<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
Commission File Number: 0-12806
DYNATEC INTERNATIONAL, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
UTAH 87-0367267
------------------------------------------ ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
3820 West Great Lakes Drive
Salt Lake City, Utah 84120
------------------------------------------ ---------------------------------
(Address of principal executive offices) (Zip Code)
(801) 973-9500
----------------
(Issuer's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. [X] yes [
] no
The Company had 5,246,679 shares of common stock outstanding at August 7, 2000.
The aggregate market value of voting stock held by non-affiliates of the Company
at August 7, 2000 was $2,866,899.
Transitional small business disclosure format. Yes [ ] No [X]
1
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999.....................................................3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999...................................5
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2000 and 1999...................................6
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999...................................7
Notes to Condensed Consolidated Financial Statements..................9
Item 2. Management's Discussion and Analysis or Plan of Operation...........17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................25
Item 2. Changes in Securities and Use of Proceeds......................27
Item 6. Exhibits and Reports on Form 8-K...............................27
Signatures................................................29
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
------------- -------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 68,759 $ 244,755
Trade accounts receivable, net of allowance for doubtful accounts of $47,109
and $39,036 at June 30, 2000 and December 31, 1999, respectively 2,221,694 1,695,897
Accounts receivable-other 60,000 -
Common stock subscription receivable (note 9) 75,000 -
Inventories (note 2) 2,820,265 2,963,064
Prepaid expenses and other
377,057 415,921
------------- -------------
Total current assets 5,622,775 5,319,637
------------- -------------
BUILDING AND EQUIPMENT, at cost:
Building and improvements 2,865,000 2,865,000
Furniture, fixtures, and equipment 3,849,426 3,724,808
------------- -------------
6,714,426 6,589,808
Less accumulated depreciation and amortization 2,731,716 2,471,862
------------- -------------
Net building and equipment 3,982,710 4,117,946
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES, net (note 2) 172,436 194,743
DEFERRED LOAN COSTS, net of accumulated amortization of $43,226 and $30,452 at
June 30, 2000 and December 31, 1999, respectively
23,420 36,194
OTHER ASSETS 153,646 119,450
------------- -------------
$ 9,954,987 $ 9,787,970
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Short-term note payable $ 1,880,656 $ 1,831,622
Convertible debentures (note 4) - 1,649,342
Current portion of long-term debt 82,500 82,500
Current portion of capital lease obligations 66,367 60,739
Accounts payable 2,041,273 1,581,463
Accrued expenses 526,035 525,038
Accrued advertising 128,569 300,000
Accrued royalties payable
74,225 80,150
-------------- --------------
Total current liabilities 4,799,625 6,110,854
DEFERRED GAIN ON SALE OF ASSET 238,203 244,363
LONG-TERM DEBT, net of current portion 39,925 81,175
CAPITAL LEASE OBLIGATIONS, net of current portion 2,923,598 2,957,740
-------------- -------------
Total liabilities 8,001,351 9,394,132
-------------- -------------
STOCKHOLDERS' EQUITY (note 3):
Common stock, $.01 par value; 100,000,000 shares authorized and 5,246,679
and 3,721,418 shares outstanding at June 30, 2000 and December 31, 1999,
respectively 52,467 37,214
Common stock subscribed (note 9) 5,904 -
Treasury stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 11,235,184 8,375,074
Accumulated deficit (8,424,769) (7,103,300)
-------------- -------------
Net stockholders' equity 1,953,636 393,838
-------------- -------------
COMMITMENTS AND CONTINGENCIES (note 6)
$ 9,954,987 $ 9,787,970
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 2000 June 30, 1999
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
PRODUCT SALES $ 3,418,073 $ 3,690,094
COST OF SALES (2,169,479) (2,169,199)
------------------ ------------------
Gross Margin 1,248,594 1,520,895
------------------ ------------------
OPERATING COSTS AND EXPENSES:
Selling expenses 1,055,186 834,438
General and administrative 622,822 783,828
Research and development 57,353 37,812
------------------ ------------------
Total operating costs and expenses 1,735,361 1,656,078
------------------ ------------------
Loss from operations (486,767) (135,183)
------------------ ------------------
OTHER EXPENSE:
Interest expense (note 4) (157,178) (272,555)
Other expense (168,733) (77)
------------------ ------------------
Total other expense (325,911) (272,632)
------------------ ------------------
Loss before income tax provision (812,678) (407,815)
INCOME TAX PROVISION - -
------------------ ------------------
Net loss $ (812,678) $ (407,815)
================== ==================
BASIC AND DILUTED NET LOSS PER SHARE $ (.17) $ (.13)
================== ==================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 4,707,459 3,218,004
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
PRODUCT SALES $ 7,257,717 $ 7,333,773
COST OF SALES (4,330,676) (4,377,570)
------------------ ------------------
Gross Margin 2,927,041 2,956,203
------------------ ------------------
OPERATING COSTS AND EXPENSES:
Selling expenses 2,216,262 1,664,065
General and administrative 1,420,374 1,615,143
Research and development 152,320 63,824
------------------ ------------------
Total operating costs and expenses 3,788,956 3,343,032
------------------ ------------------
Loss from operations (861,915) (386,829)
------------------ ------------------
OTHER INCOME (EXPENSE):
Interest expense (note 4) (292,398) (545,846)
Other income (expense) (note 3) (167,156) 2,357
------------------ ------------------
Total other expense, net (459,554) (543,489)
------------------ ------------------
Loss before income tax provision (1,321,469) (930,318)
INCOME TAX PROVISION - 3,000
------------------ ------------------
Net loss $ (1,321,469) $ (933,318)
================== ==================
BASIC AND DILUTED NET LOSS PER SHARE $ (.28) $ (.29)
================== ==================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 4,707,459 3,218,004
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
------------------- -------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,321,469) $ (933,318)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 282,731 239,229
Amortization of deferred loan costs 12,774 12,774
Amortization of deferred gain on sale of assets (6,160) -
Non-cash interest expense on convertible debentures (note 4) - 269,260
Non-cash interest expense on re-issuance of common stock
shares (note 3) 169,733 -
Forgiveness of liquidated damages related to convertible debenture
(note 4) (13,523) -
Loss (gain) on sale of assets (1,577) 699
Provision for losses on accounts receivable 5,000 5,000
Changes in operating assets and liabilities:
Trade accounts receivable (530,797) 182,434
Accounts receivable - other (60,000) -
Inventories 142,799 1,114,560
Prepaid expenses 38,864 (158,403)
Other assets (34,196) 721
Accounts payable 459,810 (567,945)
Accounts payable - other - (9,000)
Accounts payable - related party - (98,403)
Accrued expenses 997 (203,200)
Accrued advertising (171,431) (225,068)
Accrued royalties (5,925) (9,228)
------------------- -------------------
Net cash used in operating activities (1,032,370) (379,888)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of assets 2,600 19,804
Purchase of building and equipment (123,990) (82,556)
------------------ -------------------
Net cash used in investing activities (121,390) (62,752)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 49,034 959,510
Net payments on long-term debt (41,250) (178,686)
Net payments on capital lease obligations (30,734) (15,414)
Payment to retire convertible debenture (note 4) (1,500,000) -
Proceeds from the issuance of common stock related to private
placement (note 3) 1,600,000 -
Proceeds from common stock subscribed (note 3) 700,000 -
Proceeds from re-issuance of common stock (note 3) 200,714 -
------------------ -------------------
Net cash provided by financing activities 977,764 765,410
------------------ -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (175,996) 322,770
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 244,755 2,268
------------------ -------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 68,759 $ 325,038
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
------------------- -------------------
(Unaudited) (Unaudited)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid for interest $ 296,634 $ 310,829
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Building and equipment acquired under capital leases 2,220 24,000
Conversion of Convertible Debentures and accrued interest for
common stock 135,819 143,680
Issuance of 500,000 shares of restricted stock - 1,000,000
Common stock subscription receivable 75,000 -
Write-off of accounts receivable 3,073 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<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, and flashlights. Dynatec
is located in Salt Lake City, Utah. The Company conducts most of its operations
through five wholly owned subsidiaries: Softalk, Inc., Nordic Technologies,
Inc., Neat Things, Inc., SofTalk Communications, Inc., and Arnco Marketing, Inc.
