<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: September 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 5,837,155 shares of common stock outstanding at November 3,
2000.
The aggregate market value of voting stock held by non-affiliates of the Company
at November 3, 2000 was $1,389,010.
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 September 30, 2000 and
December 31, 1999.....................................................3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999.....................................5
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 2000 and 1999.....................................6
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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 4. Submission of Matters to a Vote of Security Holders............27
Item 5. Other Information..............................................28
Item 6. Exhibits and Reports on Form 8-K...............................28
Signatures................................................30
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ---------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 70,668 $ 244,755
Trade accounts receivable, net of allowance for doubtful accounts of $22,519
and $39,036 at September 30, 2000 and December 31, 1999, respectively 1,875,371 1,695,897
Inventories (note 2) 2,545,302 2,963,064
Prepaid expenses and other 282,182 415,921
--------------- --------------
Total current assets 4,773,523 5,319,637
--------------- --------------
BUILDING AND EQUIPMENT, at cost:
Building and improvements 2,865,000 2,865,000
Furniture, fixtures, and equipment 3,963,139 3,724,808
--------------- --------------
6,828,139 6,589,808
Less accumulated depreciation and amortization 2,870,490 2,471,862
--------------- --------------
Net building and equipment 3,957,649 4,117,946
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES, net (note 2) 161,282 194,743
DEFERRED LOAN COSTS, net of accumulated amortization of $59,614 and $40,452 at
September 30, 2000 and December 31, 1999, respectively 17,032
36,194
OTHER ASSETS 153,646 119,450
--------------- --------------
$ 9,063,132 $9,787,970
=============== ==============
</TABLE>
See accompanying notes to condensed consolidatedfinancial statements.
3
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ---------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Short-term note payable $ 1,607,242 $ 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 72,648 60,739
Accounts payable 2,245,429 1,581,463
Accrued expenses 556,257 525,038
Accrued advertising 157,205 300,000
Accrued royalties payable 163,270 80,150
Stock warrant reserve (note 8) 21,818 -
---------------- --------------
Total current liabilities 4,906,369 6,110,854
DEFERRED GAIN ON SALE OF ASSET 235,122 244,363
LONG-TERM DEBT, net of current portion 19,300 81,175
CAPITAL LEASE OBLIGATIONS, net of current portion 2,899,985 2,957,740
---------------- ---------------
Total liabilities 8,060,776 9,394,132
---------------- ---------------
STOCKHOLDERS' EQUITY (note 3):
Common stock, $.01 par value; 100,000,000 shares authorized and 5,837,155
and 3,721,418 shares outstanding at September 30, 2000 and December 31,
1999,
respectively 58,372 37,214
Treasury stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 11,235,184 8,375,074
Accumulated deficit (9,376,050) (7,103,300)
---------------- ---------------
Net stockholders' equity 1,002,356 393,838
---------------- ---------------
COMMITMENTS AND CONTINGENCIES
$ 9,063,132 $ 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
September 30, 2000 September 30, 1999
-------------------- --------------------
(Unaudited) (Unaudited)
<S> <C> <C>
PRODUCT SALES $ 2,076,768 $ 2,415,441
COST OF SALES (1,259,970) (1,360,190)
---------------- ---------------
Gross Margin 816,798 1,055,251
---------------- ---------------
OPERATING COSTS AND EXPENSES:
Selling expenses 867,790 879,167
General and administrative 846,956 834,353
Research and development 26,470 36,818
---------------- ---------------
Total operating costs and expenses 1,741,216 1,750,338
---------------- ---------------
Loss from operations (924,418) (695,087)
---------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (note 4) (176,781) (155,474)
Other income (expense) - 3,105
---------------- ---------------
Total other income (expense) (176,781) (152,369)
---------------- ---------------
Loss from continuing operations before income tax
provision (1,101,199) (847,456)
INCOME TAX PROVISION - -
---------------- ---------------
Loss from continuing operations (1,101,199) (847,456)
DISCONTINUED OPERATIONS:
Income from operations of discontinued home storage and
organization segment (Note 9) 149,718 172,951
---------------- ---------------
Net loss $ (951,481) $ (674,505)
================ ===============
BASIC AND DILUTED LOSS FROM CONTINUING OPERATIONS PER SHARE
$ (.19) $ (.24)
================ ===============
BASIC AND DILUTED NET LOSS PER SHARE $ (.17) $ (.19)
================ ===============
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 5,675,040 3,471,322
================ ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
--------------------- --------------------
(Unaudited) (Unaudited)
<S> <C> <C>
PRODUCT SALES $ 7,006,654 $ 7,989,357
COST OF SALES (4,119,042) (4,627,259)
---------------- ----------------
Gross Margin 2,887,612 3,362,098
--------------- ----------------
OPERATING COSTS AND EXPENSES:
Selling expenses 2,563,745 2,260,275
General and administrative 2,267,330 2,449,495
Research and development 178,790 100,642
---------------- ----------------
