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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-12806
DYNATEC INTERNATIONAL, INC.
(Exact name of registrant specified in its charter)
UTAH 87-0367267
- ---------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
3820 Great Lakes Drive
Salt Lake City, Utah 84120
- ---------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
(801) 973-9500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $0.01 per share)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. X Yes No
--- -----
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosures will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]
Registrant's revenues for the year ended December 31, 1999 were
$14,770,244
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the average bid and ask price of the Common Stock
on March 13, 2000 as reported on The Nasdaq Stock Market (R), was $ 13,527,387.
The Company had 5,038,679 shares of common stock outstanding at March
13, 2000.
Transitional small business disclosure format. Yes X No
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TABLE OF CONTENTS
PART I.
Item 1. Description of Business .............................................3
Item 2. Description of Property ............................................13
Item 3. Legal Proceedings...................................................13
Item 4. Submission of Matters to a Vote of Security Holders.................15
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters............16
Item 6. Management's Discussion and Analysis or Plan of Operations..........17
Item 7. Financial Statements................................................25
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure................................................52
PART III.
Item 9. Directors and Executive Officers; Compliance With Section 16(a) of
the Exchange Act....................................................53
Item 10. Executive Compensation..............................................56
Item 11. Security Ownership of Certain Beneficial Owners and Management......58
Item 12. Certain Relationships and Related Transactions......................60
Item 13. Exhibits and Reports on Form 8-K....................................61
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PART I
Item 1. Description of Business
General
Dynatec International, Inc., a Utah corporation ("Dynatec" or the
"Company"), is a Salt Lake City, Utah based manufacturer and distributor of
consumer products. The Company has four wholly owned subsidiaries: Softalk,
Inc., Arnco Marketing, Inc., Nordic Technologies, Inc. and SofTalk
Communications, Inc. During the year ended December 31, 1999 the Company
conducted most of its operations through its subsidiaries.
The Company is engaged primarily in the manufacture and distribution of
the following consumer product lines: telecommunication headsets and amplifiers
and other telephone accessories, home storage and organization and premium
flashlights. The Company also from time to time distributes other miscellaneous
products sold to mass market merchandisers. For information about the Company's
industry segments and operations in different geographical areas, see Note 12 to
the Company's consolidated financial statements, entitled "Business Segment
Information."
Seasonality
The Company's business is seasonal. The Company typically experiences
its highest sales volume in the fourth quarter of each year as a result of the
retail environment in which most of its customers conduct business. Because the
Company sells its products primarily to major retailers, the Company's sales
performance is significantly dependent on the performance of those retailers.
Accordingly, the fourth quarter is a key determinate to overall profitability
for the year.
Telecommunication Headsets and Amplifiers and Telephone Accessories
Historically, the manufacture and distribution of telephone accessories
have been the principal source of revenues for the Company. The Company's lead
product in this line has been a group of soft plastic shoulder rests that are
attached to a telephone handset by use of a proprietary adhesive strip
manufactured for the Company by 3M. These products are designed to ease neck
strain suffered by people who, needing both hands free while they talk on the
telephone, hold the handset between their ear and shoulder by bending their neck
toward their shoulder. These telephone shoulder rest products are currently
manufactured and distributed by the Company under the trade names of "Softalk
(TM) ", "Mini-Softalk (TM) ", "Softalk II (R)" and "Universal Phones Rest (R)",
and are available in a variety of colors, sizes and styles. The Company owns or
licenses the patent rights used in the manufacture of the telephone shoulder
rest product line, and manufactures these products at its Salt Lake City, Utah
headquarters.
The Company's telephone accessory product line also includes "Twisstop"
and "Cord Manager(R)" products. The Twisstop product is a plastic connector that
plugs into a telephone handset and allows the telephone cord to twist around the
axis of the connector to the effect that the telephone cord does not become
tangled. The Company licenses the patents used in the manufacture of the
Twisstop product from a third party. The Cord Manager product is a disk-shaped
device approximately two inches in diameter that plugs into a telephone handset.
Coiled inside the Cord Manager is telephone cord of approximately 25 feet in
length. The product is designed to allow the telephone user to have the benefit
of a relatively long telephone cord, but avoid the hassles associated with a
normal cord of such length.
