited 117,500 (14) 117,500 (4)
Charlotte House, Charlotte Street
Nassau, Bahamas
Avalon Capital Limited 125,000 (15) 125,000 (4)
487 Sherwood Drive, Suite 101
Sausalito, CA 94965
Avalon Capital, Inc. 125,000 (16) 125,000 (4)
17 Earlsfort Terrace
Dublin 2, Ireland
- ---------------------
</TABLE>
(1) Share amounts include, for the Investors, common stock
issuable upon conversion of presently issued Convertible
Debentures and Warrants, and shares that may be issued in the
future upon payment by the Company of liquidated damages under
the Credit Agreement and the Modification Agreement. The
number of shares of common stock issuable upon conversion of
the Convertible Debentures and the number of shares of common
stock issuable as payment of liquidated damages varies
according to the market price at and around the conversion or
payment date. Solely for purposes of estimating the number of
shares of common stock that would be issuable to the Selling
Shareholders as set forth in the table above, Dynatec and the
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Selling Shareholders have assumed that payment of liquidated
damages in the aggregate amount of $225,000 has been made in
common stock, the Selling Shareholders have converted all of
the Convertible Debentures issued to them, and the Company has
paid liquidated damages in common stock
as of November 30, 1999,
on which date the conversion price of the Convertible
Debentures would have been $0.75 and the payment price for
liquidated damages would have been $1.025. The actual
conversion price and payment price and the number of shares of
Dynatec common stock Shares issuable upon such conversion or
payment of liquidated damages could differ substantially. The
information set forth in the table, above, is not
determinative of any selling stockholder's beneficial
ownership of Dynatec common stock pursuant to Rule 13d-3 or
any other provision under the Securities Exchange Act of 1934,
as amended.
(2) Includes: (a) 708,000 shares issuable upon the hypothetical
conversion as of November 30, 1999, of presently issued
Convertible Debentures in the aggregate principal amount of
$531,000; (b) 131,452 shares issuable as payment in stock of
accrued interest on $531,000 principal amount of
Convertible Debentures, assuming a hypothetical conversion on
November 30, 1999; (c) 62,500 shares issuable on exercise of
presently issued A Warrants; (d) 62,500 shares issuable on
exercise of presently issued B Warrants; (e) 99,640 shares
issued prior to the date hereof upon conversion of $94,000
principal amount of Convertible Debentures and interest
accrued thereon; and (f) 91,463 Damages Shares potentially
issuable.
(3) Includes all shares described in footnote (2) except clauses
(e) and (f).
(4) There is no assurance that the Selling Shareholders will sell
any or all of the shares of common stock offered hereby.
(5) Includes: (a) 708,000 shares issuable upon the hypothetical
conversion as of November 30, 1999, of presently issued
Convertible Debentures in the aggregate principal amount of
$531,000; (b) 131,452 shares issuable as payment in stock of
accrued interest on $531,000 principal amount of
Convertible Debentures, assuming a hypothetical conversion on
November 30, 1999; (c) 62,500 shares issuable on exercise of
presently issued A Warrants; (d) 62,500 shares issuable on
exercise of presently issued B Warrants; (e) 99,640 shares
issued prior to the date hereof upon conversion of $94,000
principal amount of Convertible Debentures and interest
accrued thereon; and (f) 91,463 Damages Shares potentially
issuable.
(6) Includes all shares described in footnote (5) except clauses
(e) and (f).
(7) Includes: (a) 93,333 shares issuable upon the hypothetical
conversion as of November 30, 1999, of presently issued
Convertible Debentures in the aggregate principal amount of
$70,000; (b) 17,329 shares issuable as payment in stock of
$12,997 of accrued interest on $70,000 principal amount of
Convertible Debentures, assuming a hypothetical conversion on
November 30, 1999; (c) 10,000 shares issuable on exercise of
presently issued A Warrants; (d) 10,000 shares issuable on
exercise of presently issued B Warrants; (e) 26,898 shares
issued prior to the date hereof upon conversion of $30,000
principal amount of Convertible Debentures and interest
accrued thereon; and (f) 14,634 Damages Shares.
(8) Includes all shares described in footnote (7) except clauses
(e) and (f).
(9) Includes: (a) 33,333 shares issuable upon the hypothetical
conversion as of November 30, 1999, of presently issued
Convertible Debentures in the aggregate principal amount of
$25,000; (b) 6,189 shares issuable as payment in stock of
$4,642 of accrued interest on $25,000 principal amount of
Convertible Debentures, assuming a hypothetical conversion on
November 30, 1999; (c) 5,000 shares issuable on exercise of
presently issued A Warrants; (d) 5,000 shares issuable on
exercise of presently issued B Warrants; (e) 22,701 shares
issued prior to the date hereof upon conversion of $25,000
principal amount of Convertible Debentures and interest
accrued thereon and (f) 7,317 Damages Shares.
(10) Includes all shares described in footnote (9) except clauses
(e) and (f).
(11) Includes: (a) 110,000 shares issuable upon the hypothetical
conversion as of November 30, 1999, of presently issued
Convertible Debentures in the aggregate principal amount of
$82,500; (b) 20,423 shares issuable as payment in stock of
$15,318 of accrued interest on $82,500 principal amount of
Convertible Debentures, assuming a hypothetical conversion on
November 30, 1999; (c) 10,000 shares issuable on exercise of
presently issued A Warrants; (d) 10,000 shares issuable on
exercise of presently issued B Warrants; (e) 16,405 shares
issued prior to the date hereof upon conversion of $10,000
principal amount of Convertible Debentures and interest
accrued thereon; and (f) 14,634 Damages Shares.
(12) Includes all shares described in footnote (11) except clauses
(e) and (f).
(13) All shares issuable on exercise of presently issued A
Warrants.
(14) Includes: (a) 67,500 shares issuable on exercise of presently
issued A Warrants; and (b) 50,000 shares issuable on exercise
of presently issued B Warrants.
(15) All shares issuable on exercise of presently issued B
Warrants.
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(16) All shares issuable on exercise of presently issued B
Warrants.
In connection with the sale of shares, these Selling Shareholders may be deemed
to be underwriters under applicable federal securities laws. See "Plan of
Distribution."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Softalk, Inc., one of the Company's subsidiaries, 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 consideration for this royalty reduction,
the Company issued options to purchase a total of 200,000 shares of common stock
to WAC, having an exercise price of $2.50 per share. 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. The Company believes that the terms of these transactions are as
favorable as they would be if they were between Dynatec and an unrelated third
party.
During 1995, the Company sold all rights and interest in various
discontinued products to WAC for $193,000 in the form of a demand note bearing
8% interest. As part of the transaction, inventory and molds were also sold at
cost to WAC. In June 1997, the Company received 18,000 shares of its common
stock from WAC as payment in full of all outstanding balances. Such shares were
valued at the market price of $10.00 per share, which represented the current
market value of the stock. The common stock was issued to WAC to pay $154,000 on
the note, including accrued interest, and $26,000 of other WAC obligations to
Dynatec. The Company believes that the terms of these transactions are as
favorable as they would be if they were between Dynatec and an unrelated third
party.
In September 1998 WAC advanced $98,403 to the Company as reimbursement
to the Company of Mr. Wood's salary for the first six months of 1998. The
Company subsequently determined that this amount was a payable to WAC, and at
December 31, 1998 recognized the obligation on its consolidated balance sheet.
In February 1999, the Company repaid this amount to WAC. The Company believes
that the terms of these transactions are as favorable as they would be if they
were between Dynatec and an unrelated third party.
Donald M. Wood, who served as the Company's Chief Executive Officer
during the entirety of 1998 and until January 14, 1999, owned a residential
rental property in Park City, Utah during all of 1997 and until August 1998. The
Company leased this property from him to use for Dynatec-related travel,
promotional work, lodging, and entertainment for customers, suppliers, and
employees. The monthly rental payment for this property was $7,000. The Company
paid total rents of $56,000 and $84,000 for the years ending December 31, 1998
and 1997, respectively. This cost also covered operating and maintenance costs,
and general care of the property. In August 1998, this property was sold by Mr.
Wood. As a result, the Company is no longer obligated to pay rental fees. The
Company believes that the terms of these transactions are as favorable as they
would be if they were between Dynatec and an unrelated third party.
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 its former Chairman and Chief Executive Officer 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 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
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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.
During 1997 the Board of Directors authorized grants of various options
under both non-qualified and incentive stock options plans. These options are
described in detail in Note 14 to the accompanying financial statements for the
years ended December 31, 1998 and 1997. The non-qualified plans included 537,500
options granted to Muito Bem Ltd., an entity controlled by a shareholder and
former CEO of the Company, at an exercise price of $2.50 per share. The
shareholder and former executive officer of the Company who owns Muito Bem
agreed in 1999 to cancel all stock options issued to Muito Bem. Additionally, in
1997, 200,000 options were granted to WAC, at an exercise price of $2.50 per
share in consideration for certain royalty reductions and abatements. The
Company believes that the terms of these transactions are as favorable as they
would be if they were between Dynatec and an unrelated third party.
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 & Trust 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. The Company believes that the terms of these
transactions are as favorable as they would be if they were between Dynatec and
an unrelated third party.
DESCRIPTION OF SECURITIES
The following descriptions are qualified in their entirety by reference
to the detailed provisions of the Company's articles of incorporation and
bylaws, and the instruments and agreements relating to the offer and sale of
such instruments, copies of which have been filed as exhibits to the
registration statement of which this Prospectus forms a part.
Common Stock
The Company's authorized capital stock consists of 100,000,000 shares
of common stock, par value $.01 per share. As of the date of this Prospectus,
there are 3,391,627 shares issued and outstanding. Holders of the common stock
are entitled to one vote for each share held of record on matters submitted to a
vote of stockholders. Each share of stock is entitled to share pro rata in
dividends and distributions with respect to the shares when, as and if declared
by the Company's Board of Directors from funds legally available therefor.
The articles of incorporation of the Company do not grant any
shareholder of the Company preemptive rights to subscribe for any of the
Company's securities. Upon dissolution, liquidation or winding up of the
Company, the assets will be divided pro rata on a share-for-share basis among
the holders of the common stock, subject to the rights of creditors.
The shareholders of the Company are not entitled to cumulative voting
in the election of directors. Accordingly, the holders of more than 50% of the
shares voting for the election of directors can elect all of the directors if
they choose to do so; in such event, the holders of the remaining shares voting
for the election of the directors will be unable to elect any person or persons
to the Board of Directors.
The Board of Directors has authority to issue the authorized but
unissued shares of common stock without action by the shareholders. Future
issuance of shares, whether by exercise of outstanding options, warrants or
conversion rights or otherwise, would reduce the percentage ownership held by
existing shareholders, including persons purchasing the shares.
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The Company has also issued the Convertible Debentures that require,
upon conversion, the issuance of shares of its common stock in accordance with
the terms of such instruments and agreements. The exercise of such rights would
result in immediate and substantial dilution to existing shareholders and,
because the maximum number of shares is determined by fluctuations in the market
price of the Company's common stock as reported by the Nasdaq SmallCap Stock
Market, such dilution may result in an effective change in control of the
Company and depression of the market price of the Company's securities.
Convertible Debentures
On May 22, 1998, the Company issued Convertible Debentures in face
amount of $1,500,000 to the Investors pursuant to the terms of the Credit
Agreement. The Company originally agreed to issue and receive payment for
additional Convertible Debentures in face amount of $500,000 within five days of
the effective date of the registration statement of which this Prospectus is a
part, however, under the Modification Agreement, the Company and the Investors
have agreed to cancel and terminate the respective obligations of the parties
with respect to any additional principal amount of Convertible Debentures. The
Convertible Debentures have a three-year term. The Convertible Debentures may be
converted, at the option of the holder thereof, into shares of common stock. The
number of shares issuable upon conversion of the Convertible Debentures is
determined by dividing the principal amount of the Convertible Debenture being
converted, together with interest thereon accrued at the rate of 12% per annum
from the date of issuance and through the effective date of the registration
statement of which this Prospectus forms a part and at the rate of 6% thereafter
through the date of conversion, by a conversion price. The conversion price is
calculated as the lesser of (1) 75% of the average of the three lowest closing
bid prices of the Company's common stock as reported by the Bloomberg LP during
the 22 trading days immediately preceding the Conversion Date (the "Lookback
Period"), or (2) $6.50.
The Warrants
On May 22, 1998, the Company issued A and B Warrants in connection with
the closing of the Credit Agreement. The A Warrants allow the holders thereof
the right to acquire 300,000 shares of common stock at $6.50 per share (the
market price of the common stock on the date of grant). The B Warrants entitle
the holders thereof to purchase 450,000 shares of common stock at $7.15 per
share. In light of the Modification Agreement, the Company will issue no more
Warrants under the Credit Agreement. All of the Warrants have a three-year term.
Holders of the Warrants have no rights as shareholders (such as the right to
vote for directors of the Company) until such time, if any, as the Warrants have
been exercised for common stock.