Total operating costs and expenses 5,009,865 4,810,412
---------------- ----------------
Loss from operations (2,122,253) (1,448,314)
---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (note 4) (468,979) (701,321)
Other income (expense) (note 3) (167,156) 5,462
---------------- ----------------
Total other expense, net (636,135) (695,859)
---------------- ----------------
Loss from continuing operations before income tax
provision (2,758,388) (2,144,173)
INCOME TAX PROVISION - 3,000
---------------- ----------------
Loss from continuing operations (2,758,388) (2,147,173)
---------------- ----------------
DISCONTINUED OPERATIONS
Income from operations of discontinued home storage and
organization segment (Note 9) 485,638 539,350
---------------- ----------------
Net loss $ (2,272,750) $ (1,607,823)
================ ================
BASIC AND DILUTED LOSS FROM CONTINUING OPERATIONS PER SHARE $ (.55) $ (.65)
================ ================
BASIC AND DILUTED NET LOSS PER SHARE $ (.45) $ (.49)
================ ================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 5,032,340 3,303,371
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
---------------------- ----------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (2,272,750) $ (1,607,823)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 432,660 398,981
Amortization of deferred loan costs 19,162 19,161
Amortization of deferred gain on sale of assets (9,241) -
Non-cash interest expense on convertible debentures (note 4) - 308,932
Non-cash expense on re-issuance of common stock shares (note 3) 169,733 -
Non-cash interest expense on issued stock warrant (note 8) 21,818
Forgiveness of liquidated damages related to convertible debenture
(note 4) (13,523) -
Loss (gain) on sale of assets (1,577) (881)
Provision for losses on accounts receivable 20,000 15,000
Changes in operating assets and liabilities:
Trade accounts receivable (199,474) (15,263)
Inventories 417,762 1,216,364
Prepaid expenses 133,739 (185,304)
Other assets (34,196) (1,687)
Accounts payable 663,966 (134,518)
Accounts payable - other - (9,000)
Accounts payable - related party - (98,403)
Accrued expenses 31,219 (239,837)
Accrued advertising (142,795) (167,522)
Accrued royalties 83,120 (5,440)
----------------- -----------------
Net cash used in operating activities (680,377) (507,240)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of assets 2,600 26,124
Purchases of furniture, fixture and equipment (237,703) (224,179)
----------------- ------------------
Net cash used in investing activities (235,103) (198,055)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit (224,380) 1,114,054
Net payments on long-term debt (61,875) (249,508)
Net payments on capital lease obligations (48,066) (19,839)
Payment to retire convertible debenture (note 4) (1,500,000) -
Proceeds from the issuance of common stock related to private
placement (note 3) 2,375,000 -
Proceeds from re-issuance of common stock (note 3) 200,714 -
----------------- -----------------
Net cash provided by financing activities 741,393 844,707
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (174,087) 139,412
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 244,755 2,268
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 70,668 $ 141,680
================= =================
</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>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
---------------------- ----------------------
(Unaudited) (Unaudited)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid for interest $ 447,893 $ 414,612
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Building and equipment acquired under capital leases 2,220 99,463
Conversion of Convertible Debentures and accrued interest for
common stock 135,819 218,680
Issuance of 500,000 shares of restricted stock - 1,000,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
DYNATEC INTERNATIONAL, INC.
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 its wholly owned subsidiaries: Softalk, Inc., Nordic Technologies, Inc.,
and SofTalk Communications, Inc., and in the case of its home organization
product line, an unincorporatted division operated under the name "Neat
Things!". Unless specified to the contrary herein, references to Dynatec or to
the Company refer to the Company and its subsidiaries and divisions 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
September 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 nine months ended September 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 September 30, 2000 and December 31, 1999, respectively, are
summarized as follows:
September 30, December 31,
2000 1999
----------------- ---------------
Raw materials....... $ 1,076,248 $ 886,377
Work-in-Process..... 163,311 135,931
Finished Goods...... 1,305,743 1,940,756
----------------- ---------------
$ 2,545,302 $ 2,963,064
================= ===============
9
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DYNATEC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months ended September 30,
2000, and 1999, warrants and options to purchase 757,000 and 1,556,000 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 September 30, 2000 and December 31, 1999 was as
follows:
2000 1999
----------- -----------
Goodwill $ 34,306 $ 34,306
Less accumulated amortization 21,441 8,576
----------- -----------
$ 12,865 $ 25,730
=========== ===========
(3) STOCKHOLDERS' EQUITY
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 issued 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
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.