The Company's line of telephone and computer headset amplifiers and
headset telephones are designed to supplement or replace traditional telephone
handsets allowing increased flexibility for the user, particularly users who can
benefit from having their hands free while they use the telephone. Such products
currently are distributed by the Company under the trade names of "Tele-Link
(TM)", "Computer-Link (TM)", "Power-Link (TM)", and "Power Phone(TM)".
For the year ended December 31, 1999, revenues from the
telecommunication headsets and amplifiers and telephone accessories product line
accounted for 49.6% of the Company's total revenues and 46.1% of total revenues
for the year ended December 31, 1998. Major customers for this product line
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include United Stationers, SP Richards, Boise Cascade, Staples, Corporate
Express, and Lucent Technologies. In addition, the Company sells these products
through several catalogs of major office products providers.
Home Storage and Organization
The Company's home storage and organization product line includes the
following products:
>> "Expand-A-Shelf" >> "The Wedge"
>> "Mini Expand-A-Shelf" >> "Super Wedge"
>> "Mega Expand-A-Shelf" >> "Medicine Cabinet
Organizer"
>> "Expandable Book Shelf" >> "Drawer Organizer"
>> "Sofstop" >> "Cover-Up"
>> "Expand-A-Drawer" >> "Easy Reach Roll-Out"
shelves
>> "Hide It"
>> "Expanding-Roll-Out"
These products are designed to promote convenience and comfort in the
home by helping people take better advantage of limited space by organizing
drawers, closets and shelves and providing other useful home products such as
door stops. The products in this line are typically custom manufactured for
Dynatec by Norco Injection molding, a California company, and by offshore,
nonaffiliated manufacturers using proprietary third party designs that the
Company licenses.
For the year ended December 31, 1999, the home storage and organization
product line accounted for 31.5% of the Company's total revenues, compared to
28.4% of Company revenues for the year ended December 31, 1998. These products
generally are distributed directly to retail stores, distributors, and catalogs
including Bed Bath & Beyond, Wal-Mart, National Manufacturing, Container Store,
Linens N Things, Lechters, Lowe's Companies Inc. and others.
Flashlights
Through its Nordic Technologies, Inc. subsidiary, the Company
manufactures and markets a broad range of specialty and premium flashlight
products and accessories under the trademark "Nordic Lites." These products
include water and impact resistant aluminum flashlights that operate on "AA",
"C" and "D" batteries, specialty flashlights that have such features as
focusable beams and flexible handles, and ordinary plastic flashlights. In 1998,
the Company began offering flashlight packages containing multiple flashlights
and related accessories bundled together in a convenient storage and display
container. The Company's flashlight product line, including such package units
is presently marketed to major retailers and warehouse shopping customers. Major
customers for the flashlight products include Lowe's Companies, Aladdin
Industries, Radio Shack, Barjan L.P. Products, and The Home Depot.
The Company entered the flashlight business in December 1996, when it's
subsidiary acquired substantially all of the assets of Nordic Lights, Inc., a
Texas corporation. In July 1997, the Company sold the assets it had acquired
from Nordic Lights that were located in Ft. Worth, Texas, and moved the
manufacturing of the Company's core line of aluminum flashlights entirely to the
offshore facilities of an unaffiliated party, which continues to supply the
Company's flashlights. The Company believes that it was able to take advantage
of more economical and efficient manufacturing relationships with Asian sources.
Presently, although the Company does some packaging of its flashlight products,
all manufacturing is sourced from such third parties. Sales of flashlight
products for the year ended December 31, 1999 were $1,809,777, or 12.3% of the
Company's total revenues and 6.0% of revenues for the year ended December 31,
1998.