The Line of Credit
On May 21, 1998, the Company entered into the Credit Agreement with the
Investors. Under the terms of the Credit Agreement, the Investors agreed to
acquire the Convertible Debentures and the Warrants and covenanted to advance up
to $10,000,000 in cash to the Company during a period of two years under the
Line of Credit, for which they would receive shares of the Company's common
stock (the "Line of Credit Shares"). The two-year period covered by the Line of
Credit was to have commenced with the effective date of the registration
statement of which this Prospectus is a part. At a minimum, the Company would
have been required under the Credit Agreement to exercise the put feature as to
$1,000,000 under the Line of Credit. The number of shares to be issued upon
receipt of funds under the Line of Credit was to have been calculated with
reference to 80% of the average of the lowest closing bid prices of Dynatec
common stock during the six trading days ("Valuation Period") beginning three
days immediately preceding and ending on the second trading day after the date
on which a notice ("Put Notice") was given by the Company to the Investors
requiring them to purchase shares under the Line of Credit. In addition, the
principal amount under the Credit Agreement that could have been the subject of
a particular Put Notice was limited by changes in the Company's share price and
trading volume as defined in the Credit Agreement. In addition to the Line of
Credit Shares, the Company was obligated to issue to the Placement Agents 6,000
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shares of common stock for each $1,000,000 of puts exercised under the Line of
Credit. All of the rights and obligations of the Company and the Investors with
respect to the Line of Credit were cancelled and terminated under the
Modification Agreement, effective as of June 25, 1999.
Utah Corporation Law Affecting Change of Control Transactions
The Company was organized under Utah law and conducts the majority of
its business from its corporate offices located in Utah. The Utah Control Shares
Acquisition Act ("Control Shares Act") provides that any person or entity that
acquires 20% or more of the outstanding voting shares of a publicly-held Utah
corporation in the secondary public or private market may be denied voting
rights with respect to the acquired shares, unless a majority of the
disinterested shareholders of the corporation elects to restore such voting
rights in whole or in part. The Control Share Acquisition Act provides that a
person or entity acquires "control shares" whenever it acquires shares that, but
for the operation of the Control Share Acquisition Act, would bring its voting
power within any of the following three ranges: (i) 20 to 331/3%, (ii) 331/3 to
50%, or (iii) more than 50%. A "control share acquisition" is generally defined
as the direct or indirect acquisition of either ownership or voting power
associated with issued and outstanding control shares. The shareholders or board
of directors of a corporation may elect to exempt the stock of the corporation
from the provisions of the Control Share Acquisition Act through adoption of a
provision to that effect in the articles of incorporation or bylaws of the
corporation. The Company's articles of incorporation and bylaws do not exempt
the Company's common stock from the Control Share Acquisition Act.
The provisions of the Control Share Acquisition Act may discourage
companies or persons interested in acquiring a significant interest in or
control of the Company, regardless of whether such acquisition may be in the
interest of the Company's shareholders.
Registration Rights
The Selling Shareholders' shares have been registered for offer and
sale by such shareholders under this Prospectus under the terms of certain
registration rights granted to the Selling Shareholders. Such rights are
contained in agreements entered into by the Company and the Selling
Shareholders. The existence and/or the exercise of these rights could adversely
affect the market price of the Company's Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
Transfer Agent
The transfer agent and registrar for the Company is American Stock
Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Debenture Shares, Warrant Shares and Damages Shares will be issued
to the Selling Shareholders at prices determined at the time the agreements
relating to such securities were entered into with these investors and any
subsequent modification to such agreements. All of the underlying shares may be
sold in the future by and for the account of the Selling Shareholders as
discussed below. The Convertible Debentures, the Warrants and the Agency Shares
were originally issued in connection with private transactions pursuant to
exemptions from the registration provisions of the Securities Act of 1933.
Shares issued upon exercise of the conversion rights under the Convertible
Debentures, upon exercise of the Warrants and as payment of the Damages Shares
will also be issued pursuant to exemptions from registration under the
Securities Act. At such time as the registration statement of which this
Prospectus forms a part has been declared effective by the SEC and thereafter
for so long as the registration statement will continue effective, the Selling
Shareholders may offer and sell the shares covered by this Prospectus to the
public or otherwise at such times and in such amounts as they may respectively
determine in their sole discretion. The Company has been advised by the Selling
Shareholders that they may sell the shares or that the shares may be sold on
their behalf through one or more broker-dealers or underwriters or directly to
investors pursuant to this Prospectus or in transactions that are exempt from
the requirements of registration under the Securities Act. As of the date
hereof, none of the Selling Shareholders has advised the Company that it has
entered into any agreement or understanding with any broker-dealer for the offer
or sale of any of the shares. The Selling Shareholders may enter into such
agreements or understandings in the future. Such brokers may act as dealers by
purchasing any or all of the shares covered by the Prospectus.
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The Selling Shareholders and any broker-dealer who may act in
connection with the sale of the shares hereunder may be deemed to be
"underwriters" as that term is defined in Section 2(11) of the Securities Act,
as amended. Under the Exchange Act and the regulations promulgated thereunder,
persons (including the Selling Shareholders) deemed to be underwriters and
engaged in a distribution of the shares offered hereby may not simultaneously
engage in market making activities with respect to the common stock of the
Company during the applicable "cooling off" periods prior to the commencement of
such distribution. In addition, and without limiting the foregoing, the Selling
Shareholders, by virtue of their distribution of the shares, may be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of common stock of the Company by the
Selling Shareholders. Regulation M contains certain limitations and prohibitions
intended to prevent issuers and Selling Shareholders and other participants in a
distribution of securities from conditioning the market through manipulative or
deceptive devices to facilitate the distribution. Offers and sales of the shares
may also be made into markets outside the United States.
The Selling Shareholders may offer the shares through market
transactions at prices prevailing in the Nasdaq SmallCap Stock market or at
negotiated prices, which may be fixed or variable and which may differ
substantially from reported market prices. Moreover, the Selling Shareholders
may receive cash or other forms of consideration in exchange for the shares. The
Selling Shareholders have not advised the Company that they anticipate paying
any consideration, other than usual and customary brokers' commissions, in
connection with sales of the shares. The Selling Shareholders are acting
independently of the Company in making such decisions with respect to the
timing, manner and size of each sale.
The Company will bear the cost of registration of the shares with state
and federal agencies. These costs, which include professional (legal and
accounting) fees, transfer agents' fees, printing and engraving costs, and
filing and listing fees, are estimated to be approximately $200,000. The Company
will not pay any commission or finders fees in connection with the sale of
shares by the Selling Shareholders.
LEGAL PROCEEDINGS
On 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 accused 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,
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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. During the quarter ended June 30, 1999, Mag and the Company agreed to
pursue their efforts to settle the dispute and, pending such discussions, the
complaint would be dismissed without prejudice upon the joint stipulation of the
parties. The Company has expressly agreed with Mag, however, that if the pending
disputes are not settled, Mag may refile the complaint in the same court and
venue.
On April 27, 1998, the Enforcement Division of the Securities and
Exchange Commission notified the Company that the SEC was anticipating filing an
administrative proceeding in the later part of calendar year 1998 against
various individuals and entities who had engaged in transactions with a Canadian
corporation. The SEC Enforcement Division further indicated that the Company may
be named as a defendant in such administrative action. In July 1998, the Company
submitted a Wells Submission to clarify why, in the Company's estimation, it
should not be named in the administrative proceeding, if any. The Company
suggested in the Wells Submission that it should not be named in any
administrative proceeding because the Company never consummated either of the
two transactions with the subject Canadian company that the Company was
considering, and the Company received no consideration in connection with those
aborted transactions. Moreover, the Company believes that its conduct in
connection with those proposed but aborted transactions met applicable legal
requirements. As of April 30, 1999, the Company had received no response from
the Enforcement Division about whether the SEC plans to name the Company in any
administrative action.
In addition, the Company has previously disclosed that it has been
informed of an investigation by the Enforcement Division of the Securities and
Exchange Commission. The Company believes this investigation concerns certain
trading activity in the Company's common stock and other transactions involving
the Company's securities, however, the Company has not been informed of the
specifics of such investigation. The Company is cooperating fully with these
administrative proceedings. Any finding or order of the Commission adverse to
the Company or any judgment against the Company in any of the pending litigation
matters, would have an adverse effect on the business, financial condition or
results of operations of the Company, or the market for its common stock.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a material adverse
effect on the Company's operations or financial condition.
LEGAL MATTERS
The validity of the securities offered hereby and other legal matters
relative to this offering have been passed upon for the Company by Julian D.
Jensen and Bruce L. Dibb of 311 South State Street, Suite 380, Salt Lake City,
Utah 84111.
EXPERTS
The financial statements of the Company as of and for the years ended
December 31, 1997 and December 31, 1998 included in the Prospectus have been
included in the Prospectus in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and as indicated in
their report, and are included herein in reliance upon the authority of that
firm as experts in accounting and auditing.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 16-10a-902 (Section 902) of the Utah Revised Business
Corporation Act ("URBCA") and Article X of the Company's Bylaws contain
provisions for indemnification of the officers, directors, employees and agents
of the Company. The Bylaws require the Company to indemnify such persons to the
full extent permitted by Utah law. Section 902 provides that a corporation may
indemnify any individual who was, is, or is threatened to be made a named
defendant or respondent ("Party") in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (a "Proceeding") because he is or
was a director of the corporation or is or was serving at its request as a
director, officer, partner, trustee, employee, fiduciary or agent of another
corporation or other person or of an employee benefit plan (an "Indemnified
Director"), against any obligation incurred with respect to a Proceeding,
including any judgment, settlement, penalty, fine or reasonable expenses
(including attorneys' fees) incurred in the Proceeding if his conduct was in
good faith, he reasonably believed that his conduct was in, or not opposed to,
the best interests of the corporation, and, in the case of any criminal
Proceeding, he had no reasonable cause to believe his conduct was unlawful;
except that (1) indemnification under Section 902 in connection with a
Proceeding by or in the right of the corporation is limited to payment of
reasonable expenses (including attorneys' fees) incurred in connection with the
Proceeding and (2) the corporation may not indemnify a director in connection
with a Proceeding by or in the right of the corporation in which the director is
adjudged liable to the corporation, or in connection with any other Proceeding
charging that the director derived an improper personal benefit, whether or not
involving any action in his official capacity, in which Proceeding he was
adjudged liable on the basis that he derived an improper personal benefit.
Section 16-10a-903 (Section 903) of the URBCA provides that, unless
limited by its articles of incorporation, a corporation shall indemnify a
director who was successful, on the merits or otherwise, in the defense of any
Proceeding or in the defense of any claim, issue or matter in the proceeding, to
which he was a party because he is or was a director of the corporation, against
reasonable expenses (including attorneys' fees) incurred by him in connection
with the Proceeding or claim with respect to which he has been successful.
In addition to the indemnification provisions of Sections 902 and 903,
Section 16-10a-905 (Section 905), provides that, unless otherwise limited by a
corporation's articles of incorporation, a director may apply for
indemnification to the court conducting the Proceeding or to another court of
competent jurisdiction. The court may, in its discretion in such cases, (1)
order mandatory indemnification under Section 903, in which case the court shall
also order the corporation to pay the director's reasonable expenses incurred to
obtain court-ordered indemnification, or (2) upon the court's determination that
the director is fairly and reasonably entitled to indemnification in view of all
the relevant circumstances and regardless of whether the director met the
applicable standard of conduct set forth in Section 902, the court may order
indemnification as the court determines to be proper, except that
indemnification with respect to certain Proceedings resulting in a director
being found liable for certain actions against the corporation may be limited to
reasonable expenses incorrect by the director.
Section 16-10a-904 (Section 904) of the URBCA provides that a
corporation may pay for or reimburse reasonable expenses (including attorneys'
fees) incurred by a director who is a Party to a Proceeding in advance of the
final disposition of the Proceeding if (1) the director furnishes the
corporation a written affirmation of his good faith belief that he has met the
applicable standard of conduct described in Section 902; (2) the director
furnishes to the corporation a written undertaking executed personally or in his
behalf, to repay the advance if it is ultimately determined that he did not meet
the required standard of conduct, and (3) a determination is made that the facts
then known to those making the determination would not preclude indemnification
under Section 904.
Section 16-10a-907 of the URBCA states that unless a corporation's
articles of incorporation provide otherwise (a) an officer of the corporation is
entitled to mandatory indemnification and is entitled to apply for court ordered
indemnification, in each case to the same extent as a director (2) the
corporation may indemnify and advance expenses to an officer, employee,
fiduciary or agent of the corporation to the same extent as a director (iii) a
corporation may also indemnify and advance expenses to an officer, employee,
fiduciary or agent who is not a director to a greater extent than the right of
indemnification with claims or liability arising out of director or officers'
own negligence or willful misconduct.