Unless specified to the contrary herein, references to Dynatec or to the Company
refer to the Company and its subsidiaries on a consolidated basis.
The Company's business follows seasonal trends. As a result the Company
experiences its highest revenues in the fourth quarter. Because the Company
sells its products primarily to major retailers, the Company's sales performance
is significantly dependent on the performance of those retailers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-QSB, and accordingly, do not
include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, these unaudited condensed
consolidated financial statements reflect all adjustments, which consist only of
normal recurring adjustments, which are necessary to present fairly the
Company's financial position, results of operations and cash flows as of June
30, 2000 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, 1999 filed with the
Securities and Exchange Commission.
The preparation of the condensed consolidated 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.
The results of operations for the three and six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the
remainder of the year ending December 31, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories, consisting principally of telecommunication headsets and
amplifiers and telephone accessories, home storage and organization, and
flashlights as of June 30, 2000 and December 31, 1999, respectively, are
summarized as follows:
June 30, December 31,
2000 1999
--------------- ---------------
Raw materials............ $ 1,080,499 $ 886,377
Work-in-Process.......... 189,882 135,931
Finished Goods........... 1,549,884 1,940,756
--------------- ---------------
$ 2,820,265 $ 2,963,064
=============== ===============
9
<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.
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.
Diluted loss per common share is the amount of loss for the period related to
each share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the period.
In calculating net loss per share for the six months ended June 30, 2000,
and 1999, warrants and options to purchase 766,750 and 1,150,000 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.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired from Transworld Products, Inc. (Transworld) on July 15,
1999. The goodwill is being amortized using the straight-line basis over two
years. The balance as of June 30, 2000 and December 31, 1999 was as follows:
2000 1999
----------- -----------
Goodwill $ 34,306 $ 34,306
Less accumulated amortization 17,153 8,576
----------- -----------
----------- -----------
$ 17,153 $ 25,730
=========== ===========
(3) STOCKHOLDERS' EQUITY
On February 4, 1999, the Company entered into a deposit payable conversion
agreement, whereby a $1,000,000 deposit received by the Company in early 1998
and recorded as a liability was cancelled, and the Company issued 500,000 shares
of restricted common stock under Regulation D to the depositor.
On February 23, 2000 the Company completed a private placement of its
restricted common stock to seven offshore investors. The private placement was
accomplished pursuant to a Stock Purchase Agreement (the "Stock Purchase
Agreement") between the Company and the investors dated as of February 11, 2000.
Under the Stock Purchase Agreement, the Company agreed to issue a total of
1,222,811 shares of restricted common stock. The consideration paid by the
investors was the greater of (i) $1.00 per share or (ii) 100% of the average of
the closing bid prices of the Company's common stock as quoted by the Nasdaq
Stock Market for the five trading days immediately preceding the date the
investors paid the purchase price or any portion thereof. The total proceeds to
the Company from the private placement were $1,600,000.
In February 2000, Merrill Lynch & Co., Inc. ("Merrill Lynch") notified the
Company that American Stock Transfer & Trust Co., New York, New York, the
Company's stock transfer agent ("AST"), had confiscated three separate
certificates purporting to represent a total of 208,000 shares of restricted
common stock issued in the name of an entity affiliated with Donald M. Wood, the
Company's former Chairman and Chief Executive Officer. AST confiscated such
certificates because they were not then shown as valid certificates representing
the Company's issued and outstanding common stock. Based on further
investigation by AST, the Company believes that its former stock transfer agent
10
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) STOCKHOLDERS' EQUITY-(continued)
had transferred the shares represented by such certificates to third parties,
but had not received the original certificates representing such shares at the
time of those transfers. Nor did the former transfer agent obtain documentation
indicating that such certificates had been lost, stolen or destroyed. Several
years after the shares represented by such certificates had been transferred,
Mr. Wood then tendered the original certificates to Merrill Lynch with
instruction to sell the shares represented by such certificates. Merrill Lynch
then sold such shares and tendered the certificates to AST for transfer, at
which time AST confiscated the certificates.
On March 28, 2000, the Company received a letter from counsel for Merrill
Lynch. In that letter, Merrill Lynch advised the Company of its intention to
enforce its clients' rights to compel the Company to recognize the transfers of
the shares represented by the certificates tendered by Mr. Wood under Article 8
of the Uniform Commercial Code as adopted by the State of Utah. The Company
complied with Merrill Lynch's demand. The net effect of this action was that the
Company was required to recognize as having been previously issued 208,000
shares of common stock that were not then shown as being issued and outstanding
on the books and records of the Company.
On March 29, 2000, the Company filed a lawsuit in Utah state court against
Mr. Wood, WAC Research, Inc. ("WAC") and Muito Bem Ltd Partnership ("Muito
Bem"), Alpha Tech Stock Transfer & Trust Company, the Company's former stock
transfer agent ("Alpha Tech"). Both WAC and Muito Bem are entities affiliated
with Wood. The case sought damages from all defendants, and specifically asked
the court to award to the Company the proceeds of the sales by WAC and/or Muito
Bem of the shares that the Company was compelled to reinstate on the basis that
those entities and their principals had been unjustly enriched. In a settlement,
dated April 12, 2000, among Wood, WAC, Muito Bem, Merrill Lynch and the Company,
the Company received cash in the amount of $200,714, in exchange for which it
released its claims for further damages against Wood, WAC, Muito Bem and Merrill
Lynch. The Company's claims against Alpha Tech are still pending.
On April 4, 2000 the Company recognized as having previously been issued
the 208,000 shares of common stock. As a result, the Company recognized a one
time non-cash expense of $169,733, which is the difference between the fair
market value of the 208,000 shares as of the date of such recognition, or
$370,447, and the $200,714 cash received.
On May 18, 2000 the Company entered into a Stock Purchase Agreement (the
"May 2000 Stock Purchase Agreement") with three offshore investors. Under the
May 2000 Stock Purchase Agreement, the offshore investors agreed to purchase and
acquire from the Company shares of the Company's common stock, having an
aggregate purchase price of at least $775,000 (the "Minimum Investment Amount")
and a maximum aggregate purchase price of $1,000,000. The number of shares
issuable to the investors in consideration of their payment of the purchase
price was calculated as follows (i) as to the Minimum Investment Amount, by
dividing the total dollar amount of the Minimum Investment Amount paid to the
Company as of closing, by $1.3125, which was 100% of the fair market value of
the Company's common stock as of the date of the May 2000 Stock Purchase
Agreement, and (ii) as to any additional amount invested over the Minimum
Investment Amount, by dividing the total dollar amount of such additional amount
paid to the Company by 100% of the average of the closing bid prices of the
Company's common stock for the five trading days immediately preceding the date
of actual payment of such additional amount. As of June 30, 2000 the Company had
received $700,000 of the Minimum Investment Amount. The remainder of the Minimum
Investment Amount was received by July 11, 2000 (see note 9).