10
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) STOCKHOLDERS' EQUITY-(continued)
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.
On April 4, 2000 the Company recognized as having been previously 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. The Company received $700,000 of
the Minimum Investment Amount in the second quarter and the remainder of the
Minimum Investment Amount was received by July 11, 2000. Accordingly, the
Company issued a total of 590,476 shares of restricted common stock to the
investors.
(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
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
11
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
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.
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
12
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
REVENUES: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
<S> <C> <C> <C> <C>
Telephone Accessories....................... $ 1,440,000 $ 1,700,000 $ 4,871,000 $ 5,472,000
Flashlights...................................... 381,000 501,000 1,487,000 900,000
Hardware/Houseware............................... 256,000 214,000 649,000 625,000
Mass Market...................................... - - - 992,000
--------------- -------------- -------------- --------------
Total..................................... $ 2,077,000 $ 2,415,000 $ 7,007,000 $ 7,989,000
=============== ============== ============== ==============
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
OPERATING LOSS: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ (354,000) $ (331,000) $ (631,000) $ (807,000)
Flashlights...................................... (444,000) (327,000) (1,251,000) (557,000)
Hardware/Houseware............................... (126,000) (37,000) (240,000) (90,000)
Mass Market...................................... - - - 6,000
--------------- -------------- -------------- --------------
Total..................................... $ (924,000) $ (695,000) $ (2,122,000) $ (1,448,000)
=============== ============== ============== ==============
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
DEPRECIATION AND AMORTIZATION: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $ 94,000 $ 100,000 $ 271,000 $ 250,000
Flashlights...................................... 27,000 29,000 79,000 73,000
Hardware/Houseware............................... 17,000 24,000 52,000 55,000
Discontinued Operations.......................... 12,000 7,000 31,000 21,000
--------------- -------------- -------------- --------------
Total..................................... $ 150,000 $ 160,000 $ 433,000 $ 399,000
=============== ============== ============== ==============
</TABLE>
13
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) BUSINESS SEGMENT INFORMATION (Continued)
Information as to the assets and capital expenditures of Dynatec International,
Inc. is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS: 2000 1999
---------------------------------------------------- -------------------- ------------------
Telecommunication Headsets and Amplifiers and
<S> <C> <C>
Telephone Accessories......................... $ 4,364,000 $ 4,973,000
Flashlights...................................... 1,854,000 1,861,000
Hardware/Houseware............................... 653,000 813,000
Discontinued Operations.......................... 1,669,000 1,324,000
-------------------- ------------------
Total assets for reportable segments...... 8,540,000 8,971,000
Other assets not allocated to segments........... 523,000 817,000
-------------------- ------------------
Total..................................... $ 9,063,000 $ 9,788,000
==================== ==================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
CAPITAL EXPENDITURES: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
<S> <C> <C> <C> <C>
Telephone Accessories....................... $ 8,000 $ 56,000 $ 65,000 $ 120,000
Flashlights...................................... - 17,000 19,000 25,000
Hardware/Houseware............................... - - - -
Discontinued Operations.......................... 106,000 44,000 154,000 79,000
--------------- -------------- -------------- --------------
Total..................................... $ 114,000 $ 117,000 $ 238,000 $ 224,000
=============== ============== ============== ==============
</TABLE>
Information as to the Company's operations in different geographical areas is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
REVENUES: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
United States.................................... $ 1,990,000 $ 2,350,000 $ 6,705,000 $ 7,849,000
Other (1)........................................ 87,000 65,000 302,000 140,000
--------------- -------------- -------------- --------------
Total..................................... $ 2,077,000 $ 2,415,000 $ 7,007,000 $ 7,989,000
=============== ============== ============== ==============
</TABLE>
(1) Includes Canada, Europe and other miscellaneous.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
OPERATING LOSS: 2000 1999 2000 1999
----------------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
United States.................................... (924,000) (695,000) (2,122,000) (1,448,000)
=============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
ASSETS:
------------------------------------------ --------------------- --------------------
<S> <C> <C>
United States.......................... $ 8,759,000 $ 9,418,000
Asia................................... 304,000 370,000
--------------------- --------------------
Total........................... $ 9,063,000 $ 9,788,000
===================== ====================
</TABLE>
14
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, is effective for all fiscal years beginning after June 15,
2000. SFAS 133 establishes new accounting and reporting standards for companies
to report information about derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company intends to adopt SFAS 133 by
January 1, 2001. The impact of adopting SFAS 133 is not anticipated to be
material to the financial statements.
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 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
have a material impact on the Company's consolidated financial position, results
of operations, or liquidity.