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Miscellaneous/Mass Market
In addition to its telecommunication accessory, home storage and
flashlight product lines, the Company also has been involved in what it has
identified as a "Miscellaneous/Mass Market" product line that included commodity
type products sold to national mass-market merchandisers, such as Dolgencorp,
Inc. Among the specific products sold by the Company in conjunction with this
product line were single-use cameras, audiocassette tapes, three piece
flashlights, and disposable lighters, all of which products were distributed to
Dolgencorp. Sales for these types of products accounted for 6.7% and 19.6% of
the Company's revenues for the years ended December 31, 1999 and 1998,
respectively. On December 24, 1998 the Company entered an agreement with
Grandway China ("Grandway"), a Hong Kong enterprise. The agreement provided for
the transfer of inventory, distribution and sales rights of products that the
Company was then supplying to Dolgencorp. Upon execution, Grandway agreed to
purchase the approximately $1,800,000 of inventory earmarked for sale to
Dolgencorp. During the year ended December 31, 1999 Grandway purchased the
entire remaining inventory. Since the sale of the remaining inventory
constituting the Miscellaneous/Mass Market product line in early 1999, the
Company has not actively sought to further develop or participate in this
segment. The Company's management does not presently anticipate that the
Miscellaneous/Mass Market product line will be a source of material revenue in
the future.
Subsidiaries of the Company
During the year ended December 31, 1999, the Company conducted most of
its operations through its subsidiaries. The name of each of the Company's
subsidiaries, the date of organization and the date of acquisition by the
Company is set forth in the following table. Dynatec owns 100% of the voting and
other equity securities of each of its subsidiaries.
<TABLE>
<CAPTION>
Date Date Acquired
Subsidiary Organized By Company
---------------------------------------- ----------------------- -------------------------------
<S> <C> <C>
Softalk, Inc. (1) 7/15/82 4/18/83
Arnco Marketing, Inc. (2) 7/22/86 9/30/91
Nordic Technologies, Inc. (3) 10/25/96 10/25/96
SofTalk Communications, Inc. (4) 12/23/96 12/23/96
</TABLE>
(1) Engaged in the manufacturing, sourcing and distribution of the
telephone accessory, hardware/housewares, and mass market
products of the Company.
(2) Arnco Marketing imports and markets Twisstop to SofTalk and
others under a license agreement with Recoton Inc.
(3) Involved in the research, development and marketing of
flashlight products.
(4) Engaged in the research, development and marketing of
telecommunications products.
Raw Material and Supplies
The Company uses a premixed plastisol to manufacture the Softalk, Mini
Softalk, Universal Phone Rest, Sofstop, and Softalk II products. "Plastisol" is
a generic term for the petroleum based raw material from which the vinyl
substance forming the Softalk products is manufactured.
Other than the Softalk products, the Company's products are purchased
in finished form and packaged according to Dynatec's specifications by the
supplier. In some cases, Dynatec purchases finished product and packages the
product for distribution at its Salt Lake City headquarters. The Company, to
date, has relied upon approximately fifteen primary suppliers for plastic and
other materials ordered to specification for its assembly, manufacturing, and
marketing processes. The Company has not experienced any shortage of plastic
products or of Plastisol in the past year, and does not anticipate any shortage
in the future. With respect to finished products the Company purchases from
domestic or foreign manufacturers, which products constitute the majority of the
Company's business, the Company's suppliers of its home organization and storage
products have demonstrated continued dependability in supplying quality product
in a timely manner. During 1999, the Company experienced some difficulties with
its Taiwan-based supplier of finished flashlight products. The Company's
management believes that these difficulties resulted primarily from the regional
impact of an earthquake that occurred in August 1999. The Company intends to
continue to source its flashlight products from such supplier through 2000. The
Company believes that it could replace that supplier with a domestic source or
another offshore supplier if necessary.
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The Company anticipates usual, inflationary increases in the price of
plastic products, the raw materials used to manufacture its flashlights,
freight, and packaging in 2000. The Company anticipates that these usual,
inflationary increases will not materially impact the results of operations for
the year ended 2000, although there can be no assurance that the Company will
not encounter raw material or other manufacturing delays, price increases or
shortages, or material increases in shipping costs associated with rising fuel
prices, any of which could adversely affect the Company's financial condition
and operations.