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT
On May 22, 1998, the Company executed a Convertible Debenture and Private
Equity Line of Credit Agreement (the "Credit Agreement") between the Company and
five separate investors. Under the Credit Agreement, the Company issued
convertible debentures (the "Convertible Debentures") in the aggregate principal
amount of $1,500,000 due May 22, 2001. The Convertible Debentures were
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.
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
11
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
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. Additionally,
upon the effectiveness of a registration statement covering the shares of common
stock issuable under the Credit Agreement (the "Registration Statement"), the
Company was obligated to issue an additional $500,000 principal amount of
Convertible Debentures, pro rata to the investors. Also in connection with the
Credit Agreement, the investors and placement agent were issued Series A and
Series B warrants as follows:
Placement Exercise
Investors Agent Price
------------ ------------ --------------
Series A Warrants........ 150,000 150,000 $6.50
Series B Warrants........ 150,000 300,000 $7.15
On June 25, 1999, the Company and the Convertible Debenture investors
entered into a Modification Agreement (the "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 provided 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 inability 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.
Under the Modification Agreement, the Company was 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 was to have been payable at any
time after October 1, 1999, upon request for payment therefore by the investors,
in shares of the Company's common stock. Additionally, 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 was not declared
effective on or 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 were subject to rescission at the option of the investors.
The Company also issued, under the Credit Agreement, 20,000 shares of its
common stock as a fee to the placement agent. These shares were delivered to the
placement agent at the time of the closing.
On November 12, 1999, the Company and the investors amended the
Modification Agreement to substitute February 15, 2000 for the October 31, 1999
deadline originally in the Modification Agreement. Consequently, the accrual of
liquidated damages was to have been deferred from June 24, 1999 until February
15, 2000, provided that the Registration Statement became effective and
shareholder approval of the transaction was obtained on or before that date.
Liquidated damages from February 24, 1999 through June 23, 1999 were not accrued
and continued to be payable by the Company as specified in the Modification
Agreement.
12
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
The Company and the holders of the Convertible Debentures executed a
Convertible Debenture Retirement Agreement dated as of February 1, 2000, and
which closed on February 23, 2000 (the "Retirement Agreement"). Under the
Retirement Agreement, and in exchange for payment to the holders of the
Convertible Debentures, pro rata, of $1,500,000 cash, the holders agreed to
surrender for cancellation all but a small portion of the then unconverted
Convertible Debentures, to surrender for cancellation all of the A and B
warrants that were issued under the Credit Agreement, and otherwise terminate
all of the obligations of either party under the Credit Agreement. At the
closing of the Retirement Agreement, the holders agreed to convert the remaining
portion of the principal amount of the Convertible Debentures into that number
of shares that would have been issuable had such portion been converted as of
January 24, 2000, or 94,450 shares. In light of the closing of the Retirement
Agreement, the Company has no ongoing obligations under the Credit Agreement,
and has submitted a request to the Securities and Exchange Commission to
withdraw the pending Registration Statement.
(5) 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 non-cash
amortization of intangible assets ("EBITDA"). The accounting policies of the
business segments are the same as those described in the summary of significant
accounting policies.
<TABLE>
<CAPTION>
(Rounded) (Rounded)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
REVENUES: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
<S> <C> <C> <C> <C>
Telephone Accessories....................... $ 1,565,000 $ 1,937,000 $ 3,431,000 $ 3,772,000
Home Storage and Organization.................... 1,336,000 1,181,000 2,721,000 2,171,000
Flashlights...................................... 517,000 188,000 1,106,000 399,000
Miscellaneous/Mass Market........................ - 384,000 - 992,000
--------------- -------------- -------------- --------------
Total..................................... $ 3,418,000 $ 3,690,000 $ 7,258,000 $ 7,334,000
=============== ============== ============== ==============
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
OPERATING LOSS: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ 37,000 $ 39,000 $ 122,000 $ 19,000
Home Storage and Organization.................... (206,000) (88,000) (336,000) (226,000)
Flashlights...................................... (318,000) (60,000) (648,000) (186,000)
Miscellaneous/Mass Market........................ - (26,000) - 6,000
--------------- -------------- -------------- --------------
<PAGE>
Total..................................... $ (487,000) $ (135,000) $ (862,000) $ (387,000)
=============== ============== ============== ==============
(5) BUSINESS SEGMENT INFORMATION (Continued)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
DEPRECIATION AND AMORTIZATION (1): 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ 63,000 $ 71,000 $ 130,000 $ 143,000
Home Storage and Organization.................... 61,000 43,000 110,000 81,000
Flashlights...................................... 22,000 7,000 43,000 15,000
--------------- -------------- -------------- --------------
Total..................................... $ 146,000 $ 121,000 $ 283,000 $ 239,000
=============== ============== ============== ==============
</TABLE>
(1) Amortization includes all amortization relating to product license rights,
non-compete agreements and purchased patents.
13
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information as to the assets and capital expenditures of Dynatec
International, Inc. is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS (1): 2000 1999
---------------------------------------------------- --------------- --------------
Telecommunication Headsets and Amplifiers and
<S> <C> <C>
Telephone Accessories......................... $ 4,369,000 $ 4,827,000
Home Storage and Organization.................... 2,936,000 2,468,000
Flashlights...................................... 1,892,000 1,676,000
Miscellaneous/Mass Market........................ - -
--------------- --------------
Total assets for reportable segments...... 9,197,000 8,971,000
Other assets not allocated to segments........... 758,000 817,000
--------------- --------------
Total..................................... $ 9,955,000 $ 9,788,000
=============== ==============
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
CAPITAL EXPENDITURES: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ 10,000 $ 22,000 $ 57,000 $ 64,000
Home Storage and Organization.................... 13,000 13,000 48,000 35,000
Flashlights...................................... 5,000 3,000 19,000 8,000
Miscellaneous/Mass Market........................ - - - -
--------------- -------------- -------------- --------------
Total..................................... $ 28,000 $ 38,000 $ 124,000 $ 107,000
=============== ============== ============== ==============
Information as to the Company's operations in different geographical areas is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
REVENUES: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
United States.................................... $ 3,311,000 $ 3,671,000 $ 7,043,000 $ 7,259,000
Other (1)........................................ 107,000 19,000 215,000 75,000
--------------- -------------- -------------- --------------
Total..................................... $ 3,418,000 $ 3,690,000 $ 7,258,000 $ 7,334,000
=============== ============== ============== ==============
(1) Includes Canada, Europe and other miscellaneous.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
OPERATING LOSS: 2000 1999 1999 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
United States.................................... (487,000) (135,000) (862,000) (387,000)
=============== ============== ============== ==============
JUNE 30, DECEMBER 31,
ASSETS: 2000 1999
------------------------------------------ --------------- --------------
United States.......................... $ 9,629,000 $ 9,418,000
Asia................................... 326,000 370,000
--------------- --------------
Total........................... $ 9,955,000 $ 9,788,000
=============== ==============
</TABLE>
14
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) 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
condensed consolidated 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 options to purchase 537,500 shares of common stock to Muito
Bem, 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 agreed in January 1999 to
cancel all stock options issued to Muito Bem.