(7) 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 last quarter of 2000 to fund a combination
of short-term working capital requirements and growth. The Company intends to
sell the assets of one or more of its operating subdivisions in an effort to
streamline and restructure the Company's business operations and to provide
operating capital. If the Company is not able to meet its ongoing cash
requirements, it may have to curtail some or all of its operations, or seek
protection under bankruptcy laws.
(8) STOCK WARRANT
On August 4, 2000, the Company issued a warrant to purchase 43,636 shares
of the Company's restricted common stock to Wells Fargo Business Credit, Inc.
("Lender"). Lender accepted the warrant in lieu of payment by the Company's
Nordic Technologies, Inc. and Softalk, Inc., subsidiaries of a portion of an
accommodation fee payable by those subsidiaries as consideration for Lender's
renegotiation of certain provisions of the Credit Agreement between Lender and
those subsidiaries. The warrant is exercisable at any time prior to the
termination date under the Credit Agreement. No consideration is payable by
Lender upon exercise of the warrant. As a result, the Company recognized
non-cash interest expense of $21,818.
15
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) SUBSEQUENT EVENTS
During the period ended September 30, 2000, the Company began investigating
potential sales of one or more of its business divisions or subsidiaries in an
effort to streamline and restructure its operations to provide more
strategicfocus on core competencies. The Company has engaged in negotiations
with multiple potential purchasers of its home organization and storage
products, which are being manufactured and sold under the names "Neat Things!"
and "Expandables". The primary products in this line are expandable drawer and
closet organizers made of injection-molded plastic. As of the date of this
report, no definitive agreement for the sale of such assets has been executed.
Nevertheless, management has the requisite authority and intent to sell its home
organization and storage product line and has determined to report the results
of that product line as discontinued operations in the accompanying financial
statements. There can be no assurance that the Company will, in fact, consummate
any sale of any of its assets.
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 nine-month
periods ended September 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 Nine Months Ended
----------------------------------- ------------------------------------
% OF % OF
CHG CHG
FROM FROM
SEPTEMBER SEPTEMBER 1999 TO SEPTEMBER SEPTEMBER 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............. $ 2,077,000 $2,415,000 (14.0)% $ 7,007,000 $ 7,989,000 (12.3)%
Cost of sales............. 1,260,000 1,360,000 (7.4) 4,119,000 4,627,000 (11.0)
------------- ----------- ------------- ------------
Gross margin...... 817,000 1,055,000 (22.6) 2,888,000 3,362,000 (14.1)
------------- ----------- ------------- ------------
Operating Costs and Expenses:
Selling expenses.......... 868,000 879,000 (1.3) 2,564,000 2,260,000 13.5
General and administrative 847,000 834,000 1.6 2,267,000 2,449,000 (7.5)
Research and development.. 26,000 37,000 (29.7) 179,000 101,000 77.2
------------- ----------- ------------- -------------
Total operating costs
and Expenses........... 1,741,000 1,750,000 (0.5) 5,010,000 4,810,000 4.2
------------- ----------- ------------- ------------
Other Income (Expense), net:
Interest expense.......... (177,000) (155,000) 14.2 (469,000) (701,000 (33.1)
Other income (expense).... - 3,000 - (167,000) 2,000 (8450.0)
------------- ----------- ------------- ------------
Total other income
(expense) (177,000) (152,000) 16.4 (636,000) (699,00) (9.0)
Loss from continuing
operations (1,101,000) (847,000) 30.0 (2,758,000) (2,147,000 28.5
------------- ----------- ------------- ------------
Discontinued Operations:
Income from discontinued
operations 150,000 173,000 (13.3) 486,000 539,000 (10.0)
Net loss.............. $ (951,000) $ (674,000) 41.1% $ (2,272,000) $(1,608,000) 41.3%
============= =========== ============= ============
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories $ 1,440,000 $1,700,000 (15.3)% $ 4,871,000 $ 5,472,000 (11.0)%
Flashlights.................. 381,000 501,000 (24.0) 1,487,000 900,000 65.2
Hardware/houseware........... 256,000 214,000 (19.6) 649,000 625,000 3.8
Mass market.................. - - - - 992,000 -
------------- ----------- ------------- ------------
Total product sales...... $ 2,077,000 $2,415,000 (9.0)% $ 7,007,000 $ 7,989,000 (12.3)%
============= =========== ============= ============
</TABLE>
The following are explanations of significant period to period changes for the
three months ended September 30, 2000 and 1999:
Revenues
Total Product Sales. Total product sales decreased by $338,000, or 14.0%,
from $2,415,000 to $2,077,000 for the three months ended September 30, 2000
compared to the three months ended September 30, 1999.