49
<PAGE>
The Company may also purchase and maintain insurance on behalf of
present and past directors or officers insuring against any liability asserted
against such person incurred in the capacity of director or officer or arising
out of such status, whether or not the Company would have the power to indemnify
such person.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
In late 1997, the Company decided to engage a larger, international
auditing firm in place of Jones, Jensen & Company. In December 1997, KPMG LLP
was engaged as the Company's new auditing firm. The Company had no disagreements
with Jones, Jensen & Co. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. The decision to
engage KPMG LLP as the Company's independent auditors was approved by the
unanimous consent of the Company's board of directors. During the years ended
December 31, 1998 and 1997, there were no other reportable events (as referenced
in Item 304(a)(1)(iv) of Regulation S-B).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act, and in accordance with those requirements files reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information statements filed by the Company may be
inspected and copied at the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission
Regional Offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such materials may also be obtained upon written
request from the Commission's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
Site at http://www.sec.gov which contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The common stock of the Company is traded on The Nasdaq
SmallCap Market and reports, proxy statements and other information concerning
the Company may be inspected at The Nasdaq SmallCap Market, 1735 K Street, N.W.,
Washington, D.C. 20006.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on
Form SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the shares of
its common stock being offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the common stock, reference
is hereby made to the Registration Statement, including the exhibits which are a
part thereof, which may be obtained upon request to the Commission and the
payment of the prescribed fee. Material contained in the Registration Statement
may be examined at the Commission's Washington, D.C. office and copies may be
obtained at the Commission's Washington, D.C. office upon payment of prescribed
fees. Statements in the Prospectus are not necessarily complete, and in each
case reference is made to the copy of such contracts or documents filed as an
exhibit to the Registration Statement, each such statement being qualified by
this reference.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Independent Auditor's Report of KPMG LLP............................F-1
Dynatec International, Inc. and Subsidiaries Consolidated Balance
Sheets As of December 31, 1998 and 1997.............................F-2
Dynatec International, Inc. and Subsidiaries Consolidated Statements
Of Operations For the Years Ended December 31, 1998 and 1997........F-4
Dynatec International, Inc. and Subsidiaries Consolidated Statements
Of Stockholders' Equity.............................................F-5
Dynatec International, Inc. and Subsidiaries Consolidated Statements
Of Cash Flows For the Years Ended December 31, 1998 and 1997........F-6
Notes To Consolidated Financial Statements..........................F-8
Unaudited Interim Financial Statements
Dynatec International, Inc. and Subsidiaries Condensed Consolidated
Balance Sheets As of November 30, 1999 and December 31, 1998.......F-27
Dynatec International, Inc. and Subsidiaries Condensed Consolidated
Statements Of Operations For the Three and Nine Month Periods
Ended September 30, 1999 and 1998..................................F-29
Dynatec International, Inc. and Subsidiaries Condensed Consolidated
Statements Of Cash Flows For the Three and Nine Month Periods
Ended September 30, 1999 and 1998..................................F-30
Notes to Condensed Consolidated Financial Statements...............F-32
51
<PAGE>
Independent Auditors' Report of KPMG LLP
The Board of Directors
Dynatec International, Inc.:
We have audited the accompanying consolidated balance sheets of Dynatec
International, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also included
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dynatec
International, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Salt Lake City, Utah
February 19, 1999, except as to
Note 16, which is as of
March 19, 1999
F-1
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------------- --------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,268 $ 332,894
Trade accounts receivable, net of allowance for doubtful accounts of $30,190
and $29,684, respectively 2,229,157 1,549,888
Accounts receivable - other 110 426,131
Inventories (see Note 3) 4,857,241 2,522,149
Prepaid expenses and other 316,347 261,312
------------- -------------
Total current assets 7,405,123 5,092,374
------------- -------------
LAND, BUILDING AND EQUIPMENT, at cost:
Land 365,860 365,860
Building and improvements 2,214,144 2,214,144
Furniture, fixtures and equipment 3,554,045 3,289,886
------------- -------------
6,134,049 5,869,890
Less accumulated depreciation and amortization 2,336,427 1,928,303
------------- -------------
Net land, building and equipment 3,797,622 3,941,587
------------- -------------
TRADEMARKS AND OTHER INTANGIBLES, net (see Note 4) 205,102 267,825
------------- -------------
DEFERRED LOAN COSTS, net of accumulated amortization of $4,903 and
$-0-, respectively (see Note 2)
61,743 -
OTHER ASSETS 69,337 107,631
$ 11,538,927 $ 9,409,417
============= =============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated balance sheets.
F-2
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
CURRENT LIABILITIES:
<S> <C> <C>
Short-term note payable (see Note 5) $ 1,389,223 $ 1,331,169
Convertible debentures (see Note 8) 1,667,079 -
Current portion of long-term debt (see Note 6) 246,855 1,003,477
Current portion of capital lease obligations (see Note 7) 17,881 15,699
Accounts payable 1,518,316 1,077,631
Accounts payable - other 9,000 -
Accounts payable-related party (see Note 12) 98,403 -
Accrued expenses 637,051 238,121
Accrued advertising 320,000 350,000
Accrued royalties payable 70,246 18,882
------------- -------------
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.
F-3
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
PRODUCT SALES $ 16,578,694 $ 14,566,079
COST OF SALES 10,973,161 10,174,205
------------- -------------
Gross Margin 5,605,533 4,391,874
------------- -------------
OPERATING COSTS AND EXPENSES:
Selling expenses 2,874,259 2,378,547
Research and development 143,088 508,314
General and administrative 3,028,682 1,729,639
------------- -------------
Total operating costs and expenses 6,046,029 4,616,500
------------- -------------
Loss from operations (440,496) (224,626)
-------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (see Note 8) (1,773,079) (427,392)
Interest income 3,340 9,417
Other expense (20,192) -
Other income - 295,023
----------------- -------------
Total other expense, net (1,789,931) (122,952)
-------------- -------------
Loss before income tax provision (2,230,427) (347,578)
INCOME TAX PROVISION (see Note 9) (15,000) (61,594)
--------------- -------------
Net loss $ (2,245,427) $ (409,172)
============= ==============
BASIC AND DILUTED NET LOSS PER SHARE (see Note 2) $ (0.80) $ (0.18)
============= =============
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.
F-4
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------
Number of Treasury Stock Additional Accumulated
Shares Amount at Cost Paid-in Capital Deficit
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 1,974,104 $ 19,741 $ - $ 3,595,699 $ (971,156)
Shares issued pursuant to Regulation S
Stock offerings 881,836 8,818 - 1,991,181 -
Treasury Stock (18,000 shares) received to
satisfy related-party receivable - - (180,000) - -
Treasury Stock (73,515 shares) received in
exchange for assets - - (735,150) - -
Shares issued pursuant to employee stock
option plans 4,000 40 - 9,960 -
Net loss - - - - (409,172)
--------- -------- --------- ----------- ----------
BALANCE DECEMBER 31, 1997 2,859,940 $ 28,599 $(915,150) $ 5,596,840 $(1,380,328)
Shares issued pursuant to employee stock
option plans 11,687 117 - (117) -
Issuance of convertible debentures and
equity line-of-credit (see Note 8) 20,000 200 - 864,967 -
Capital addition (see Note 10) - - - 580,000 -
Net loss - - - - (2,245,427)
--------- -------- --------- ----------- -----------
BALANCE DECEMBER 31, 1998 2,891,627 $ 28,916 $(915,150) $ 7,041,690 $(3,625,755)
========= ======== ========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated statements.
F-5
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (2,245,427) $ (409,172)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 504,991 461,231
Amortization of deferred loan costs 97,415
Non-cash charges on issuance of convertible
debentures (see Note 8) 1,004,996 -
Loss (gain) on sale of assets 20,192 (90,829)
Changes in assets and liabilities:
Accounts receivable - trade (679,269) (424,138)
Accounts receivable - other 426,021 80,325
Inventories (2,335,092) (1,337,963)
Prepaid expenses and other (16,741) (139,239)
Accounts payable 525,684 537,488
Accounts payable - other 22,403 (11,575)
Accrued expenses 558,136 146,182
Accrued advertising (30,000) 45,500
Accrued royalties 52,365 (48,325)
Income tax payable 15,000 (500)
-------------- ---------------
Net cash used in operating activities (2,079,326) (1,191,015)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets 63,706 6,007
Receivable from related parties - (30,000)
Purchase of property and equipment (394,365) (587,187)
-------------- --------------
Net cash used in investing activities (330,659) (611,180)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 58,054 108,447
Debt issuance costs (298,986) 3,906
Net payments on long-term debt (744,459) (190,635)
Principal payments on capital lease obligations (15,250) (36,774)
Proceeds from capital addition (see Note 10) 580,000 -
Proceeds from convertible debenture offering (see Note 8) 1,500,000 -
Proceeds from issuance of stock pursuant to Incentive Stock Option Plan - 10,000
Proceeds from deposit for stock issuance (see Note 10) 1,000,000 -
Proceeds from stock sold pursuant to Regulation S offering 2,000,000
-------------- -------------
-
Net cash provided by financing activities 2,079,359 1,894,944
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (330,626) 92,749
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 332,894 240,145
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,268 $ 332,894
============== =============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated statements.
F-6
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
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.
F-7
<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.
Nordic was incorporated as a wholly-owned subsidiary of the Company in the
State of Utah on October 25, 1996. Effective December 1, 1996, Nordic and the
Company entered into an agreement with unrelated parties to acquire certain
assets and assume certain related liabilities in exchange for 550,000 shares of
common stock of the Company at $1.60 per share for a total of $880.000. In
addition, warrants to purchase 250,000 shares of common stock were issued. Such
warrants are exercisable only on the achievement by the Company of certain gross
sales requirements beginning January 1, 1999. This acquisition has been
accounted for using the purchase method. No goodwill was recognized and there
were no other contingent payments or options.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenue and expense for the period being reported. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Effective January 1, 1998, the Company changed its method of
determining the value of inventory from last-in, first-out (LIFO) to first-in,
first-out (FIFO). Historically, the difference between the LIFO and FIFO values
of inventories has been immaterial. Accordingly, the accompanying financial
statements for the years ended December 31, 1997 and 1996 have not been restated
for the change.
F-8
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Depreciation on Property and Equipment is computed on the straight-line
method over the following useful lives:
Building and Improvements 7-39 years
Capital Leases 5-7 years
Equipment 5-10 years
Office Equipment & Fixtures 5-7 years
Vehicles 5 years
Signs and Show Booths 5-7 years
Equipment held under capital leases and leasehold improvements are
amortized on straight line over the shorter of the lease term or estimated
useful life of the asset.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount of fair value less costs to sell.
Intangible Assets
Intangible Assets include purchased patents, product licenses, and
other agreements allowing the Company non-exclusive rights to manufacture,
produce, and sell various products. Such costs are amortized on a straight-line
basis over their estimated useful lives of 5 to 40 years. Other intangible
assets such as covenants not to compete are not significant and are being
amortized using the straight-lined method over five years.
Deferred Loan Costs
Deferred loan costs totaling $61,743 resulted from issuance costs related
to the Company's revolving credit facility, and are being amortized as interest
expense over thirty-six months (see Note 5).
Revenue Recognition
The Company recognizes revenue from product sales at the time of
shipment. The Company has established programs, which under specified conditions
enable its customers to return product. The effect of these programs is
estimated and current period sales and cost of sales are reduced accordingly.
F-9
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
The Company uses the intrinsic value method prescribed by Accounting
Principles Board (APB) Opinion No. 25 when accounting for its employee stock
compensation plans. As such, compensation expense is recorded on the date of
grant only if the current market price of the stock exceeds the exercise price.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company provides credit to its customers in the normal course of business, and
accordingly performs ongoing credit evaluations and maintains allowances for
potential credit losses. Concentrations of credit risk with respect to trade
receivables are limited due to the Company's large number of customers and their
dispersion across many geographic areas.
For the year ended December 31, 1998, one customer accounted for 19.6%
and no other customer accounted for more than 10% of the Company's total
revenues.
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be settled or recovered. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is calculated based upon the weighted
average number of common shares outstanding during the periods presented. In
calculating net loss per share for the years ended December 31, 1998, and 1997,
warrants and options to purchase 606,145, and 555,062 potential common shares,
respectively, are not included in the computation of diluted net loss per common
share as their effect would have been anti-dilutive, thereby decreasing the net
loss per common share.
A reconciliation between the basic and diluted weighted-average number
of shares outstanding as of December 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Basic weighted average number of common shares................... 2,792,738 2,284,419
Weighted average number of common stock options.................. - -
=============== =============
Diluted weighted average number of shares.................. 2,792,738 2,284,419
=============== =============
</TABLE>
F-10
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Standards
During the year ended December 31, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires an "all-inclusive" income statement approach
which specifies that all revenues, expenses, gains and losses recognized during
the period be reported in income, regardless of whether they are considered to
be results of operations of the period. The adoption of SFAS No. 130 had no
material impact on the Company's financial statement presentation, as the
Company had no items of comprehensive income as defined by SFAS No. 130.