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 originally were reserved for issuance in the form of
non-qualified stock options or qualifying Incentive Stock Options. In May 2000,
the Company's Board of Directors increased the number of shares of common stock
covered by the 1999 Plan to 1,000,000 shares. As of June 30, 2000, the
compensation committee of the Company's Board of Directors has granted stock
options under the 1999 Plan to purchase a total of 497,750 shares of common
stock to various executives, employees and directors of the Company. Such
options were granted as non-qualified options having terms of 10 years from the
date of grant. The vesting schedule is 50% at the date of grant, 63% three
months after the date of grant, 75% six months after the date of grant and 100%
after one year from the date of grant. All such options have an exercise price
of between $1.00 and $1.75 per share, with a weighted average price of $1.462
per share. The exercise price for the options was greater than or equal to the
fair market value on the grant date.
The Company's qualified options issued to employees in December 1996 and
January 1997 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 non-qualified 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.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition," (SAB No. 101) to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements; however, SAB No. 101 does not change existing literature on revenue
recognition. SAB 101 explains the staff's general framework for revenue
recognition. The Company will incorporate the guidance of SAB 101 in the fourth
quarter of fiscal 2000. The Company continues to evaluate the impact, if any, of
SAB 101 and any possible, subsequent interpretations of SAB 101 on the Company's
policies and procedures.
The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation-an Interpretation of APB Opinion No. 25" (FIN No.
44) in March 2000. The interpretation clarifies the application of Opinion 25
for only certain issues such as the following: (i) the definition of employee
for purposes of applying Opinion 25, (ii) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (iii) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (iv) the accounting for an exchange of stock compensation awards in a
business combination. Management does not believe that the interpretation will
15
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
have a material impact on the Company's consolidated financial position, results
of operations, or liquidity.
(8) LIQUIDITY
Based on current operations and, after accounting for anticipated cost
savings through an aggressive restructuring plan and associated operating
efficiencies and reductions in selling, and general and administrative expenses,
the Company believes that its present sources of liquidity will not be adequate
to meet its projected requirements for working capital, capital expenditures,
scheduled debt service requirements and other general corporate purposes for the
remainder of 2000. The Company therefore will pursue additional sources of
liquidity in the form of commercial credit or additional sales of the Company's
debt or equity securities during the second half of 2000 to fund a combination
of short-term working capital requirements and growth (see note 9).
(9) SUBSEQUENT EVENTS
On July 11, 2000 the Company received the remainder of the Minimum
Investment Amount related to the May 2000 Stock Purchase Agreement recorded in
the condensed consolidated financial statements as a common stock subscription
receivable as of June 30, 2000 (see note 3). No additional amounts over the
Minimum Investment Amount were paid by the investors. Accordingly, subsequent to
June 30, 2000, the Company will issue a total of 590,476 shares of restricted
common stock to the investors.
In connection with the Company's aggressive restructuring plan, on August
7, 2000 the Company announced a workforce reduction of approximately 15% of its
workforce. The reduction was effective immediately and included a severance
package of approximately $90,000, which will be accounted for in the third
quarter of 2000.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 six-month
periods ended June 30, 2000 and 1999, respectively. As supplemental information,
the table also segregates the Company's revenues by product line type.
<TABLE>
<CAPTION>
(Rounded) (Rounded)
For the Three Months Ended For the Six Months Ended
----------------------------------- ----------------------------------
% OF % OF
CHG CHG
FROM FROM
JUNE JUNE 1999 TO JUNE JUNE 1999 TO
30, 2000 30, 1999 2000 30, 2000 30, 1999 2000
------------ ------------ ---------- ---------- ----------- ----------
.
Unaudited Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C>
Product sales............. $ 3,418,000 $3,690,000 (7.4)% $ 7,258,000 $7,334,000 (1.0)%
Cost of sales............. 2,169,000 2,169,000 0.0 4,331,000 4,378,000 (1.1)
------------ ------------ ------------ ----------
Gross margin...... 1,249,000 1,521,000 (17.9) 2,927,000 2,956,000 (1.0)
------------ ------------ ------------ ----------
Operating Costs and Expenses:
Selling expenses.......... 1,055,000 834,000 26.5 2,216,000 1,664,000 33.2
General and administrative 624,000 784,000 (20.4) 1,421,000 1,615,000 (12.0)
Research and development.. 57,000 38,000 50.0 152,000 64,000 137.5
------------ ------------ ------------ ----------
Total operating costs and 1,736,000 1,656,000 4.8 3,789,000 3,343,000 13.3
Expenses.............. ------------ ------------ ------------ ----------
Other Income (Expense), net:
Interest expense.......... (157,000) (273,000) (42.5) (292,000) (545,000) (46.4)
Other income (expense).... (169,000) - - (167,000) 2,000 8450.0
------------ ------------ ------------ ----------
Net loss............... $ (813,000) $ (408,000) (99.3)% $(1,321,000) $(930,000) 42.0%
============ ============ ============ ==========
Unaudited Supplemental Information:
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories $ 1,565,000 $ 1,937,000 (19.2)% $ 3,431,000 $3,772,000 (9.0)%
Home storage and organization 1,336,000 1,181,000 13.1 2,721,000 2,171,000 25.3
Flashlights.................. 517,000 188,000 175.0 1,106,000 399,000 177.2
Miscellaneous/Mass market. - 384,000 - - 992,000 -
------------ ------------ ------------ ----------
Total product sales.. $ 3,418,000 $ 3,690,000 (7.4)% $ 7,258,000 $7,334,000 (1.0)%
============ ============ ============ ==========
</TABLE>
The following are explanations of significant period to period changes for the
three months ended June 30, 2000 and 1999:
Revenues
Total Product Sales. Total product sales decreased by $272,000, or 7.4%,
from $3,690,000 to $3,418,000 for the three months ended June 30, 2000 compared
to the three months ended June 30, 1999.
Telecommunication Headsets and Amplifiers and Telephone Accessories. Sales
of telecommunication headsets and amplifiers and telephone accessories decreased
$372,000, or 19.2%, from $1,937,000 to $1,565,000 for the three months ended
June 30, 2000 compared to the three months ended June 30, 1999. This decrease
was primarily attributable to a $235,000 decrease in sales of telephone shoulder
rests, a decrease in sales of $78,000 in telephone accessories and a decrease in
sales of telephone headsets and amplifiers of $59,000. These decreases are a
result of lower sales to the Company's office supply catalogue customers.
Overall gross margins in this category decreased to 53.2% from 54.8% for the
three months ended June 30, 1999, as a result of the sales mix.
Home Storage and Organization. Home storage and organization revenues
increased $155,000, or 13.1%, from $1,181,000 to $1,336,000 for the three months
ended June 30, 2000 compared to the three months ended June 30, 1999. The
increase is primarily attributable to an increase of $216,000 in the
"Expand-A-Drawer" product line, and $36,000 in the Company's "Expand-A-Shelf"
product line.. These increases are the results of the Company's efforts to
improve the retail packaging of this product line. These increases were offset
in part by a $77,000 decrease in the doorstops product line, a decrease of
$13,000 in the baskets product line and $7,000 in the miscellaneous houseware
17
<PAGE>
products line. Overall gross margins for products in this category decreased
from 36.4% to 30.9% for the three months ended June 30, 2000 when compared to
June 30, 1999, as a result of an increase in the price of raw materials due to
increased petroleum prices.