Telecommunication Headsets and Amplifiers and Telephone Accessories. Sales
of telecommunication headsets and amplifiers and telephone accessories decreased
$260,000, or 15.3%, from $1,700,000 to $1,440,000 for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999. This
decrease was primarily attributable to a decrease in sales of telephone headsets
and amplifiers of $185,000, a decrease in sales of $39,000 in telephone
accessories and a $36,000 decrease in sales of telephone shoulder rests. These
decreases are a result of lower sales to the Company's office supply catalogue
customers. Overall gross margins in this category increased to 56.2% from 55.1%
for the three months ended September 30, 1999, as a result of the sales mix.
Flashlights. Flashlight revenues decreased $120,000, or 24.0%, from
$501,000 to $381,000 for the three months ended September 30, 2000 compared to
the three months ended September 30, 1999. Overall gross margins for products in
17
<PAGE>
this category decreased from 17.6% to (9.1)% for the three months ended
September 30, 2000 when compared to September 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.
Hardware/Houseware. Hardware/Houseware revenues increased $42,000, or
19.6%, from $214,000 to $256,000 for the three months ended September 30, 2000
compared to the three months ended September 30, 1999. The increase is
attributable to an increase in the Company's doorstops product line. Overall
gross margins for products in this category increased from 13.8% to 16.5% for
the three months ended September 30, 2000 when compared to September 30, 1999.
Operating Costs and Expenses
Selling Expenses. Selling expenses decreased $11,000, or 1.3%, from
$879,000 to $868,000 for the three months ended September 30, 2000 compared to
the three months ended September 30, 1999. This decrease is due in part to a
decrease of $33,000 in commissions paid to outside sales reps, as well as a
decrease in consulting fees of $76,000. The decrease was offset in part by an
increase in salaries for sales personnel of $66,000 due to the addition of the
Executive Vice President of Sales and a European sales manager for the
flashlights product line, as well as increases in freight expenses of $22,000
due to increased fuel prices.
General and Administrative Expenses. General and administrative expenses
increased $13,000, or 1.6%, from $834,000 to $847,000 for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999. The
increase in general and administrative expenses was primarily the result of an
increase in severance pay in the amount of approximately $83,000 that was paid
to the Company's former Chief Financial Officer and Vice President of Operations
in connection with the Company's workforce reduction on August 11, 2000. The
increase was offset in part by a decrease of $21,000 in travel expenses, and a
decrease in employee recruitment, relocation and education of $27,000 and a
$16,000 decrease in temporary help.
Research and Development. Research and development decreased by $11,000, or
29.7%, from $37,000 to $26,000 for the three months ended September 30, 2000
compared to the three months ended September 30, 1999. The decrease was
primarily attributable to the Company's completion of its 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
decreased by $9,000, or 0.5%, from $1,750,000 to $1,741,000 for the three months
ended September 30, 2000 compared to the three months ended September 30, 1999,
for the reasons discussed above.
Interest Expense. Interest expense increased by $22,000, or 14.2% from
$155,000 to $177,000 for the three months ended September 30, 2000 compared to
the three months ended September 30, 1999. This increase is attributable to the
$22,000 non-cash interest expense related to a warrant issued on August 4, 2000
in lieu of fees paid to the Company's lending institution (see note 8 to the
accompanying condensed consolidated financial statements).
Other income (expense). Other income (expense) decreased by $3,000 from
$3,000 to -0- for the three months ended September 30, 2000 compared to the
three months ended September 30, 1999.
Net Loss from continuing operations. The net loss from continuing
operations increased by $254,000, or 30.0%, from $847,000 to $1,101,000 for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999 due to the factors described above.
The following are explanations of significant period to period changes for the
nine months ended September 30, 2000 and 1999:
Revenues
Total Product Sales. Total product sales decreased by $982,000, or 12.3%,
from $7,989,000 to $7,007,000 for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999.
Telecommunication Headsets and Amplifiers and Telephone Accessories. Sales
of telecommunication headsets and amplifiers and telephone accessories decreased
$601,000, or 11.0%, from $5,472,000 to $4,871,000 for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999. This
decrease was primarily attributable to a $251,000 decrease in sales of telephone
shoulder rests as well as a decrease in sales of $136,000 in telephone
accessories and a decrease of $214,000 in sales of telephone headsets and
18
<PAGE>
amplifiers. These decreases are primarily a result of lower sales to the
Company's office supply catalogue customers. Overall gross margins in this
category increased to 55.7% from 55.4% for the nine months ended September 30,
2000 when compared to September 30, 1999, as a result of the sales mix.