Advertising
Advertising costs are expensed as incurred. The Company does not
participate in direct response advertising. Advertising expense amounted to
$531,949 and $404,426 in 1998 and 1997, respectively.
Reclassifications
Certain reclassifications have been made in the prior period's
consolidated financial statements to conform with the current year presentation.
(3) INVENTORIES
Inventories, consisting principally of telecommunication headsets and
amplifiers and telephone accessories, home storage and organization,
flashlights, and other miscellaneous products sold to mass market merchandisers
as of December 31, 1998 and December 31, 1997, respectively, are summarized as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Raw materials............................ $902,703 $ 671,883
Work-in-Process.......................... 309,815 159,600
Finished Goods........................... 3,644,723 1,690,666
================= =================
$4,857,241 $2,522,149
================= =================
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets are comprised of the following as of December 31, 1998 and
1997 and are amortized on a straight-line basis over their estimated useful
lives.
F-11
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) INTANGIBLE ASSETS (Continued)
<TABLE>
<CAPTION>
Est. Useful
1998 1997 Life (years)
---- ---- ------------
<S> <C> <C> <C>
License agreement $203,509 $203,509 40
Product rights 301,263 301,263 5-10
Non-compete agreements 87,500 87,500 5
-------- --------
592,272 592,272
Less accumulated amortization 387,170 324,447
$205,102 $267,825
</TABLE>
(5) SHORT-TERM NOTE PAYABLE
The short-term note payable consists of a revolving line-of-credit
obtained on May 27, 1998 from a regional financial institution that provides up
to $5,000,000 bearing interest at a rate of prime plus one percent with interest
payable monthly. The note is secured by accounts receivable and inventory and is
due May 26, 2001. As of December 31, 1998 and 1997, direct outstanding
borrowings totaled $1,389,223 and $1,331,169, respectively. Direct outstanding
borrowings as of December 31, 1997 were under a revolving credit line terminated
in 1998 and replaced by the Company's current credit line. The amount of unused
borrowings under the Company's credit facility is limited to the then-current
levels of inventory and receivables. Under the terms of the loan agreement, the
Company is required to maintain financial covenants and ratios, including book
net worth, net income and debt service coverage. At December 31, 1998 the
Company was in default of certain of these covenants, however, the Company has
obtained a waiver. The Company and the lending institution have negotiated an
amendment to the agreement which amended the terms of certain of the financial
covenants and ratios for 1999. As a result of the net loss incurred in 1998, the
pricing of the credit facility was increased to a rate of prime plus three
percent, with interest payable monthly.
Maximum and average borrowings as well as weighted average interest
rate for the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Maximum Outstanding $2,416,638 $1,471,802
Average Outstanding $1,780,576 $1,127,635
Weighted Average Interest Rate 8.25% 9.91%
</TABLE>
(6) LONG -TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revolving line-of-credit up to $1,000,000 payable to a bank; interest
at prime plus 1% and terminated May 1, 1998;
secured by equipment $ - $ 564,816
Term Note payable to a bank, interest at prime plus 1%, due May 26,
2001, secured by equipment 266,175 -
F-12
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) LONG -TERM DEBT (Continued)
Note payable to a company; due in annual
installments of $79,560 plus interest at 7%;
due December 31, 1999, unsecured - 195,991
Note payable to a company; due in monthly
installments of $6,807 plus interest at 6%;
due October 31, 2000, unsecured 149,755 -
Note payable to a financial institution; due in monthly installments of
$455 with interest at 8.75%, due November 29, 2001,
secured by a vehicle 13,976 17,992
Note payable to a company; due in monthly installments of $1,160 plus
accrued interest at 7.9%, due November 30, 2002,
secured by equipment - 70,800
Note payable to a bank; due in monthly installments of $10,234 with
interest at 8.75%, due November 1, 2010, secured by
land and building 882,782 1,182,158
Note payable to the Small Business Administration; due in monthly
installments of $8,541 with interest at 7.32%; due August 14, 2016,
secured by land and building as well as
assets of a former officer of the Company 940,685 966,075
---------- ------------
Total Long-term debt 2,253,373 2,997,832
Less current portion 246,855 1,003,477
---------- -----------
Total Long-term debt excluding current portion $2,006,518 $1,994,355
========== ============
</TABLE>
Aggregate maturities for each of the five years subsequent to December 31, 1998,
are as follows:
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
===========
F-13
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7) LEASES
The following represents assets under capital lease at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Equipment $82,357 $82,357
Less accumulated depreciation 33,704 19,409
------ ------
Net property under capital lease $48,653 $62,948
====== ======
</TABLE>
Amortization of assets held under capital lease is included with
depreciation expense. Rental expense for operating leases during the years ended
December 31, 1998 and 1997 was $21,407 and $28,007, respectively.
At December 31, 1998 the Company is obligated under the terms of
non-cancelable leases for the following minimum lease commitments:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ----------
<S> <C> <C>
Year ended December 31: 1999 $17,882 $20,659
2000 12,958 18,136
2001 15,695 6,960
------ ------
Total minimum lease payments $46,535 $45,755
======
Less current portion 17,881
------
Capital Lease obligations excluding
current portion $28,654
======
</TABLE>
(8) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT
On May 22, 1998, the Company closed a transaction that has provided to
date net capital proceeds of $1,335,000. These funds were raised pursuant to the
sale by the Company of Convertible Debentures (the "Convertible Debentures") in
the aggregate principal amount of $1,500,000 due May 22, 2001. The Convertible
Debentures are convertible into shares of the Company's common stock at the
lesser of: (i) 75% of the average of the three lowest closing bid prices of the
Company's common stock during the 22-trading-day period immediately preceding
the conversion date or (ii) $6.50. Assuming a hypothetical conversion of the
entire principal amount of the Convertible Debentures outstanding as of March
26, 1999, and all interest accrued thereon at the rate of 12% per annum as of
March 26, 1999, the Convertible Debentures would be convertible into 978,961
shares of the Company's common stock. The Convertible Debentures are callable by
the holders thereof. The transaction was accomplished pursuant to a Convertible
Debenture and Private Equity Line of Credit Agreement (the "Credit Agreement")
between the Company and a group of five unaffiliated investors. In addition to
the sale of the Convertible Debentures, the Company also obtained the right to
use a "put" mechanism to periodically draw down up to $10,000,000 of additional
equity capital. Under the terms of the Credit Agreement, a minimum of $1,000,000
must be drawn, and all amounts must be drawn in increments of not less than
$50,000. In return for the payment of additional capital upon such put
exercises, the Company is required to issue shares of its common stock at a per
share purchase price equal to 80% of the average of the three lowest closing bid
prices of the common stock during a six day valuation period commencing three
days before the put date and ending two days after the put date. The put
mechanism cannot be utilized, and the Company has no obligation to exercise any
portion of the put mechanism, until after the effective date of the registration
statement for the underlying stock of the Credit Agreement. Additionally, upon
registration of the underlying shares
F-14
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
which may be issued upon conversion of the Convertible Debentures, the Company
is obligated to issue an additional $500,000 of Convertible Debentures.
In connection with the Credit Agreement, the investors and placement
agent were issued warrants. These warrants have been issued as Series A and
Series B as follows:
<TABLE>
<CAPTION>
Placement Exercise
Investors Agent Price
----------------- ---------------- ---------------
<S> <C> <C> <C>
Series A Warrants....................... 150,000 150,000 $6.50
Series B Warrants....................... 150,000 300,000 $7.15
</TABLE>
The Company must issue 50,000 additional Series A warrants to both the
placement agent and the investors, collectively, upon the issuance of the
additional $500,000 of Convertible Debentures. One-sixth of the market value of
the Series A and B warrants was allocated to the Convertible Debenture and
five-sixths was allocated to the equity line-of-credit established under the
Credit Agreement. This allocation was based on the relative notional amounts of
the two elements of the Credit Agreement. The value of the warrants issued to
the investors has been written off as a one-time, non-cash debt issuance cost,
as the warrants are immediately exercisable. The value of the warrants issued to
the placement agent and allocated to the Convertible Debentures is being
amortized over the 36 month life of the Convertible Debentures. In addition,
because the Convertible Debentures are convertible at a 25% discount from the
market value, an additional $500,000 representing the intrinsic value of the
beneficial conversion premium was written off as a non-cash expense for the
second quarter of 1998.
These non-cash charges for the market value of the warrants are
included with interest expense in the consolidated statements of operations for
the year ended December 31, 1998. The market value of the warrants issued to the
investors in connection with the additional $500,000 of Convertible Debentures
will be charged to operations at the time of issuance.
The Company is also directly issuing, as part of the transaction
involving the Credit Agreement, consideration of up to 80,000 shares of its
common stock as a fee to the placement agent. Of these shares, 20,000 were
issued at the time of the closing. The remaining 60,000 shares are retained in
escrow and are to be released in 6,000 share increments as each $1,000,000 is
drawn down under the equity line-of-credit established under the Credit
Agreement. If all of the equity line-of-credit is not utilized, the remaining
shares held in escrow will be returned to the Company and cancelled.
Because the registration statement for the shares of common stock
underlying the Credit Agreement was not effective with the Securities and
Exchange Commission within 90 days of the closing date, liquidated damages were
assessed against the Company at the rate of two percent of the purchase price of
the outstanding Convertible Debentures for the first 30-day period beyond the
original 90 days and three percent of the purchase price of the then outstanding
securities (pro rated on a daily basis) for each 30-day period thereafter. As of
March 15, 1999, the registration statement had not yet become effective. As a
result the Company has paid $165,000, and accrued $45,000, in liquidated
damages.
F-15
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES
Income tax expense (benefit) attributable to income from continuing
operations consists of:
<TABLE>
<CAPTION>
Current Deferred Total
--------- ----------- ----------
<S> <C> <C> <C>
Year ended December 31, 1998
Federal $ 19,386 $ (4,386) $ 15,000
State 650 (650) -
----------- ----------- ----------
$ 20,036 $ (5,036) $ 15,000
=========== =========== ==========
Year ended December 31, 1997
Federal $ - $ 53,694 $ 53,694
----------- ----------- ----------
State - 7,900 7,900
----------- ----------
$ - $ 61,594 $ 61,594
=========== =========== ==========
</TABLE>
Income tax expense (benefit) from continuing operations differed from
the amounts computed by applying the U.S. federal income tax rate of 34 percent
to pretax loss from continuing operations as a result of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Computed "expected" tax benefit $ (983,952) $ (118,177)
Change in the valuation allowance for deferred tax
assets allocated to income tax expense 269,952 177,961
Non-deductible financing costs 682,733 -
Other 46,267 1,810
----------- ----------
Total $ 15,000 $ 61,594
=========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997, are presented below.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory capitalization $ 60,041 $ 165,343
Allowance for bad debts 11,261 11,072
Compensated absences accrued for financial
reporting purposes 25,784 14,377
Net operating loss carry-forward 649,945 290,216
Intangibles, principally due to differences in
Amortization 17,701 5,273
Warranty reserve 8,837 -
Research and experimentation credit 25,000 -
----------- ----------
Total gross deferred tax assets 798,569 486,281
Less valuation allowance 756,233 486,281
----------- ----------
Total deferred tax assets 42,336 -0-
</TABLE>
F-16
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation 42,336 (5,036)
----------- ----------
Total gross deferred tax liabilities 42,336 (5,036)
=========== ==========
Net deferred tax assets (liabilities) $ - $ (5,036)
=========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997
was -0-. The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was $269,952 and $177,961, respectively.
The Company has $1,742,481 of net operating loss carryforwards at
December 31, 1998. Of the total net operating loss carryforwards, $525,792,
$490,219 and $726,470 expire in the years ended December 31, 2011, 2012 and
2018, respectively.
(10) STOCKHOLDERS' EQUITY
On March 11, 1997, the Company's Board of Directors approved Regulation
S offerings of its common stock to raise three to five million dollars in
working capital. The stock was offered to non U.S. persons at a price of
approximately 50% of the then-prevailing market value, which was $3.88 on March
11, 1997. As a result, 881,836 shares of restricted common stock was issued.
During June 1997, the Company received 18,000 shares of stock in
exchange for debts owed to the Company. These shares were recorded as treasury
stock at the fair market value of $10.00 per share. In addition, 4,000 shares
were exercised under the 1996 incentive stock option plan.
In July 1997, the Company received 73,515 shares of its common stock in
exchange for assets sold by the Company. The shares received in exchange for
these assets were recorded as treasury stock at their fair market value of
$10.00 per share. The value of the stock received from the sale of these assets
approximated the current book value of the assets sold.