Flashlights. Flashlight revenues increased $329,000, or 175.0%, from
$188,000 to $517,000 for the three months ended June 30, 2000 compared to the
three months ended June 30, 1999. This increase was primarily the result of the
addition of new major foreign and domestic customers as a 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 0.7%
for the three months ended June 30, 2000 when compared to June 30, 1999, as a
result of an increase in costs related to upgrading the retail packaging of this
product line, as well as an increase in freight costs to expedite the delivery
of the product from the Company's overseas vendors, in order to meet ship date
requirements.
Miscellaneous and Mass Market. Miscellaneous and mass market revenues
decreased $384,000, from $384,000 to -0- for the three months ended June 30,
2000 compared to the three months ended June 30, 1999. This decrease was the
result of the Company's decision to discontinue its efforts in this product line
and the resulting December 24, 1998 agreement with Grandway China ("Grandway").
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 approximately $1,800,000 of inventory
that had been acquired by the Company and earmarked for sale to Dolgencorp.
Management does not presently anticipate future significant sales in this
product line.
Operating Costs and Expenses
Selling Expenses. Selling expenses increased $221,000, or 26.5%, from
$834,000 to $1,055,000 for the three months ended June 30, 2000 compared to the
three months ended June 30, 1999. This increase is due in part to an increase in
salaries for sales personnel of $99,000 due to the addition of the Executive
Vice President of Sales, a national sales manager for the housewares product
line and a European sales manager for the flashlights product line, as well as
increases in advertising expense resulting from the placement of additional
pages in office product catalogues. Travel expenses increased by $32,000 and
trade show expenses increased by $38,000 due to increased travel to foreign
trade shows. Also, freight expenses increased by $34,000 due to increased fuel
prices.
General and Administrative Expenses. General and administrative expenses
decreased $160,000, or 20.4%, from $784,000 to $624,000 for the three months
ended June 30, 2000 compared to the three months ended June 30, 1999. The
decrease in general and administrative expenses was primarily the result of a
decrease in legal expense of $111,000, a decrease of $30,000 in travel expenses,
and a decrease in employee recruitment and education of $19,000.
Research and Development. Research and development increased by $19,000, or
50.0%, from $38,000 to $57,000 for the three months ended June 30, 2000 compared
to the three months ended June 30, 1999. The increase was primarily attributable
to the Company's increased research and development efforts associated with the
Company's flashlight line to improve the function and appearance of the
products.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $80,000, or 4.8%, from $1,656,000 to $1,736,000 for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999, for
the reasons discussed above.
Interest Expense. Interest expense decreased $116,000, or 42.3%, from
$273,000 to $157,000 for the three months ended June 30, 2000 compared to the
three months ended June 30, 1999. This decrease was primarily associated with
the retirement of the Convertible Debentures on February 14, 2000. The normal
non-cash interest that was recognized on the Convertible Debentures at 12% per
annum in the three months ended June 30, 1999 was $44,000 and liquidated damages
were assessed against the Company in the amount of $123,000 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. These decreases were offset in part by an
increase in interest expense related to the amortization of the capital lease on
the Company's office building and an increase in the borrowings on the Company's
line of credit.
Other income (expense). Other income (expense) increased by $169,000 from
-0- to $169,000 for the three months ended June 30, 2000 compared to the three
months ended June 30, 1999. The increase is due to the one time non-cash expense
related to the April 4, 2000 recognition as having been previously issued of
208,000 shares of the Company's
18
<PAGE>
common stock. This non-cash expense is equal to the difference between the fair
market value of the 208,000 shares on April 4, 2000 and the funds recovered
from the settlement (see note 3 to the accompanying condensed consolidated
financial statements).
Net Loss. The net loss increased by $405,000, or 99.3%, from $408,000 to
$813,000 for the three months ended June 30, 2000 compared to the three months
ended June 30, 1999 due to the factors described above.
The following are explanations of significant period to period changes for the
six months ended June 30, 2000 and 1999:
Revenues
Total Product Sales. Total product sales decreased by $76,000, or 1.0%,
from $7,334,000 to $7,258,000 for the six months ended June 30, 2000 compared to
the six months ended June 30, 1999.
Telecommunication Headsets and Amplifiers and Telephone Accessories. Sales
of telecommunication headsets and amplifiers and telephone accessories decreased
$341,000, or 9.0%, from $3,772,000 to $3,431,000 for the six months ended June
30, 2000 compared to the six months ended June 30, 1999. This decrease was
primarily attributable to a $213,000 decrease in sales of telephone shoulder
rests as well as a decrease in sales of $101,000 in telephone accessories and a
decrease of $27,000 in sales of telephone headsets and amplifiers. These
decreases are primarily a result of lower sales to the Company's office supply
catalogue customers. Overall gross margins in this category remained unchanged
at 55.5% for the six months ended June 30, 2000 when compared to the six months
ended June 30, 1999.
Home Storage and Organization. Home storage and organization revenues
increased $550,000, or 25.3%, from $2,171,000 to $2,721,000 for the six months
ended June 30, 2000 compared to the six months ended June 30, 1999. The increase
is primarily attributable to an increase of $466,000 in the "Expand-A-Drawer"
product line, and $149,000 in the Company's "Expand-A-Shelf" product line. These
increases are the results of the Company's efforts to improve the retail
packaging of this product line. These increases were offset in part by a
decrease of $31,000 in the baskets product line, a $17,000 decrease in the both
the doorstops product line and in the miscellaneous houseware products line.
Overall gross margins for products in this category decreased from 35.4% to
34.3% for the six months ended June 30, 2000 when compared to June 30, 1999, as
a result of the sales mix.
Flashlights. Flashlight revenues increased $707,000, or 177.2%, from
$399,000 to $1,106,000 for the six months ended June 30, 2000 compared to the
six months ended June 30, 1999. This increase was primarily the result of the
addition of new major foreign and domestic customers as a 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 22.7% to 8.2%
for the six months ended June 30, 2000 when compared to June 30, 1999, as a
result of an increase in costs related to upgrading the retail packaging of this
product line, as well as an increase in freight costs to expedite the delivery
of the product from the Company's overseas vendors in order to meet sales ship
date requirements.
Miscellaneous and Mass Market. Miscellaneous and mass market revenues
decreased $992,000, from $992,000 to -0- for the six months ended June 30, 2000
compared to the six months ended June 30, 1999. This decrease was the result of
the Company's decision to discontinue its efforts in this product line and the
resulting December 24, 1998 agreement with Grandway China ("Grandway"). 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 approximately $1,800,000 of inventory that had been
acquired by the Company and earmarked for sale to Dolgencorp. Management does
not presently anticipate future significant sales in this product line.
Operating Costs and Expenses
Selling Expenses. Selling expenses increased $552,000, or 33.2%, from
$1,664,000 to $2,216,000 for the six months ended June 30, 2000 compared to the
six months ended June 30, 1999. This increase is due in part to an increase in
salaries for sales personnel of $204,000 due to the addition of the Executive
Vice President of Sales, a national sales manager for the housewares product
line and a European sales manager for the flashlights product line, as well as
increases in advertising expense resulting from the placement of additional
pages in office product catalogues. Travel expenses increased by $73,000 and
trade show expenses increased by $38,000 due to increased travel to foreign
trade shows. Also, freight expenses increased by $97,000 due to increased fuel
prices.
19
<PAGE>
General and Administrative Expenses. General and administrative expenses
decreased $194,000, or 12.0%, from $1,615,000 to $1,421,000 for the six months
ended June 30, 2000 compared to the six months ended June 30, 1999. The decrease
in general and administrative expenses was primarily the result of a decrease in
severance pay in the amount of approximately $115,000 that was 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. As well
as, a decrease in legal expense of $109,000, a decrease of $41,000 in travel
expenses, and a decrease in employee recruitement and education of $19,000. This
decrease was offset in part by increases in consulting expense of $65,000, and
Directors and Officers and group health insurance premiums of $51,000.