Flashlights. Flashlight revenues increased $587,000, or 65.2%, from
$900,000 to $1,487,000 for the nine months ended September 30, 2000 compared to
the nine months ended September 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
19.9% to 3.8% for the nine months ended September 30, 2000 when compared to
September 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.
Hardware/Houseware. Hardware/Houseware revenues increased $24,000, or 3.8%,
from $625,000 to $649,000 for the nine months ended September 30, 2000 compared
to the nine months ended September 30, 1999. The increase is attributable to an
increase in the doorstop product line . Overall gross margins for products in
this category decreased from 23.3% to 18.3% for the nine months ended September
30, 2000 when compared to September 30, 1999.
Mass Market. Mass market revenues decreased $992,000, from $992,000 to -0-
for the nine months ended September 30, 2000 compared to the nine months ended
September 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 $304,000, or 13.5%, from
$2,260,000 to $2,564,000 for the nine months ended September 30, 2000 compared
to the nine months ended September 30, 1999. This increase is due in part to an
increase in salaries for sales personnel of $268,000 due to the addition of an
Executive Vice President of Sales 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 $72,000 due to increased travel to foreign trade shows.
Also, freight expenses increased by $73,000 due to increased fuel prices.
General and Administrative Expenses. General and administrative expenses
decreased $182,000, or 7.5%, from $2,449,000 to $2,267,000 for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
The decrease in general and administrative expenses was primarily the result of
a decrease in legal expense of $87,000, a decrease of $63,000 in travel
expenses, and a decrease in employee recruitment and education of $35,000. This
decrease was offset in part by increases in consulting expense of $53,000, and
Directors and Officers and group health insurance premiums of $66,000.
Research and Development. Research and development increased by $78,000, or
77.2%, from $101,000 to $179,000 for the nine months ended September 30, 2000
compared to the nine months ended September 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 $200,000, or 4.2%, from $4,810,000 to $5,010,000 for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999, for the reasons discussed above.
Interest Expense. Interest expense decreased $232,000, or 33.1%, from
$701,000 to $469,000 for the nine months ended September 30, 2000 compared to
the nine months ended September 30, 1999. This decrease was primarily associated
with the retirement of the Convertible Debentures on February 23, 2000. The
normal non-cash interest that was recognized on the Convertible Debentures at
12% per annum in the nine months ended September 30, 1999 was $128,000 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 a warrant issued on
August 4, 2000 in lieu of fees paid to the Company's lending institution (see
19
<PAGE>
note 8 to the accompanying condensed consolidated financial statements), as well
as the amortization of the capital lease on the Company's office building and an
increase in the interest rate on borrowings under the Company's line of credit.
Other income (expense). Other income (expense) increased $169,000, from
$2,000 to $(167,000) for the nine months ended September 30, 2000 compared to
the nine months ended September 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 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 from continuing operations. The net loss from continuing
operations increased by $611,000, or 28.5%, from $2,147,000 to $2,758,000 for
the nine months ended September 30, 2000 compared to the nine months ended
September 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. As of September 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 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 sold 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.
20
<PAGE>
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
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 issued 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.
21
<PAGE>
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.
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. The Company received $700,000 of
the Minimum Investment Amount in the second quarter and the remainder of the
Minimum Investment Amount was received by July 11, 2000. Accordingly, the
Company issued a total of 590,476 shares of restricted common stock to the
investors
September 30, 2000 Compared to December 31, 1999
As of September 30, 2000, the Company had liquid assets (cash and cash
equivalents and receivables) of $1,946,000, an increase of 0.3%, or $5,000, from
December 31, 1999 when liquid assets were $1,941,000. Cash decreased $174,000,
or 71.0%, to $71,000 at September 30, 2000 from $245,000 at December 31, 1999.
The decrease in cash was primarily the result of the Company utilizing its
revolving credit facility, under which "draws" are made by the Company to fund
capital expenditures, purchase inventory and for general-purpose use. After a
draw is made a corresponding payable is setup, when collections of outstanding
accounts receivable are made the monies collected, are swept, the next day, and
re-applied against outstanding draws. Trade accounts receivable increased
$179,000, or 10.6%, to $1,875,000 at September 30, 2000 from $1,696,000 at
December 31, 1999 due to the nature and timing of payments received.
Current assets decreased by $546,000, or 10.3%, to $4,774,000 at September
30, 2000 from $5,320,000 at December 31, 1999. This decrease was primarily the
result of a decrease in cash of $174,000, discussed above, a decrease in
inventory levels of $418,000 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 $134,000. This decrease was offset in part by an increase in trade
accounts receivable of $179,000, as discussed above.