As of December 31, 1998, $1,000,000, which is included in deposit for
stock issuance in the accompanying balance sheet, was received as a deposit. On
February 4, 1999, the Company entered into a deposit payable conversion
agreement, whereby a $1,000,000 deposit received by the Company in early 1998
and is recorded as a liability in the accompanying balance sheet, was cancelled
and the Company issued 500,000 shares of restricted common stock under
Regulation D to the depositor.
The Company is a party to pending litigation with a Canadian brokerage
firm captioned as Canaccord Capital Corporation ("Canaccord") vs. Dynatec
International, Inc., Civil No. 2:98-cv-420C, and filed in the United States
District Court for the District of Utah. Canaccord initially sued seeking
injunctive relief and money damages stemming from the Company's allegedly
wrongful cancellation of 125,000 shares of the Company's common stock in January
1998. Canaccord claimed that it suffered damage from a market shortage and
deficiency to various accounts which had previously been sold by Canaccord as a
result of the allegedly wrongful cancellation of shares. On July 17, 1998 the
District Court entered a preliminary injunction requiring the Company to reissue
125,000 shares in the name of CEDE & Company, as the market clearing house, to
replace the alleged market shortage. The court preserved Canaccord's remaining
claims for money damages and the return of an additional block of shares alleged
to have been wrongfully
F-17
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCKHOLDERS' EQUITY (Continued)
cancelled, which are still pending. The Company has named various third party
defendants to whom it believes the shares may have been improperly issued and is
seeking either recovery of the shares or the recovery of damages. At present,
the Company is engaged in negotiations with representatives of various of the
third parties and Canaccord, and believes that a resolution of the outstanding
claims, in whole or in part, will be reached.
Related to the Canaccord litigation, a claim for an additional 125,000
shares of the stock of the Company had been made by Katori Consultants, Ltd., a
Philippines corporation. The answer and third party complaint of Dynatec named
Katori Consultants, Ltd. as a third party defendant so that such additional
claim could be addressed as part of the Canaccord legal action. On October 21,
1998, Katori Consultants, Ltd. gave written notice to Dynatec that it
relinquished any claim to additional shares of common stock of the Company.
In March 1998, the Company received $580,000 as a nonrefundable payment
under an agreement with a third party pursuant to which the third party acquired
nonexclusive rights to market certain of the Company's products internationally.
The cash paid to the Company was obtained from the sale of the Company's common
stock by such third party. The Company is therefore of the opinion that the
proceeds of such transaction were not attributable to the culmination of an
earnings process. Consequently, such proceeds have been accounted for as an
addition to capital in the accompanying consolidated financial statements.
(11) BUSINESS SEGMENT INFORMATION
During the year ended December 31, 1998 the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 establishes standards for reporting information about operating segments
in annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance.
Information as to the operations of the Company in different business
segments is set forth below based on the nature of the products and services
offered. Management evaluates performance based on several factors, of which the
primary financial measure is business segment operating income before noncash
amortization of intangible assets ("EBITDA"). The accounting policies of the
business segments are the same as those described in the summary of significant
accounting policies.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
REVENUES: 1998 1997
- ----------------------------------------------------- --------------- ------------------
<S> <C> <C>
Telecommunication Headsets and
Amplifiers and Telephone Accessories.......... $ 7,640,000 $ 6,146,000
Home Storage and Organization.................... 4,444,000 3,387,000
Flashlights...................................... 989,000 893,000
Miscellaneous/Mass Market........................ 3,506,000 4,140,000
----------- ------------
Total..................................... $16,579,000 $ 14,566,000
=========== ============
</TABLE>
F-18
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) BUSINESS SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
OPERATING INCOME (LOSS): 1998 1997
- ----------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 904,000 $ 718,000
Home Storage and Organization.................... (496,000) (317,000)
Flashlights...................................... (696,000) (852,000)
Miscellaneous/Mass Market........................ (152,000) 226,000
----------- ------------
Total..................................... $ (440,000) $ (225,000)
=========== ============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
DEPRECIATION AND AMORTIZATION (1): 1998 1997
- ----------------------------------------------------- ---------------- ------------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 206,000 $ 189,000
Home Storage and Organization.................... 183,000 167,000
Flashlights...................................... 93,000 87,000
Miscellaneous/Mass Market........................ 23,000 18,000
----------- ------------
Total..................................... $ 505,000 $ 461,000
=========== ============
</TABLE>
(1) Amortization includes all amortization relating to product license rights,
non-competes and purchased patents.
Information as to the assets and capital expenditures of Dynatec International,
Inc. is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
ASSETS (1): 1998 1997
- ---------------------------------------------------- ---------------- ------------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 4,795,000 $ 3,938,000
Home Storage and Organization.................... 3,200,000 2,628,000
Flashlights...................................... 1,728,000 1,213,000
Miscellaneous/Mass Market........................ 1,366,000 502,000
----------- ------------
Total assets for reportable segments...... 11,089,000 8,281,000
Other assets..................................... 319,000 1,020,000
Deferred loan costs and other assets not allocated
to segments...................................... 131,000 108,000
=========== ============
Consolidated total........................ $11,539,000 $ 9,409,000
=========== ============
</TABLE>
F-19
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) BUSINESS SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
CAPITAL EXPENDITURES: 1998 1997
- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 157,000 $ 397,000
Home Storage and Organization.................... 162,000 135,000
Flashlights...................................... 69,000 46,000
Miscellaneous/Mass Market........................ 6,000 9,000
----------- ------------
Total..................................... $ 394,000 $ 587,000
=========== ============
</TABLE>
Information as to Dynatec International, Inc.'s operations in different
geographical areas is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
REVENUES: 1998 1997
- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C>
United States.................................... $16,402,000 $ 14,344,000
Other (1)........................................ 177,000 222,000
----------- ------------
Total..................................... $16,579,000 $ 14,566,000
=========== ============
</TABLE>
(1) Includes Canada, Europe and other miscellaneous.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
OPERATING LOSS: 1998 1997
- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C>
United States.................................... $ (440,000) $ (225,000)
=========== ============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
ASSETS: 1998 1997
- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C>
United States.................................... $11,089,000 $ 8,996,000
Asia............................................. 450,000 413,000
---------- ------------
Total..................................... $11,539,000 $ 9,409,000
=========== ============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
EBITDA: 1998 1997
- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 1,137,000 $ 913,000
Home Storage and Organization.................... (361,000) (210,000)
Flashlights...................................... (666,000) (824,000)
Miscellaneous/Mass Market........................ (45,000) 357,000
----------- ------------
Total..................................... $ 65,000 $ 236,000
================ ============
</TABLE>
F-20
<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.
F-21
<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 (400,000 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..
F-22
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) STOCK OPTIONS (Continued)
Additionally, in December 1996, the Company granted a total of 200,000
non-qualified stock options to WAC Research, Inc., an entity owned, in part, by
a shareholder and the former CEO of the Company, which options were granted in
exchange for the reduction of royalties payable by the Company to WAC on sales
of the Softalk products and for reimbursement to the Company of certain travel
expenses incurred by the Company's former CEO. These options have been included
in the options outstanding at year-end in the tables set forth below.
The Company's non-qualified options issued to employees may be
exercised upon the holder-employee's continued employment with the Company for
six years and the Company's achievement of profitable operations for three out
of those six years. Such options expire ten years from the date of the grant.
Options granted under the 1996 Plan become exercisable as of the date of grant
and expire five years from the date of grant, or three months following
termination, or 24 months following death of the employee.
Summary of stock options is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
FIXED OPTIONS: Shares Exercise Shares Exercise
(000's) Price (000's) Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 934 $2.50 833 $2.50
Granted.................................. -- -- 105 $2.50
Exercised................................ (17) $2.50 (4) $2.50
Canceled................................. (8) $2.50 -- --
------------- -------------
Outstanding at end of year............... 909 $2.50 934 $2.50
============= =============
Options exercisable at year-end.......... 171 $2.50 196 $2.50
============= =============
Weighted average fair value of
Options granted during the year....... -- $1.42
Weighted average remaining
contractual life for exercisable
options at year-end................... 2.5 years 3.5 years
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
VARIABLE OPTIONS: Shares Exercise Shares Exercise
(000's) Price (000's) Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 1,640 $2.00 840 $2.00
Granted.................................. -- -- 800 $2.00
============= =============
Outstanding at end of year............... 1,640 $2.00 1,640 $2.00
============= =============
Weighted average fair value of
Options granted during the year....... -- $2.22
</TABLE>
F-23
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) STOCK OPTIONS (Continued)
The Company applies the intrinsic value method under APB No. 25 in
accounting for stock-based employee compensation arrangements. Had compensation
cost for the Company's stock option plans been determined pursuant to the fair
value method under SFAS No. 123, the Company's net loss and net loss per share
would have increased accordingly. The fair value of options granted under the
Company's stock option plans has been estimated using the Black-Scholes option
pricing model with the following weighted average assumptions: dividend yield of
0%, risk free interest rate of 5.5%, expected volatility of 60.3% and expected
lives of 16 years for options granted under the Non-Qualified Plan and 10 years
for options granted under the 1996 Plan.
<TABLE>
<CAPTION>
1998 1997
---------------- -------------
<S> <C> <C>
Net loss As reported $(2,245,427) $ (409,172)
Pro Forma $(2,245,427) $ (2,333,753)
Basic and diluted
loss per share As reported $ (0.80) $ (0.18)
Pro Forma $ (0.80) $ (1.02)
</TABLE>
(15) EMPLOYEE BENEFITS
The Company also has a defined contribution plan which is a qualified
retirement plan under section 401(k) of the Internal Revenue Code. Under the
terms of the Plan, employees may make contributions to the Plan and are eligible
to participate in the Plan immediately. The Company does not currently make any
matching contributions to the Plan.
(16) SUBSEQUENT EVENTS
On March 19, 1999, Alpha Tech Stock Transfer Company ("Alpha Tech")
filed a lawsuit against the Company in Utah state court in Salt Lake City, Utah.
Alpha Tech was the Company's stock transfer agent for a period of approximately
ten years until the Company terminated its relationship with Alpha Tech in
January 1999. Alpha Tech is in the process of transferring the Company's stock
transfer records to American Stock Transfer, New York, New York. The complaint
alleges that the Company breached its service contract with Alpha Tech by
failing to pay $132,165 to Alpha Tech for transfer agent services rendered and
reimbursement for legal expenses incurred by Alpha Tech. Alpha Tech has not yet
served the complaint; the Company learned about the filing of the complaint
through an unrelated third party. The Company has demanded that Alpha Tech
voluntarily dismiss the complaint. In any event the Company disputes the claims
of Alpha Tech's complaint. If the complaint is not voluntarily dismissed and
process is served, the Company intends to vigorously defend the suit.
Effective January 14, 1999, Donald M. Wood, who had served as the
Company's Chairman and Chief Executive Officer since 1982, resigned and retired
from the Company. In the several months leading up to his resignation, Mr. Wood
was hindered in his efforts on the Company's behalf by poor health. Moreover,
certain transactions between Mr. Wood and the Company or between entities owned
by or affiliated with Mr. Wood and the Company, and certain activities conducted
by the Company's executives during Mr. Wood's tenure were the subject of an
internal investigation conducted by the Company's Board of Directors with the
assistance of an independent third party. In light of Mr. Wood's resignation,
the Company terminated its internal investigation. The Company does not
anticipate taking further action, legal or otherwise, with respect to the
matters investigated, although the Company, through its new management, has
identified several areas in which new corporate governance policies have been
adopted or old policies changed.
F-24
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) SUBSEQUENT EVENTS (Continued)
The Company will continue to pay Mr. Wood his salary through July 1999.
Mr. Wood has agreed to the cancellation of 900,000 non-qualified stock options
that were issued to him in 1996 and 1997. He also has agreed to the cancellation
of 537,500 stock options granted in 1996 to an entity owned by him.
On January 14, 1999, Paul A. Boyer, the Company's Senior Vice President
and Chief Financial Officer was appointed to the Company's Board of Directors,
which as of that time was comprised of Frederick W. Volcansek, Sr., Reed Newbold
and Mr. Boyer. On February 6, 1999, the Board of Directors employed Mr.
Volcansek as the Company's Chief Executive Officer and appointed him Chairman of
the Company's Board of Directors. On March 5, 1999, the Honorable Wayne L.
Berman, a principal of Park Strategies, L.L.C. located in Washington D.C., was
appointed as an outside director of the Company. On March 17, 1999, F. Randy
Jack, the Company's President and Chief Operating Officer resigned.
On February 4, 1999, the Company entered into a deposit payable
conversion agreement, whereby a $1,000,000 deposit received by the Company in
early 1998 and is recorded as a liability in the accompanying consolidated
balance sheet, was cancelled and the Company issued 500,000 shares of restricted
common stock under Regulation D to the depositor.