Research and Development. Research and development increased by $88,000, or
137.5%, from $64,000 to $152,000 for the six months ended June 30, 2000 compared
to the six months ended June 30, 1999. The increase was primarily attributable
to the Company's increased research and development efforts associated with the
Company's flashlight line to improve the function and appearance of the
products.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $446,000, or 13.3%, from $3,343,000 to $3,789,000 for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999, for
the reasons discussed above.
Interest Expense. Interest expense decreased $253,000, or 46.4%, from
$545,000 to $292,000 for the six months ended June 30, 2000 compared to the six
months ended June 30, 1999. This decrease was primarily associated with the
retirement of the Convertible Debentures on February 14, 2000. The normal
non-cash interest that was recognized on the Convertible Debentures at 12% per
annum in the six months ended June 30, 1999 was $88,000 and 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 within the time
specified in a registration rights agreement executed in connection with the
sale of the Convertible Debentures. These decreases were offset in part by an
increase in interest expense related to the amortization of the capital lease on
the Company's office building and an increase in the borrowings on the Company's
line of credit.
Other income (expense). Other income (expense) increased $169,000, from
$2,000 to $(167,000) for the six months ended June 30, 2000 compared to the six
months ended June 30, 1999. The increase is due to the one time non-cash expense
related to the April 4, 2000 recognition as having previously been issued of
208,000 shares of the Company's common stock. This non-cash expense is equal to
the difference between the fair market value of the 208,000 shares on April 4,
2000 and the monies recovered from the settlement (see note 3 to the
accompanying condensed consolidated financial statements).
Net Loss. The net loss increased by $391,000, or 42.0%, from $930,000 to
$1,321,000 for the six months ended June 30, 2000 compared to the six months
ended June 30, 1999 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 facility. On May 27, 1998, the Company obtained its 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 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 March 23, 2000 the Company and its lending
institution entered into a Seventh Amendment to the Credit Agreement (the
"Seventh Amendment"). Pursuant to this amendment certain definitions have been
modified as follows: (i) the maximum line decreased from $3,000,000 to
$2,500,000; and (ii) the inventory advance rate increased from 40% to 48% of
eligible inventory. Also, the Seventh Amendment changed the terms of certain of
the financial covenants and ratios for the remainder of year 2000 and for 2001.
At June 30, 2000 the Company was in default of certain of these covenants. On
August 4, 2000 the Company and its lending institution entered into an Eighth
Amendment to the Credit Agreement (the "Eighth Amendment"). Pursuant to this
amendment certain definitions have been modified as follows: (i) the accounts
receivable advance rate decreases from 78% to 77.5% and shall be reduced by one
half of one percent on August 7, 2000 and on each Monday thereafter until such
rate is equal to 70%. (ii) the interest rate on the equipment loan changes from
prime plus 3 percent to prime plus 5.25 percent, (iii) the interest rate on the
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revolving line of credit increases from prime plus 3 percent to prime plus 5
percent, (iv) the inventory advance rate decreases to 47.5% and shall be reduced
by one-half of one percent on August 7, 2000 and on each Monday thereafter until
such rate is equal to 30%, and (v) the maximum line decreases from $2,500,000 to
$2,200,000.
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 were 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. 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 (the "Registration Statement") for the underlying stock
of the Credit Agreement. Additionally, upon registration of the underlying
shares, which were issuable upon conversion of the Convertible Debentures, the
Company was obligated to issue an additional $500,000 of Convertible Debentures.
The Company filed the Registration Statement on Form SB-2 as required by the
Credit Agreement but it had not become effective by June 1999.
On June 25, 1999, the Company and the Convertible Debenture holders entered
into a Modification Agreement ("Modification Agreement"), under which the
parties agreed to cancel the Equity Line and all of the parties' respective
obligations there under. 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 provided 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 three-month period ended March 31, 1999. Under the Modification
Agreement, the Company was 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 was 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 was to have been
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 was not declared effective
before October 31, 1999.
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 was 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 and made certain other changes to the Credit Agreement.
On December 8, 1999, the Company filed its third amendment to the
Registration Statement. The Registration Statement did not become effective,
however. The Company and the holders of the Convertible Debentures subsequently
executed a Convertible Debenture Retirement Agreement dated as of February 1,
2000, and which closed on February 23, 2000 (the "Retirement Agreement"). Under
the Retirement Agreement, and in exchange for payment to the holders of the
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Convertible Debentures, pro rata, of $1,500,000 cash, the holders agreed to
surrender for cancellation all but a small portion of the then unconverted
Convertible Debentures, to surrender for cancellation all of the A and B
warrants that were issued under the Credit Agreement, and otherwise terminate
all of the obligations of either party under the Credit Agreement. At the
closing of the Retirement Agreement, the holders agreed to convert the remaining
portion of the principal amount of the Convertible Debentures into that number
of shares that would have been issuable had such portion been converted as of
January 24, 2000, or 94,450 shares. In light of the closing of the Retirement
Agreement, the Company has no ongoing obligations under the Credit Agreement,
and has submitted a request to the Securities and Exchange Commission to
withdraw the pending Registration Statement.
To allow the Company to consummate the transactions contemplated by the
Retirement Agreement, the Company completed a private placement of its
restricted common stock to seven offshore investors. The private placement was
accomplished pursuant to a Stock Purchase Agreement (the "Stock Purchase
Agreement") between the Company and the investors dated as of February 11, 2000,
which closed on February 23, 2000. Under the Stock Purchase Agreement, the
Company agreed to issue a total of 1,222,811 shares of restricted common stock.
The consideration paid by the investors was the greater of (i) $1.00 per share
or (ii) 100% of the average of the closing bid prices of the Company's common
stock as quoted by the Nasdaq Stock Market for the five trading days immediately
preceding the date the investors paid the purchase price or any portion thereof.
The total proceeds to the Company from the private placement were $1,600,000, of
which $1,500,000 was used to close the Retirement Agreement, and $100,000 was
used for general corporate purposes.
In February 2000, Merrill Lynch & Co., Inc. ("Merrill Lynch") notified the
Company that American Stock Transfer & Trust Co., New York, New York, the
Company's stock transfer agent ("AST"), had confiscated three separate
certificates purporting to represent a total of 208,000 shares of restricted
common stock issued in the name of an entity affiliated with Donald M. Wood, the
Company's former Chairman and Chief Executive Officer. AST confiscated such
certificates because they were not then shown as valid certificates representing
the Company's issued and outstanding common stock. Based on further
investigation by AST, the Company believes that its former stock transfer agent
had transferred the shares represented by such certificates to third parties,
but had not received the original certificates representing such shares at the
time of those transfers. Nor did the former transfer agent obtain documentation
indicating that such certificates had been lost, stolen or destroyed. Several
years after the shares represented by such certificates had been transferred,
Mr. Wood then tendered the original certificates to Merrill Lynch with
instruction to sell the shares represented by such certificates. Merrill Lynch
then sold such shares and tendered the certificates to AST for transfer, at
which time AST confiscated the certificates.