Long-term assets decreased $178,000, or 4.0%, to $4,290,000 at September
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 $1,795,000, or 29.4%, to $4,906,000 at
September 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 23, 2000 agreement to retire the convertible
22
<PAGE>
debentures, as well as a decrease in accrued advertising of $143,000 and a
decrease of $224,000 in short-term notes payable as a result of payments made
under the company's revolving line of credit. These decreases were off-set in
part by an increase of $664,000 in trade accounts payable as a result of the
Company negotiating extended terms with some of its major suppliers and
extending payments beyond terms with many of the Company's vendors.
The Company's working capital deficit decreased by $658,000, or 83.2%, to
($133,000) at September 30, 2000 from ($791,000) at December 31, 1999, for the
reasons described above.
The Company used net cash of $680,000 in operating activities during the
nine months ended September 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 $235,000 in investing activities during the
nine months ended September 30, primarily for capital expenditures for
equipment.
The Company provided net cash of $741,000 from financing activities during
the nine months ended September 30, 2000. The increase was primarily due to
proceeds from the issuance of common stock related to two separate private
placements and from proceeds from the re-issuance of common stock, off-set in
part by payments made on the retirement of the convertible debentures, payments
made on long-term debt, and payments made on the Company's revolving
line-of-credit.
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 last quarter of 2000 to fund a combination
of short-term working capital requirements and growth. The Company intends to
sell the assets of one or more of its operating subdivisions in an effort to
streamline and restructure the Company's business operations and to provide
operating capital. If the Company is not able to meet its ongoing cash
requirements, it may have to curtail some or all of its operations, or seek
protection under bankruptcy laws.
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.
23
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 4, 2000, the Company filed suit (the "Utah WAC Action") against
WAC Research, Inc., a Utah corporation ("WAC"), in Utah state court in Salt Lake
City, Utah. WAC is a corporation fifty percent of which is owned by Donald M.
Wood ("Wood"), the Company's former Chairman and Chief Executive Officer. The
dispute with WAC arose out of a series of royalty agreements between the Company
and WAC dated in 1990 and 1998 that purported to obligate the Company to pay
perpetual royalties to WAC on sales of products in the Company's telephone
accessories product line. In return for this perpetual royalty (which the
Company has paid for approximately 10 years) WAC purported to assign and grant
to the Company the intellectual property rights underlying certain of the
Company's Softalk products. At the times the WAC agreements were negotiated,
Wood controlled both WAC and the Company. The Company amended its complaint in
the Utah WAC Action on August 29, 2000 and on October 19, 2000. After WAC filed
its own complaint in state court in Phoenix, Arizona (the "Arizona WAC Action")
on October 6, 2000, the Company served process in the Utah WAC Action. The
Company's complaint in the Utah WAC Action, as amended to date, seeks the
court's declaration that no further royalties are owed by the Company to WAC
because, among other reasons, (i) WAC never had any interest in or to any of the
intellectual property rights underlying the Company's Softalk products, (ii) WAC
breached its representations and warranties of ownership as to such intellectual
property rights as set forth in the WAC agreements, (iii) patents covering
certain of the key products in the Company's Softalk product line have expired,
and such products are not otherwise covered by enforceable copyrights or other
intellectual property rights, (iv) the Company owns all trademark rights with
respect to its Softalk products, (v) WAC has no right to continue forcing the
Company to pay royalties under expired patents, (vi) WAC's ongoing attempts to
enforce the WAC royalty agreements constitute patent misuse, and (vii) as a
consequence of WAC's patent misuse, WAC is liable to the Company for royalties
paid under a 1998 agreement between WAC and the Company. The complaint in the
Utah WAC Action also includes claims for damages stemming from WAC's alleged
patent misuse, failure of consideration, unjust enrichment and additional
declaratory relief. WAC's complaint in the Arizona WAC Action alleges that WAC
made unspecified loans to the Company that were never repaid, and that the
Company is in breach of its royalty payment obligations under the WAC royalty
agreements. In the Arizona WAC Action, WAC seeks declaratory judgment that the
Company is required prospectively to pay royalties under the WAC agreements and
for money damages in the amount of $308,841. The Company has moved to dismiss
the Arizona WAC Action for lack of jurisdiction or, in the alternative to stay
the Arizona WAC Action pending a resolution of the Utah WAC Action. The Company
intends to vigorously prosecute the Utah WAC Action and defend the Arizona WAC
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's
subsidiary, Nordic Technologies, Inc. ("Nordic"), 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. During the second quarter
of 1999, Mag and the Company agreed to attempt to settle the dispute and, agreed
that pending such discussions, the complaint would be dismissed without
prejudice upon the joint stipulation of the parties, with Mag having the express
right to refile the complaint in the same court and venue. No settlement was
ever reached. On October 30, 2000, Mag filed and subsequently served a new
complaint in the same federal district court. The new Mag complaint alleges that
Nordic has infringed two patents and related trademarks owned by Mag, and also
has engaged in unfair competition arising out of Nordic's alleged use of a
flashlight design that is confusingly similar to the shape, style and overall
appearance of Mag's miniature "AA" light, all in violation of various provisions
of federal and California state law. Mag seeks unspecified money damages,
punitive damages and injunctive relief. The Company does not believe that any of
Nordic's flashlight products have infringed any patents or trademarks of Mag,
and intends to vigorously defend the suit.