On February 22, 1999, the Company received a demand letter from counsel
for Mag Instrument, Inc., a manufacturer and distributor of flashlights and one
of the Company's competitors ("Mag"). In the letter, Mag accuses the Company of
infringing certain of Mag's patents and committing false advertising and unfair
competition. Attached to the demand letter was a copy of a complaint filed in
the U.S. District Court for the Central District of California on February 19,
1999. The complaint alleges that the Company has infringed three patents owned
by Mag, and seeks (i) an order enjoining the Company from infringing Mag's
patents, (ii) the delivery to the Court of all flashlights which infringe Mag's
patents, (iii) that the Company identify all entities who have purchased,
distributed or sold any infringing products, (iv) that the Company deliver to
the Court all documents reflecting or relating to the purchase, sale or
distribution of any flashlights which infringe Mag's patents, (v) money damages
sustained by Mag by reason of the alleged patent infringement, including
interest, costs, and attorney's fees. The demand letter specified that the
complaint was filed as a "precaution," and that Mag will refrain from serving
the complaint on the Company pending the receipt of certain assurances from the
Company. The Company has engaged patent litigation counsel and commenced its
preliminary assessment of the claims asserted in the complaint.
(17) CONTINGENCIES
On April 27, 1998, the Enforcement Division of the Securities and
Exchange Commission notified the Company that the SEC was anticipating filing an
administrative proceeding in the later part of calendar year 1998 against
various individuals and entities who had engaged in transactions with a Canadian
corporation. The SEC Enforcement Division further indicated that the Company may
be named as a defendant in such administrative action. In July 1998, the Company
submitted a Wells Submission to clarify why, in the Company's estimation, it
should not be named in the administrative proceeding, if any. The Company
suggested in the Wells Submission that it should not be named in any
administrative proceeding because the Company never consummated either of the
two transactions with the subject Canadian company that the Company was
considering, and the Company received no consideration in connection with those
aborted transactions. Moreover, the Company believes that its conduct in
connection with those proposed but aborted transactions met applicable legal
requirements. As of December 31, 1998, the Company had received no response from
the Enforcement Division about whether the SEC plans to name the Company in any
administrative action.
F-25
<PAGE>
DYNATEC INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) CONTINGENCIES (Continued)
On February 12, 1998, Fuji Corporation filed a claim with the
International Trade Commission seeking a cease and desist order against
approximately 30 entities. Fuji sought to enlist the aid of the U.S. Customs
Department in preventing the importation of single-use cameras which are
manufactured by any of the defendant entities and which infringe the patents of
Fuji. The Company does not manufacture single-use cameras, but previously has
distributed single-use cameras which have been refurbished and reloaded in
mainland China. The Company was therefore involved in the Fuji proceeding. The
Company engaged intellectual property counsel and vigorously defended its
position until December 1998, when the Company sold its remaining inventory of
single-use cameras to another entity. In connection with that sale, any
liability of the Company in connection with the Fuji proceeding, including the
costs of further defending the action, were assumed by the purchaser of the
Company's single-use camera inventory.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a material adverse
effect on the Company's operations or financial condition.
F-26
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 141,680 $ 2,268
Trade accounts receivable, net of allowance for doubtful accounts of $30,846
and $30,190, respectively 2,228,560 2,229,157
Accounts receivable - other 970 110
Inventories (see Note 2) 3,640,877 4,857,241
Prepaid expenses and other 501,651 316,347
------------- -------------
Total current assets 6,513,738 7,405,123
------------- -------------
LAND, BUILDING AND EQUIPMENT, at cost:
Land 365,860 365,860
Building and improvements 2,226,988 2,214,144
Furniture, fixtures and equipment 3,550,823 3,554,045
------------- -------------
6,143,671 6,134,049
Less accumulated depreciation and amortization 2,486,456 2,336,427
------------- -------------
Net land, building and equipment 3,657,215 3,797,622
------------- -------------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $431,651
and $382,170, respectively (see Note 3) 214,928 205,102
------------- -------------
DEFERRED LOAN COSTS, net of accumulated amortization of $34,065 and
$14,903, respectively 42,581 61,743
------------- -------------
OTHER ASSETS 71,024 69,337
------------- -------------
$ 10,499,486 $ 11,538,927
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an
integral part of these condensed consolidated
balance sheets.
F-27
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Short-term note payable $ 2,503,277 $ 1,389,223
Convertible debentures 1,699,846 1,667,079
Current portion of long-term debt 153,554 246,855
Current portion of capital lease obligations 32,829 17,881
Accounts payable 1,383,798 1,518,316
Accounts payable - other - 9,000
Accounts payable-related party - 98,403
Accrued expenses 454,699 637,051
Accrued advertising 152,478 320,000
Accrued royalties payable 64,806 70,246
------------- -------------
Total current liabilities 6,445,287 5,974,054
LONG-TERM DEBT, net of current portion 1,850,311 2,006,518
DEPOSIT FOR STOCK ISSUANCE - 1,000,000
CAPITAL LEASE OBLIGATIONS, net of current portion 63,330 28,654
------------- -------------
Total liabilities 8,358,928 9,009,226
------------- -------------
STOCKHOLDERS' EQUITY (see Note 4):
Common stock, $.01 par value; 100,000,000 shares authorized and 3,574,373
and 2,891,627 shares outstanding, respectively 35,744 28,916
Treasury stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 8,253,543 7,041,690
Accumulated deficit (5,233,579) (3,625,755)
------------- -------------
Total stockholders' equity 2,140,558 2,529,701
------------- -------------
$ 10,499,486 $ 11,538,927
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an
integral part of these condensed consolidated
balance sheets.
F-28
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
PRODUCT SALES $ 3,540,463 $ 4,382,334
COST OF SALES 2,081,965 2,788,193
------------- -------------
Gross Margin 1,458,498 1,594,141
------------- -------------
OPERATING COSTS AND EXPENSES:
Selling expenses 1,109,463 903,386
Research and development 36,818 12,045
General and administrative 834,353 693,086
------------- -------------
Total operating costs and expenses 1,980,634 1,608,517
------------- -------------
Loss from operations (522,136) (14,376)
------------- -------------
OTHER EXPENSE:
Interest expense (see Note 5) (155,474) (243,989)
Other income 1,525 -
Gain (loss) on sale of assets 1,580 (1,284)
------------- -------------
Total other expense, net (152,369) (245,273)
------------- -------------
Loss before income tax provision (674,505) (259,649)
INCOME TAX PROVISION - -
------------- -------------
Net loss $ (674,505) $ (259,649)
============= =============
BASIC NET LOSS PER SHARE $ (.20) $ (.09)
============= =============
DILUTED NET LOSS PER SHARE (see Note 2) $ (.20) $ (.09)
============= =============
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 3,303,371 2,820,802
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an
integral part of these condensed consolidated
statements.
F-29
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months Ended Nine Months Ended
September 30, 1999 September 30, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
PRODUCT SALES $ 10,874,236 $ 12,166,092
COST OF SALES 6,459,535 7,424,393
------------- -------------
Gross Margin 4,414,701 4,741,699
------------- -------------
OPERATING COSTS AND EXPENSES:
Selling expenses 2,773,528 2,586,079
Research and development 100,642 47,528
General and administrative 2,449,495 1,786,857
------------- -------------
Total operating costs and expenses 5,323,665 4,420,464
------------- -------------
Income (loss) from operations (908,964) 321,235
------------- -------------
OTHER INCOME (EXPENSE), net:
Interest expense (see Note 5) (701,321) (1,138,377)
Interest income - 3,340
Other income 4,581 -
Gain (loss) on sale of assets 881 (22,615)
------------- -------------
Total other expense, net (695,859) (1,157,652)
------------- -------------
Loss before income tax provision (1,604,823) (836,417)
INCOME TAX PROVISION 3,000 -
------------- -------------
Net loss $ (1,607,823) $ (836,417)
============= =============
BASIC NET LOSS PER SHARE $ (.49) $ (.30)
============= =============
DILUTED NET LOSS PER SHARE (see Note 2) $ (.49) $ (.30)
============= =============
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 3,303,371 2,820,802
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an
integral part of these condensed consolidated
statements.
F-30
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,607,823) $ (836,417)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 398,981 359,723
Amortization of deferred loan costs 19,161 53,071
Interest expense on convertible debentures 308,932 685,611
(Gain) loss on sale of assets (881) 22,616
Changes in assets and liabilities:
Trade accounts receivable 597 (708,311)
Accounts receivable - other (860) 426,131
Inventories 1,216,364 (2,267,986)
Prepaid expenses and other (186,991) 30,534
Trade accounts payable (134,518) (82,998)
Accounts payable - other (107,403) (21,375)
Accrued expenses (257,837) 19,555
Accrued advertising (167,522) (170,194)
Accrued royalties (5,440) 51,052
Income tax payable 18,000 -
------------- -------------
Net cash used in operating activities (507,240) (2,438,988)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets 26,124 48,006
Purchase of property and equipment (224,179) (376,195)
------------- -------------
Net cash used in investing activities (198,055) (328,189)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 1,114,054 616,261
Increase in debt issuance costs - (275,640)
Principal payments on long-term debt (249,508) (749,944)
Payments on capital lease obligations (19,839) (12,476)
Proceeds from capital addition - 580,000
Proceeds from convertible debenture offering - 1,500,000
Proceeds from deposit for stock issuance - 940,000
------------- -------------
Net cash provided by financing activities 844,707 2,598,201
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 139,412 (168,976)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,268 332,894
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 141,680 $ 163,918
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an
integral part of these condensed consolidated
statements.
F-31
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash paid for interest................................................ $ 414,612 $ 422,140
============= =============
Share certificate cancelled........................................... $ - $ 250,000
============= =============
Debt issuance cost attributable to warrants to placement agent........ $ - $ 426,000
============= =============
Convertible debt discount associated with warrants to investors....... $ - $ 426,000
============= =============
Conversion of Convertible Debentures and accrued interest for
Common stock....................................................... $ 218,680 $ -
============= =============
Issuance of 500,000 shares of restricted stock........................ $ 1,000,000 $ -
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an
integral part of these condensed consolidated
statements.
F-32
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Dynatec International, Inc., a Utah corporation ("Dynatec" or the
"Company"), is a manufacturer and distributor of consumer products comprising
the following major product lines: telecommunication headsets and amplifiers and
telephone accessories, home storage and organization, flashlights and other
miscellaneous products sold to mass market merchandisers. Dynatec is located in
Salt Lake City, Utah. The Company conducts most of its operations through four
wholly owned subsidiaries: Softalk, Inc., Arnco Marketing, Inc., Nordic
Technologies, Inc. and SofTalk Communications, Inc. Unless specified to the
contrary herein, references to Dynatec or to the Company refer to the Company
and its subsidiaries on a consolidated basis.
The Company's business follows seasonal trends. As a result the Company
historically experiences its highest revenues in the fourth quarter. Because the
Company sells its products primarily to major retailers, the Company's sales
performance is significantly dependent on the performance of those retailers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission for Form 10-QSB, and accordingly, do
not include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, these unaudited condensed
consolidated financial statements reflect all adjustments, which consist only of
normal recurring adjustments, which are necessary to present fairly the
Company's financial position, results of operations and cash flows as of
September 30, 1999 and for the periods presented herein. These unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1998.
The results of operations for the nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the
remainder of the year ending December 31, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories, consisting principally of telecommunication headsets and
amplifiers and telephone accessories, home storage and organization,
flashlights, and other miscellaneous products sold to mass market merchandisers
as of September 30, 1999 and December 31, 1998, respectively, are summarized as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Raw materials............................ $ 932,959 $ 902,703
Work-in-Process.......................... 153,961 309,815
Finished Goods........................... 2,553,957 3,644,723
================= =================
$ 3,640,877 $ 4,857,241
================= =================
</TABLE>
F-33
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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.
The Company has recognized no tax benefit for the net operating losses
incurred during the three and nine-month periods ended September 30, 1999 due to
uncertainties about the Company's ability to generate future earnings to offset
such losses.
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 three and nine months ended
September 30, 1999 and 1998, there were warrants and options to purchase
1,556,000 and 1,687,500 potential common shares, respectively, that were not
included in the computation of diluted net loss per share as their effect would
have been anti-dilutive, thereby decreasing the net loss per common share.
Reclassifications
Certain reclassifications have been made in the prior period's
consolidated financial statements to conform with the current year presentation.
(3) TRADEMARKS AND OTHER INTANGIBLES
On July 15, 1999 the Company purchased the assets of Transworld
Products, Inc. ("Transworld) at a purchase price of $85,000. Transworld is a
manufacturer of telephone shoulder rests and was a main competitor of the
Company in that product line.In exchange for the purchase price payment, the
Company acquired certain assets of Transworld, including machinery and
equipment, inventory, and intangible assets that include a non-compete agreement
and trademarks. Additionally, $34,000 of the purchase price was allocated to
goodwill, which is being amortized over a 24-month period.
(4) STOCKHOLDERS' EQUITY
On February 4, 1999, the Company entered into a deposit payable
conversion agreement, whereby a $1,000,000 deposit received by the Company in
early 1998 and recorded as a liability in the accompanying balance sheet as of
December 31, 1998 was cancelled, and the Company issued 500,000 shares of
restricted common stock to the depositor.