On March 28, 2000, the Company received a letter from counsel for Merrill
Lynch. In that letter, Merrill Lynch advised the Company of its intention to
enforce its clients' rights to compel the Company to recognize the transfers of
the shares represented by the certificates tendered by Mr. Wood under Article 8
of the Uniform Commercial Code as adopted by the State of Utah. The Company
complied with Merrill Lynch's demand. The net effect of this action was that the
Company was required to recognize as having been previously issued 208,000
shares of common stock that were not then shown as being issued and outstanding
on the books and records of the Company.
On March 29, 2000, the Company filed a lawsuit in Utah state court against
Mr. Wood, WAC Research, Inc. ("WAC") and Muito Bem Ltd Partnership ("Muito
Bem"), Alpha Tech Stock Transfer & Trust Company, the Company's former stock
transfer agent ("Alpha Tech"). Both WAC and Muito Bem are entities affiliated
with Wood. The case sought damages from all defendants, and specifically asked
the court to award to the Company the proceeds of the sales by WAC and/or Muito
Bem of the shares that the Company was compelled by Merrill Lynch to reinstate
on the basis that those entities and their principals had been unjustly
enriched. In a settlement among Wood, WAC, Muito Bem, Merrill Lynch and the
Company, the Company received cash in the amount of $200,714, in exchange for
which it released its claims for further damages against Wood, WAC, Muito Bem
and Merrill Lynch.
On April 4, 2000 the Company recognized as having previously been issued
the 208,000 shares of common stock. As a result, the Company recognized a one
time non-cash expense of $169,733, which is the difference between the fair
market value of the 208,000 shares on the date of such recognition, or $370,447,
and the $200,714 cash received.
June 30, 2000 Compared to December 31, 1999
As of June 30, 2000, the Company had liquid assets (cash and cash
equivalents and receivables) of $2,425,000, an increase of 24.9%, or $484,000,
from December 31, 1999 when liquid assets were $1,941,000. Cash decreased
$176,000, or 71.9%, to $69,000 at June 30, 2000 from $245,000 at December 31,
1999. The decrease in cash was primarily the result of the Company utilizing its
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revolving credit facility, under which "draws" are made by the Company to fund
capital expenditures, purchase inventory and for general-purpose use. After a
draw is made a corresponding payable is setup, when collections of outstanding
accounts receivable are made the monies collected, are swept, the next day, and
re-applied against outstanding draws. Trade accounts receivable increased
$526,000, or 31.0%, to $2,222,000 at June 30, 2000 from $1,696,000 at December
31, 1999 due to the nature and timing of payments received.
Current assets increased by $303,000, or 5.7%, to $5,623,000 at June 30,
2000 from $5,320,000 at December 31, 1999. This increase was primarily the
result of an increase in trade accounts receivable of $526,000, as discussed
above, and accounts receivable-other of $60,000. The increase was offset in part
by a decrease in cash of $176,000, discussed above, inventory levels decreased
by $143,000 primarily due to the Company's efforts to reduce inventory levels to
a three months supply, and a decrease in prepaid expenses and other of $39,000.
Long-term assets decreased $136,000, or 3.0%, to $4,332,000 at June 30,
2000 from $4,468,000 at December 31, 1999. This decrease was primarily the
result of recurring depreciation expense on building and equipment, and
amortization of deferred loan costs, and other intangibles.
Current liabilities decreased by $1,311,000, or 21.5%, to $4,800,000 at
June 30, 2000 from $6,111,000 at December 31, 1999. This decrease was primarily
due to a decrease of $1,649,000 in convertible debentures as a result of the
Company's February 14, 2000 agreement to retire the convertible debentures, as
well as a decrease in accrued advertising of $171,000. These decreases were
off-set in part by an increase of $460,000 in trade accounts payable as a result
of the Company negotiating extended terms with some of its major suppliers, and
$49,000 in short-term notes payable as a result of additional borrowings under
the Company's revolving line of credit.
The Company's working capital increased by $1,614,000, or 204.0%, to
$823,000 at June 30, 2000 from ($791,000) at December 31, 1999, for the reasons
described above.
The Company used net cash of $1,032,000 in operating activities during the
six months ended June 30, 2000, primarily from the net loss incurred during the
period, an increase in trade accounts receivable and a decrease in accrued
advertising, offset in part by decreased inventory levels and prepaid expenses
as well as an increase in accounts payable.
The Company used net cash of $121,000 in investing activities during the
six months ended June 30, 2000, primarily for capital expenditures for
equipment.
The Company provided net cash of $978,000 from financing activities during
the six months ended June 30, 2000. The increase was primarily due to proceeds
from the issuance of common stock related to two separate private placements,
proceeds from the deposit for stock issuance and from proceeds from the
reissuance of common stock (see note 3) and borrowings under the Company's
revolving line-of-credit, off-set in part by payments made on the retirement of
the convertible debentures and payments made on long-term debt during the
period.
Based on current operations and, after accounting for anticipated cost
savings through an aggressive restructuring plan and associated operating
efficiencies and reductions in selling, and general and administrative expenses,
the Company believes that its present sources of liquidity will not be adequate
to meet its projected requirements for working capital, capital expenditures,
scheduled debt service requirements and other general corporate purposes for the
remainder of 2000. The Company therefore will pursue additional sources of
liquidity in the form of commercial credit or additional sales of the Company's
debt or equity securities during the second half of 2000 to fund a combination
of short-term working capital requirements and growth.
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.
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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.
Forward Looking Statements
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements will prove to be accurate.
Factors that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to, potential increases
in inventory costs, competition, the Company's ability to obtain additional
working capital to fund future growth and any of the risks described in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 4, 2000, Grandur, Inc., a Taiwan corporation ("Grandur"), sued the
Company in the United States District Court for the District of New Jersey. The
summons and complaint were served on the Company in Salt Lake City, Utah on May
12, 2000. The complaint alleges that the Company has breached a manufacturing
agreement between the Company and Grandur pursuant to which the Company is
alleged to have a minimum annual purchase requirement and an exclusive
manufacturing arrangement with Grandur for the Company's Twisstop product. The
complaint further alleges that Grandur is entitled to recover, in addition to
such damages as may be proved at trial, liquidated damages per the terms of the
contract in the amount of $500,000. The Company intends to vigorously defend the
lawsuit.
In February 2000, Merrill Lynch & Co., Inc. ("Merrill Lynch") notified the
Company that American Stock Transfer & Trust Co., New York, New York, the
Company's stock transfer agent ("AST"), had confiscated three separate
certificates purporting to represent a total of 208,000 shares of restricted
common stock issued in the name of an entity affiliated with Donald M. Wood, the
Company's former Chairman and Chief Executive Officer. AST confiscated such
certificates because they were not then shown as valid certificates representing
the Company's issued and outstanding common stock. Based on further
investigation by AST, the Company believes that its former stock transfer agent
had transferred the shares represented by such certificates to third parties,
but had not received the original certificates representing such shares at the
time of those transfers. Nor did the former transfer agent obtain documentation
indicating that such certificates had been lost, stolen or destroyed. In January
2000, several years after the shares represented by such certificates
purportedly had been transferred, the original certificates were tendered to
Merrill Lynch with instruction to sell the shares represented by such
certificates. Merrill Lynch then sold such shares and tendered the certificates
to AST for transfer, at which time AST confiscated the certificates. On March
28, 2000, the Company received a letter from counsel for Merrill Lynch. In that
letter, Merrill Lynch advised the Company of its intention to enforce its
clients' rights to compel the Company to recognize the transfers of the shares
represented by the certificates tendered to it in January 2000 under the Uniform
Commercial Code as adopted by the State of Utah. The Company complied with
Merrill Lynch's demand. The net effect of this action was that the Company was
required to recognize as having been previously issued 208,000 shares of common
stock that were not then shown as being issued and outstanding on the books and
records of the Company. On March 29, 2000, the Company filed a lawsuit in Utah
state court against Mr. Wood, WAC Research, Inc. ("WAC") and Muito Bem Ltd
Partnership ("Muito Bem"), Alpha Tech Stock Transfer & Trust Company, the
Company's former stock transfer agent ("Alpha Tech"). Both WAC and Muito Bem are
entities affiliated with Wood. The case sought damages from all defendants, and
specifically asked the court to award to the Company the proceeds of the sales
by WAC and/or Muito Bem of the shares that the Company was compelled to
reinstate on the basis that those entities and their principals had been
unjustly enriched. In a settlement, dated April 12, 2000, among Wood, WAC, Muito
Bem, Merrill Lynch and the Company, the Company received cash in the amount of
$200,714, in exchange for which it released its claims for further damages
against Wood, WAC, Muito Bem and Merrill Lynch. The Company's claims against
Alpha Tech are still pending.