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.
24
<PAGE>
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
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 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
25
<PAGE>
aborted transactions. Moreover, the Company believes that its conduct in
connection with those proposed but aborted transactions met applicable legal
requirements. As of September 30, 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.
Item 2. Changes in Securities and Use of Proceeds
2(c) Recent Sales of Unregistered Securities.
On August 4, 2000, the Company issued a warrant to purchase 43,636 shares
of the Company's restricted common stock to Wells Fargo Business Credit, Inc.
("Lender"). Lender accepted the warrant in lieu of payment by the Company's
Nordic Technologies, Inc. and Softalk, Inc., subsidiaries of a portion of an
accommodation fee payable by those subsidiaries as consideration for Lender's
renegotiation of certain provisions of the Credit Agreement between Lender and
those subsidiaries. The warrant is exercisable at any time prior to the
termination date under the Credit Agreement. No consideration is payable by
Wells Fargo upon exercise of the warrant. The Company did not register the
warrant and would not register any shares of common stock issued upon exercise
of the warrant in reliance on the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933 (the "Securities Act") and the rules
and regulations promulgated thereunder, including without limitation Rule 506 of
Regulation D. The warrant is imprinted, and the certificates representing any
shares of common stock issued upon exercise thereof will be imprinted, with a
standard legend to prevent any resale without registration under the Securities
Act or pursuant to an exemption.
Item 4. Submission of Matters To A Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on July 31, 2000, and
adjourned to August 7, 2000, the shareholders of the Company voted on the
following three proposals:
Proposal 1 - To elect the following four directors, each to serve
until the next annual meeting of shareholders and until his successor
is elected and shall have qualified: Frederick W. Volcansek, Sr.,
Wayne L. Berman, John P. Schmitz, and Reed Newbold.
Proposal 2 - To approve the Board of Directors' selection of KPMG LLP
as the Company's independent public accountants to audit the
consolidated financial statements of the Company and its subsidiaries
for the fiscal year ending December 31, 2000.
Proposal 3 - To ratify and approve the Company's 1999 Incentive Stock
Option Plan, as amended to date, under which certain employees,
officers, directors and consultants have received or may receive
options to purchase shares of the Company's common stock.
26
<PAGE>
Voting results were as follows:
<TABLE>
<CAPTION>
For Against Abstain
Proposal 1:
<S> <C> <C> <C> <C>
Mr. Volcansek 3,081,201 15,477 0
Mr. Berman 3,081,246 15,432 0
Mr. Schmitz 3,081,246 15,432 0
Mr. Newbold 3,081,246 15,432 0
For Against Abstain
Proposal 2 3,095,069 641 968
For Against Abstain Not Voted
Proposal 3 1,411,851 18,534 6,440 1,659,853
</TABLE>
Item 5. Other Information
The Company's common stock is quoted on the Nasdaq SmallCap Market under
the trading symbol "DYNX". In order to maintain such listing, the Company must
comply with the listing requirements of The Nasdaq Stock Market, which include,
among other things, the requirements that the Company's common stock maintain a
minimum closing bid price of $1.00, and that the Company maintain net tangible
assets of at least $2,000,000. The closing bid price of the Company's common
stock has been below the $1 minimum for several weeks as of the date of this
quarterly report. During the quarter ended September 30, 2000, The Nasdaq Stock
Market advised the Company that if the closing bid price of the Company's common
stock were not above $1 for any ten consecutive trading day period during the 90
day period ending November 29, 2000, the Company's common stock would be
delisted on December 1, 2000. Additionally, the Company is not presently in
compliance with the $2,000,000 net tangible asset requirement. If the Company's
common stock is delisted from the Nasdaq SmallCap Market, the Company believes
that its common stock would be traded in the over the counter market and quoted
on the OTC Bulletin Board.
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).
27
<PAGE>
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).
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. (Incorporated by reference
from Quarterly Report on form 10-QSB for the period ended June
30, 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. November 20, 2000
-------------------------------------- -----------------
Frederick W. Volcansek, Sr. Date
Chairman & Chief Executive Officer
/s/ Mark W. Sperry November 20, 2000
-------------------------------------- -----------------
Chief Accounting Officer Date