(5) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT
On May 22, 1998, the Company closed a transaction that provided net
capital proceeds of $1,335,000. 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.
These funds were raised pursuant to the sale by the Company of Convertible
Debentures (the "Convertible Debentures") in the aggregate
F-34
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT-(CONTINUED)
principal amount of $1,500,000 due May 22, 2001. The Convertible Debentures are
convertible into shares of the Company's common stock at the lesser of: (i) 75%
of the average of the three lowest closing bid prices of the Company's common
stock during the 22-trading-day period immediately preceding the conversion date
or (ii) $6.50, which was 100% of the closing bid price on the trading day
immediately preceding the closing date of the agreement.
As of November 5, 1999 the investors have converted the following amounts
of principal and interest accrued thereon in to the following amounts of common
stock :
<TABLE>
<CAPTION>
Date of Conversion Principal Number of Number of
Conversion Price/Share Amount Shares Interest Amount Shares
- ------------ ----------- ------ ---------- --------------- ------------
<S> <C> <C> <C> <C> <C>
6/10/99 $1.3438 $132,500 98,604 $11,180 8,320
7/10/99 $0.9891 $ 65,934 66,667 $ 9,066 9,157
10/8/99 $0.7500 $ 53,000 70,666 $ 8,904 11,872
</TABLE>
Accordingly, as of September 30, 1999, there was a total principal amount of
outstanding Convertible Debentures of $1,301,566. Assuming a hypothetical
conversion of this entire remaining principal amount of the Convertible
Debentures outstanding as of September 30, 1999, and all interest accrued
thereon at the rate of 12% per annum as of September 30, 1999, the Convertible
Debentures would be convertible into approximately 1,960,000 shares of the
Company's common stock. The Convertible Debentures are callable by the holders
thereof.
In addition to the sale of the Convertible Debentures, under the Credit
Agreement, the Company also obtained the right to use a "put" mechanism to
periodically draw down up to $10,000,000 of additional equity capital (the
"Equity Line"). Under the terms of the Credit Agreement, the Company was
obligated to draw down a minimum of $1,000,000 of the Equity Line, and all
amounts were to have been drawn in increments of not less than $50,000. In
return for the payment of additional capital under the Equity Line, the Company
would have been 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 draw date and ending two days after the draw date. The Equity
Line could not have been utilized, and the Company would have had 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 was obligated to
issue an additional $500,000 of Convertible Debentures.
On June 25, 1999, the Company and the investors entered into a Modification
Agreement ("Modification Agreement"), under which the parties agreed to cancel
the Equity Line and all of the parties' respective obligations thereunder. The
parties to the Modification Agreement also agreed to cancel the investors'
obligation to purchase and the Company's obligation to sell the additional
$500,000 principal amount of Convertible Debentures upon the effectiveness of
the registration statement. Additionally, the Modification Agreement provides
for the modification and temporary abatement of the Company's obligation to pay
cash liquidated damages of $45,000 per month resulting from the Company's
obligation to have the registration statement declared effective on or before
August 28, 1998. Pursuant to the terms of the Credit Agreement, the Company paid
liquidated damages from September 23, 1998 through and including February 23,
1999 in the aggregate amount of $210,000, of which $135,000 was paid during the
nine-month period ended September 30, 1999. Under the Modification Agreement,
the Company is to accrue a total of $180,000 of liquidated damages for the
period from February 24, 1999 through and including June 23, 1999, which accrued
amount is payable at any time after October 1, 1999, upon request for payment
therefor by the Investors, in shares of the Company's common stock. The number
of shares of common stock issuable upon such payment shall be determined by
dividing the total amount of damages accrued by 100% of the average of the
closing bid prices of the Company's common stock during the five trading day
period immediately preceding the date of such payment. Additionally, under the
Modification Agreement, the Company's obligation to pay liquidated damages under
the Credit Agreement was abated from June 24, 1999 through September 23, 1999,
provided that the registration statement was declared effective on or before
October 31, 1999. Additional liquidated damages in the amount of $45,000 were to
have accrued for the period between September 24, 1999 and October 23, 1999 if
the Registration Statement is not declared effective before
F-35
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT-(CONTINUED)
October 31, 1999. If the registration statement was not declared effective on or
before October 31, 1999, the Modification Agreement's provisions providing for
the payment of liquidated damages in stock and the abatement of liquidated
damages from June 23, 1999 to September 23, 1999 and the provisions allowing the
Company to pay liquidateddamages in common stock rather than cash were subject
to rescission at the option of the Investors. Except to the extent specifically
modified by the Modification Agreement, the terms and conditions of the Credit
Agreement and the documents and instruments incorporated in the Credit Agreement
shall continue in force.
Although the Company filed an amendment to the registration statement on
July 2, 1999, the registration statement was not effective by the October 31,
1999 deadline set forth in the Modification Agreement. Moreover, because the
Company's pending preliminary proxy statement is being reviewed by the
Securities and Exchange Commission in tandem with the pending registration
statement, the Company was not able to hold its annual meeting of shareholders
by the October 31, 1999 deadline. On November 12, 1999, the Company and the
Investors executed an amendment to the Modification Agreement that substituted
February 15, 2000 for the October 31, 1999 deadline originally in the
Modification Agreement. Consequently, the accrual of liquidated damages will be
deferred from June 24, 1999 until February 15, 2000, provided that the
registration statement becomes effective and shareholder approval of the
transaction is obtained on or before that date. Liquidated damages from February
24, 1999 through June 23, 1999 have been accrued and continue to be payable by
the Company as specified in the Modification Agreement. The November 12, 1999,
agreement also amended the Convertible Debentures such that, even if the
Convertible Debentures are still outstanding at their maturity date, May 22,
2001, the Convertible Debentures will not be autormatically converted into
common stock unless the holders so elect.
Also 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>
Under the Credit Agreement, the Company was obligated to 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. Because the Modification Agreement cancelled irrevocably the
Company's obligations with respect to the additional $500,000 of Convertible
Debentures, the Company will not issue additional Series A warrants. Of the
warrants that were issued, 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. This allocation was based on the relative notional
amounts of the two elements of the Credit Agreement as of the date of the Credit
Agreement. The value of the warrants issued to the investors was written off in
1998 as a one-time, non-cash debt issuance cost, because the warrants were
immediately exercisable. The value of the warrants issued to the placement agent
and allocated to the Convertible Debentures, and $500,000, representing the
intrinsic value of the beneficial conversion premium, were written off as
non-cash expense in the fourth quarter of 1998, when the Convertible Debentures
became callable by the investors.
The Company also issued, 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 were deposited into escrow and were to
be released in 6,000 share increments as each $1,000,000 was drawn down under
the Equity Line established under the Credit Agreement. Because under the
Modification Agreement the Equity Line was cancelled, and therefore the
placement agent never would have been entitled to the 60,000 additional shares
of common stock deposited in escrow, the escrow was terminated, and the 60,000
shares of common stock were returned to the Company for cancellation.
(6) BUSINESS SEGMENT INFORMATION
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 interest,
taxes, depreciation and non-cash amortization of intangible assets ("EBITDA").
The accounting policies of the business segments are the same as those described
in the summary of significant accounting policies.
F-36
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
REVENUES: 1999 1998 1999 1998
- ----------------------------------------------------- --------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ 1,700,000 $ 1,855,000 $ 5,472,000 $ 5,977,000
Home Storage and Organization.................... 1,339,000 1,302,000 3,510,000 3,498,000
Flashlights...................................... 501,000 202,000 900,000 837,000
Miscellaneous/Mass Market........................ - 1,023,000 992,000 1,854,000
--------------- ------------- -------------- ---------------
Total..................................... $ 3,540,000 $ 4,382,000 $ 10,874,000 $ 12,166,000
=============== ============= ============== ===============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
OPERATING INCOME (LOSS): 1999 1998 1999 1998
- ----------------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ (38,000) $ 180,000 $ (19,000) $558,000
Home Storage and Organization.................... (243,000) (33,000) (469,000) (54,000)
Flashlights...................................... (241,000) 4,000 (427,000) (72,000)
Miscellaneous/Mass Market........................ - (165,000) 6,000 (111,000)
-------------- ------------- ------------- --------------
Total..................................... $ (522,000) $ (14,000) $ (909,000) $ 321,000
============== ============ ============= ==============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
DEPRECIATION AND AMORTIZATION (1): 1999 1998 1999 1998
- ----------------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ 77,000 $ 69,000 $ 220,000 $ 205,000
Home Storage and Organization.................... 60,000 49,000 141,000 123,000
Flashlights...................................... 23,000 8,000 38,000 32,000
-------------- ------------ ------------- --------------
Total..................................... $ 160,000 $ 126,000 $ 399,000 $ 360,000
============== ============ ============= ==============
</TABLE>
(1) Amortization includes all amortization relating to product license rights,
non-compete agreements, purchased patents, and goodwill.
Information as to the assets and capital expenditures of the Company is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS: 1999 1998
- ---------------------------------------------------- -------------- ------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 4,980,000 $ 4,794,000
Home Storage and Organization.................... 3,055,000 3,200,000
Flashlights...................................... 1,707,000 1,729,000
Miscellaneous/Mass Market........................ - 1,366,000
-------------- ------------
Total assets for reportable segments...... 9,742,000 11,089,000
Other Assets..................................... 715,000 388,000
Deferred Loan Costs And Other Assets Not
Allocated To Segments....................... 42,000 62,000
============== ============
Total..................................... $ 10,499,000 $ 11,539,000
============== ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
CAPITAL EXPENDITURES: 1999 1998 1999 1998
- ----------------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ 56,000 $ 11,000 $ 120,000 $ 221,000
Home Storage and Organization.................... 44,000 8,000 79,000 120,000
Flashlights...................................... 17,000 1,000 25,000 35,000
Miscellaneous/Mass Market........................ - - - -
-------------- ------------ ------------- --------------
Total..................................... $ 117,000 $ 20,000 $ 224,000 $ 376,000
============== ============ ============= ==============
</TABLE>
F-37
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) BUSINESS SEGMENT INFORMATION-(CONTINUED)
Information as to the Company's operations in different geographical areas is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ----------------------------------
REVENUES: 1999 1998 1999 1998
- ----------------------------------------------------- --------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
United States.................................... $ 3,475,000 $ 4,370,000 $ 10,734,000 $ 12,084,000
Other (1)........................................ 65,000 12,000 140,000 82,000
-------------- ------------ ------------- --------------
Total..................................... $ 3,540,000 $ 4,382,000 $ 10,874,000 $ 12,166,000
============== ============ ============= ==============
</TABLE>
(1) Includes Canada, Europe and other miscellaneous.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
OPERATING INCOME (LOSS): 1999 1998 1999 1998
- ----------------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
United States.................................... (522,000) (14,000) (909,000) 321,000
============== ============ ============= ==============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS: 1999 1998
- ----------------------------------------------------- -------------- ------------
<S> <C> <C>
United States.................................... $ 10,108,000 $ 11,089,000
Asia............................................. 391,000 450,000
-------------- ------------
Total..................................... $ 10,499,000 $ 11,539,000
============== ============
</TABLE>
(7) STOCK OPTIONS
The Company has established three 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 Company's 1996-1997
non-qualified stock option program (the "Non-Qualified Plan"), the Company
granted options to acquire 1,640,000 shares of common stock. 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 (400,000 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 an exercise 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.
In May 1999, the Company's Board of Directors adopted the Company's
1999 Stock Option And Incentive Plan (the "1999 Plan"). Under the 1999 Plan, a
total of 640,000 shares were reserved for issuance in the form of non-qualified
stock options or qualifying Incentive Stock Options. During the nine months
ended September 30, 1999, the compensation committee of the Company's Board of
Directors has granted stock options under the 1999 Plan to purchase a total of
634,500 shares of common stock to various executives, employees and directors of
the Company. Such options were as non-qualified options having terms of 10 years
from the date of grant. All such options have an exercise price of between $1.00
and $1.750 per share, with a weighted average price of $1.057 per share. The
exercise price for the options were 100% of the fair market value on the grant
date.
(8) SUBSEQUENT EVENTS
On November 4, 1999, the Company sold its corporate headquarters
facility for $2,900,000. Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The net proceeds to the
Company were $831,000, after paying long-term debt secured by the building,
broker and legal fees, and other ancillary charges. The proceeds from the sale
will be used for working capital purposes. As an additional inducement to the
purchaser, the Company issued a total of 33,948 shares of its restricted common
stock to the purchaser having a market value of $35,000 based on the fair market
value of the restricted stock on the date of issue. The party that purchased the
building is not affiliated with or related to the Company or any of its officers
or directors, and the terms of the transaction were the result of arms-length
negotiations.
F-38
<PAGE>
No person has been authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company, the Selling Stockholder or
any Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any of the securities offered hereby to any
person or by anyone in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof. DYNATEC INTERNATIONAL, INC.