On December 7, 1999, Donald M. Wood, the former Chairman and Chief
Executive Officer of the Company, and the Stith Law Office (Wood's personal
legal counsel) filed a lawsuit in the District Court of Salt Lake County, State
of Utah (Case No. 990912153). In that lawsuit, Wood and Stith asserted that the
Company has breached a Settlement Agreement executed by the Company and Wood
upon Wood's resignation as the Company's Chairman and Chief Executive Officer,
effective as of January 14, 1999. The lawsuit includes claims for breach of
contract, fraud and intentional infliction of emotional distress, and seeks
money damages and punitive damages in the aggregate amount of $1,162,246. On
February 7, 2000, the Company filed its answer to the Wood litigation, in which
the Company asserted that its payment obligations under the Settlement Agreement
were excused by repeated breaches by Wood of various covenants of the Settlement
Agreement. Simultaneously, the Company filed a counterclaim against Wood for
money damages incurred by the Company as a result of Wood's various breaches of
the Settlement Agreement. The Company also simultaneously filed motions to
dismiss the fraud and intentional infliction of emotional distress claims. The
Company's management believes the Wood litigation is without merit and intends
to vigorously defend.
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 and instructed Alpha Tech to transfer 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
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expenses incurred by Alpha Tech. Alpha Tech never served the complaint; the
Company learned about the complaint through an unrelated third party. In March
2000, Alpha Tech refiled essentially the same complaint, thereby commencing
another lawsuit against the Company. The March 2000 complaint is virtually
identical to the March 1999 complaint. In April 2000, the Company accepted
service of process, and has filed a motion to dismiss the March 2000 complaint.
The Company disputes the claims of Alpha Tech's complaint and intends to
vigorously defend this action.
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,
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. During the second quarter of 1999, Mag and
the Company agreed to pursue 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. Settlement negotiations with Mag are still ongoing.
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 latter 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 June 30, 2000, 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.
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, although the Company nominally remains part of that
litigation.
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.
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Item 2. Changes in Securities and Use of Proceeds
In July 2000, the Company conducted a private placement of its restricted
common stock to three investors pursuant to a Stock Purchase Agreement dated May
18, 2000. The closing of that private placement occurred on July 11, 2000,
although funds were received by the Company in connection with that placement on
various dates in May, June and July 2000. Pursuant to the private placement the
Company received proceeds of $775,000, all of which was used for operating
capital. The purchase price of such securities was 100% of the closing bid price
of the Company's common stock, as quoted by The Nasdaq Stock Market, on May 18,
2000, the day as of which the Stock Purchase Agreement was executed. In
connection with the private placement, the Company issued a total of 590,476
shares of its restricted common stock to the three investors. The Company issued
such shares without registration under the Securities Act of 1933 (the
"Securities Act") in reliance on Section 4(2) of the Securities Act and Rule 506
of Regulation D under the Securities Act. Such shares of common stock were
issued as restricted securities, and the certificates representing such shares
was stamped with a standard legend to prevent any resale without registration
under the Securities Act or pursuant to an exemption.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
---- ------------
10.1 Convertible Debenture and Equity Line of Credit Agreement
between the Company and five investors dated as of May 28,
1998. (Incorporated by reference from Current Report on Form
8-K filed by the Company with the SEC on June 8, 1998).
10.2 Form of Convertible Debentures issued in May 1998.
(Incorporated by reference from Current Report on Form 8-K
filed by the Company with the SEC on June 8, 1998).
10.3 Form of A Warrants issued in conjunction with Convertible
Debentures. (Incorporated by reference from Current Report on
Form 8-K filed by the Company with the SEC on June 8, 1998).
10.4 Form of B Warrants issued in conjunction with Convertible
Debentures. (Incorporated by reference from Current Report on
Form 8-K filed by the Company with the SEC on June 8, 1998).
10.5 Registration Rights Agreement entered into with the holders of
Convertible Debentures. (Incorporated by reference from
Current Report on Form 8-K filed by the Company with the SEC
on June 8, 1998).
10.6 Modification Agreement between the Company and the holders of
Convertible Debentures, dated as of June 25, 1999.
(Incorporated by reference from Quarterly Report on Form
10-QSB for the period ended June 30, 1999).
10.7 Amendment to Modification Agreement between the Company and
the holders of Convertible Debentures, dated as of November
12, 1999. (Incorporated by reference from Quarterly Report on
Form 10-QSB for the period ended September 30, 1999.)
10.8 Convertible Debenture Retirement Agreement between the Company
and the holders of the Convertible Debentures, dated as of
February 1, 2000. (Incorporated by reference from Annual
Report on Form 10-KSB for the year ended December 31, 1999.)
10.9 Stock Purchase Agreement between the Company and seven
investors, dated as of February 11, 2000. (Incorporated by
reference from Annual Report on Form 10-KSB for the year ended
December 31, 1999.)
10.10 Employment Agreement between the Company and Frederick W.
Volcansek, dated as of February 5, 1999. (Incorporated by
reference from Annual Report on Form 10-KSB for the year ended
December 31, 1998).
10.11 Employment Agreement between the Company and Paul A. Boyer,
dated as of October 19, 1998. (Incorporated by reference from
Annual Report on Form 10-KSB for the year ended December 31,
1998).
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10.12 Employment Agreement between the Company and Lloyd M. Taggart,
dated as of June 22, 1999. (Incorporated by reference from
Quarterly Report on Form 10-QSB for the period ended September
30, 1999.)
10.13 Employment Agreement between the Company and Michael L.
Whaley, dated as of October 29, 1999. (Incorporated by
reference from Quarterly Report on Form 10-QSB for the period
ended September 30, 1999.)
10.14 Commercial Lease between the Company and FRE II I Corporation,
a California corporation, dated as of November 4, 1999.
(Incorporated by reference from Quarterly Report on Form
10-QSB for the period ended September 30, 1999.)
10.15 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
Quarterly Report on Form 10-QSB for the period ended September
30, 1999.)
10.16 Stock Purchase Agreement between the Company and three
investors, dated as of May 18, 2000.
27 Financial Data Schedule.
(b) Forms 8-K
None
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATEC INTERNATIONAL, INC.
/s/ Frederick W. Volcansek, Sr. August 14, 2000
-------------------------------------- ---------------
Frederick W. Volcansek, Sr. Date
Chairman & Chief Executive Officer
/s/ Mark W. Sperry August 14, 2000
-------------------------------------- ---------------
Chief Accounting Officer Date