-----------------------
TABLE OF CONTENTS
Page
Prospectus Summary...........................
Risk Factors.................................
Use of Proceeds..............................
Dividend Policy..............................
Determination of Offering Price..............
Market for Common Stock......................
Management's Discussion and Analysis.........
Properties...................................
Business.....................................
Management...................................
Executive Compensation.......................
Security Ownership of Certain
Beneficial Owners and Management..........
Selling Shareholders.........................
Certain Relationships and
Related Transactions......................
Description of Securities....................
Plan of Distribution.........................
Legal Proceedings............................
Legal Matters................................
Experts......................................
Indemnification of Directors and Officers....
Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures.....................
Available Information........................
Additional Information.......................
Financial Statements.........................
-----------------------
DYNATEC INTERNATIONAL, INC.
Common Stock
2,402,667 Shares
PROSPECTUS
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Utah Revised Uniform Business Corporation Act and the Registrant's
Articles of Incorporation and Bylaws under certain circumstances provide for the
limitation of liability and indemnification of the Registrant's directors
against liabilities which they may incur in the course of acting in such
capacity. A summary of the circumstances in which such indemnification is
provided for is contained in this Item, but that description is qualified in its
entirety by reference to the Registrant's Articles of Incorporation. The Bylaws
of the Registrant extend the same limitation of liability and indemnification to
the executive officers of the Registrant.
In general, under these provisions, any officer, director, employee or
agent may be indemnified against expenses, fines, settlements or judgments
arising in connection with a legal proceeding to which such person is a party,
as a result of such relationship, except in relation to matters in which such
person is adjudged to be liable for his own negligence or intentional misconduct
in the performance of his duty.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future of pursuant to a vote of stockholders or
directors. This indemnification is in addition to any other right of the
indemnified person under any such contract or any law, bylaw, agreement, vote of
stockholders or otherwise.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities of the Registrant being offered
hereby. Some of the expenses included below may be prepaid by the Registrant
prior to the effective date of the Registration Statement. All expenses are
estimated:
Registration and filing fee(*) $ 5,260
Listing Fee (Nasdaq SmallCap Market 5,264
Transfer agent's fee(*) 2,000
Printing and engraving(*) 5,000
Accounting fees and expenses(*) 50,000
Legal fees and expenses(*) 100,000
Blue sky fees and expense(*) 10,000
Miscellaneous expenses(*) 10,476
----------
Total(*) ......... $188,000
==========
- ----------------
(*) Estimated.
Item 26. Recent Sales of Unregistered Securities.
Within the past three calendar years, the Registrant has issued
securities in transactions summarized below:
Restricted Stock
The Company entered a "Deposit Payable Conversion Agreement" dated
February 4, 1999 between the Company and Touchstone Transport Services, Inc., an
entity located in the Philippines. During the first quarter of 1998, in
connection with an ongoing offering of the Company's common stock to offshore
investors under Regulation S of the Securities Act of 1933, the Company received
a wire transfer in the amount of $1,000,000. However, no specific subscription
agreement or other contract was ever prepared or executed in connection with
this wire transfer, and the Company never issued any securities in conjunction
with the transfer. Subsequently, the wire transfer was recorded as a payable.
II-1
<PAGE>
The Company had the use of the transferred funds for approximately ten months,
in exchange for which it neither issued any securities nor paid any principal or
interest in respect of the payable. In January 1999, the Company requested that
the depositor of the $1,000,000 wire transfer agree to convert the payable that
had been recorded into shares of the Company's restricted common stock. The
depositor agreed to convert the payable into 500,000 shares of the Company's
restricted common stock, which were issued to an entity affiliated with the
depositor. The Company issued such shares without registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act, and
the rules and regulations promulgated under that section including Regulation D.
Such shares of common stock were issued as restricted securities and the
certificate representing such shares was stamped with a standard legend to
prevent any resale without registration under the Securities Act or pursuant to
an exemption.
On June 10, July 8 and October 8, 1999, certain of the holders of the
Convertible Debentures submitted notices of conversion with respect to an
aggregate principal amount of $260,500 and accrued interest thereon, after
which the Company caused to be issued a total of 263,306 shares of common
stock. The Company issued such shares without registration under the Securities
Act of 1933 in reliance on Section 4(2) of the Securities Act, and the rules and
regulations promulgated under that section including Regulation D. Such shares
of common stock were issued as restricted securities and the certificate
representing such shares was stamped with a standard legend to prevent any
resale without registration under the Securities Act or pursuant to an
exemption.
On November 4, 1999, the Company entered into a Real Estate Purchase
Contract with an unaffiliated third party pursuant to which the Company sold the
real property at which it corporate offices are located. The Company
simultaneously entered into a long-term lease of that property. As part of that
transaction, and as an inducement to the purchaser-lessor, the Company issued a
total of 33,948 shares of restricted common stock. The Company issued such
shares without registration under the Securities Act of 1933 in reliance on
Section 4(2) of the Securities Act. Such shares of common stock were issued as
restricted securities, and the certificate representing such shares was stamped
with a standard legend to prevent any resale without registration under the
Securities Act or pursuant to an exemption.
Sales Under Regulation S
The following table shows the sales under Regulation S during 1997:
Date of Sale Title of Security # of Shares Price
- --------------------------------------------------------------------------------
February 26, 1997 Common Stock 173,500 $1.44
March 26, 1997 Common Stock 125,000 $2.00
July 1, 1997 Common Stock 125,000 $2.00
July 10, 1997 Common Stock 125,000 $2.00
December 31, 1997 Common Stock 333,334 $3.00
Such sales were completed without registration under the Securities Act
of 1933 in reliance on the provisions of Regulation S under the Securities Act.
Specifically, such sales were conducted with individuals and entities that
represented that they were non-U.S. persons within the meaning of Regulation S.
Such shares of common stock were issued as restricted stock and bore a
Regulation S legend to prevent any resales in the United States prior to the
time prescribed by Regulation S without registration under the Securities Act or
pursuant to an exemption.
Stock Options to Related Parties
Muito Bem Options. In 1996, the Company granted options to Muito Bem,
an entity owned by Donald M. Wood, the Company's former Chairman and Chief
Executive Officer, to purchase 537,500 shares of common stock at an exercise
price of $2.00 per share. The shareholder and former executive officer of the
Company who owns Muito Bem agreed in 1999 to cancel all such stock options. The
Company issued all such options without registration under the 1933 Act in
reliance on Section 4(2) or Regulation D.
WAC Options. In 1997, the Company granted to WAC Research, Inc., an
entity affiliated with Donald M. Wood, the Company's former Chairman and Chief
Executive Officer, options to purchase 200,000 shares of common stock at an
exercise price of $2.00 per share. The Company issued all such options without
registration under the 1933 Act in reliance on Section 4(2) or Regulation D.
Stock Options to Employees and Management
Grants of Non-Qualified Stock Options Under 1999 Stock Option Plan.
Between June 8, 1999, and the date hereof, the Company granted to its officers,
directors and employees options to purchase a total of 634,500 shares of the
Company's common stock pursuant to the Company's 1999 incentive stock option
plan. All such options have exercise prices of $1.031 to $1.625, which exercise
prices were, in each case, 100% of the fair market value of the Company's common
stock on the grant date.
II-2
<PAGE>
Grants of Incentive Stock Options Under 1996 Incentive Stock Option
Plan. In November 1996, the stockholders of the Company approved an Incentive
Stock Option Plan (the "1996 Plan") for the benefit of the officers, directors
and employees of the Company. In December 1996, the Company granted qualified
incentive stock options to purchase 95,000 shares of the Company's common stock
at an exercise price of $2.50 per share. In January 1997, the Company granted
under the 1996 Plan options to purchase an additional 105,000 shares of common
stock at an exercise price of $2.50 per share.
Grants of Non-qualified Options. During 1996, the Company granted
non-qualified stock options to purchase 840,000 shares of common stock at an
exercise price of $2.00 per share. Such options are performance based and are
not exercisable unless the Company's achieves certain financial performance
standards during the term thereof. In January 1997, the Company issued
additional options to purchase 800,000 shares of common stock at an exercise
price of $2.00 per share. The 1997 options have terms identical to the
non-qualified options granted in 1996. All of such options were issued to
officers, directors and employees of the Company.
Acquisitions
In December 1996, the Company issued a total of 550,000 shares of
common stock as consideration for the acquisition of substantially all of the
assets of Nordic Lights, Inc., a Texas corporation.
Each of the transactions described above was entered into and concluded
by the Company pursuant to exemptions from the registration requirements of the
Securities Act and similar exemptions available under state securities laws,
afforded to offers and sales of securities not involving a public offering. The
shares issued in such transactions are "restricted securities" as defined by
rules promulgated under the Securities Act, meaning that they cannot be resold
by the original purchaser unless they are first the subject of a registration
statement filed by the Company or an exemption from registration is available
for the transaction in which they are sold.
Item 27. Exhibits
<TABLE>
<CAPTION>
Item 601 No. Description
<S> <C>
3.1 Restated Articles of Incorporation of the Company*
3.2 Amended and Restated Bylaws of the Company*
4.1 Specimen Common Stock Certificate (Incorporated by reference from the Registration statement on
Form 10 filed by the Company with the Commission)
5.1 Opinion of Bruce L. Dibb P.C.*
10.1 Convertible Debenture and Line of Credit Agreement (Incorporated by reference from Form 8-K
(File No. 000-12806) filed by the Company with the Commission on June 8, 1998)
10.2 Form of Convertible Debenture (Incorporated by reference from Form 8-K (File No. 000-12806)
filed by the Company with the Commission on June 8, 1998)
10.3 Form of A Warrants (Incorporated by reference from Form 8-K (File No. 000-12806) filed by the
Company with the Commission on June 8, 1998)
10.4 Form of B Warrants*
10.5 Registration Rights Agreement*
10.6 Escrow Agreement*
10.7 Modification Agreement between the Company, the investors who acquired the Convertible Debentures,
and the placement agent, dated as of June 25, 1999, incorporated by reference from Amendment No. 2
Company's Registration Statement on Form SB-2, filed July 2, 1999 (File No. 333.57921)
10.8 Amendment to Modification Agreement between the Company and the holders of the Convertible
Debentures, dated November 12, 1999, incorporated by reference from the Company's Quarterly
Report on Form 10-Qsb for the period ended September 30, 1999
10.9 Employment Contract of Frederick W. Volcansek, incorporated by reference from the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998
10.10 Employment Contract of Paul A. Boyer, incorporated by reference from the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998
10.11 Employment Contract of Lloyd M. "Tag" Taggart, incorporated by reference from the Company's
Quarterly Report on Form 10-QSB for the period ended September 30, 1999
10.12 Employment Contract of Michael L. Whaley, incorporated by reference from the Company's
Quarterly Report on Form 10-QSB for the period ended September 30, 1999
10.13 Lease between the Company and FRE III Corporation, a California corporation, dated as of
November 4, 1999, incorporated by reference from the Company's
Quarterly Report on Form 10-QSB for the period ended September 30, 1999
10.14 Commercial Real Estate Purchase Contract between the Company and Darwin Datwyler
dated as of July 16, 1999, as amended through November 4, 1999, incorporated by reference from
the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1999
21.1 List of Subsidiaries of the Registrant (See "Subsidiaries of the Company"
at page 30-31)
23.1 Consent of Bruce L. Dibb P.C. (included in its opinion filed as
Exhibit 5.1)*
23.2 Consent of KPMG LLP
</TABLE>
* Incorporated by reference from registration statement originally filed June
25, 1998
II-3
<PAGE>
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(a) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(b) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
(c) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities
offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to its registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Salt Lake City, State of Utah, on December 8, 1999.
DYNATEC INTERNATIONAL, INC.
By: /s/ Frederick W. Volcansek, Sr.
-------------------------------------
Frederick W. Volcansek, Sr.
Chairman & Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ Frederick W. Volcansek, Sr., December 7, 1999
- --------------------------------------------- -----------------------
Frederick W. Volcansek, Sr., Date
Chairman of the Board of Directors & CEO
(Principal Executive Officer)
/s/ Michael L. Whaley December 7, 1999
- --------------------------------------------- -----------------------
Michael L. Whaley Date
Chief Financial Officer
(Principal Accounting and Financial
Officer)
/s/ Reed D. Newbold December 7, 1999
- --------------------------------------------- -----------------------
Reed D. Newbold, Date
Director
/s/ Wayne L. Berman December 7, 1999
- --------------------------------------------- -----------------------
Wayne L. Berman, Date
Director
/s/ John P. Schmitz December 7, 1999
- --------------------------------------------- -----------------------
John P. Schmitz Date
Director
Consent of Independent Certified Public Accountants
The Board of Directors
Dynatec International, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the registration statement.
/s/ KPMG LLP
Salt Lake City, Utah
December 7, 1999