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Trademarks and Patents
The Company currently owns or licenses the following U.S. and foreign
trademarks.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Trademarks
Year of
Trademark
Product Trademark Expiration
Country Granted/Filed or Renewal
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Softalk U.S.A. 07/20/99 Each 10 Years
Canada 02/05/81 Each 15 Years
Sofstop U.S.A. 08/04/92 Each 10 Years
The Wedge U.S.A. 10/20/92 Each 10 Years
Wall Saver U.S.A. 07/15/97 Each 10 Years
Expand-A-Shelf U.S.A. 08/24/95 Pending
Phoneworks & Design U.S.A. 05/10/96 Pending
Easy Reach U.S.A. 11/17/98 Each 10 Years
Tele Link U.S.A. 04/10/97 Pending
Computer Link U.S.A. 04/10/97 Pending
Power Link U.S.A. 11/23/99 Each 10 Years
Power Phone U.S.A. 04/10/97 Pending
Smart Sound U.S.A. 10/05/99 Each 10 Years
Softalk Design (Shape) U.S.A. 04/09/96 Each 10 Years
Mini Softalk Design (Shape) U.S.A. 05/21/96 Each 10 Years
Cord Manager U.S.A. 09/16/97 Each 10 Years
Canada 10/27/97 Each 15 Years
European Community 08/31/98 Each 8 Years
Japan 08/07/98 Each 10 Years
Home Organization U.S.A. 07/23/97 Pending
NordicLite U.S.A. 04/03/96 Pending
Nordic Helmet Design U.S.A. 07/15/97 Each 10 Years
Smoke Cutter U.S.A. 12/23/97 Each 10 Years
Nite-Site-Lite U.S.A. 04/25/97 Each 10 Years
Zoom Switch U.S.A. 09/21/99 Each 10 Years
See It, Find It, Get It U.S.A. 05/11/98 Pending
Expand-A-Drawer (Design) U.S.A. 04/17/98 Pending
Color Splash U.S.A. 04/17/98 Pending
</TABLE>
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The Company owns or licenses the following U.S. and foreign patents.
<TABLE>
<CAPTION>
Patents Year of
Patent
Patent Expiration
Product Country Granted/Filed or Renewal
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Universal Softalk U.S.A. 09/06/94 2008
Softalk II U.S.A. 02/11/92 2006
Expand-A-Drawer U.S.A. 04/14/98 2016
Expand-A-Shelf, Book Edition U.S.A. 06/25/96 2010
Door Protector U.S.A. 02/18/97 2013
Interchangeable Doorstop U.S.A. 02/18/97 2015
Zoom Light U.S.A. 10/27/98 2016
Slide Focus Flashlight U.S.A. 02/02/99 2016
Switch w/Spare Bulb Carrier U.S.A. 11/14/89 2009
Flashlight w/Switch Assembly U.S.A. 06/27/89 2007
Flashlight w/Nite-Site-Lite U.S.A. 05/07/91 2009
Cord Manager U.S.A. 02/17/98 2016
Canada 01/03/00 Pending
Medicine Cabinet Organizer U.S.A. 07/15/93 Pending
Spring Wedge U.S.A. 12/11/90 2007
Expand-A-Drawer Continued U.S.A. 03/30/99 2017
Expand-A-Drawer Canada 02/19/98 Pending
Mini Softalk U.S.A. 02/11/92 2006
Combination Flashlight & Area Lights U.S.A. 01/29/99 Pending
Magnetic Door Stop & Holder U.S.A. 05/16/93 2011
Cover Up U.S.A. 03/03/87 2001
</TABLE>
Inventory Supply and Backlog Orders
The Company has followed a standard policy of shipping within 24 hours
of receipt of payment on orders, or within 48 hours of orders on approved credit
lines with the exception of large home storage and organization orders, which
are filled within two to four weeks, and large orders for flashlight products,
which typically have lead times before shipment of between 45 and 90 days. The
Company has been able to ship within the foregoing guidelines on almost all
occasions, although in 1999 the Company experienced limited shipping delays as a
consequence of disruption caused by an earthquake in Taiwan in August 1999. The
Company may from time to time need to backorder certain items.
Major Customers
Telecommunication Headsets and Amplifiers and Telephone Accessories
For the year ended December 31, 1999, 22.9% of telephone headset and
accessories products were distributed through United Stationers, whose
headquarters are at 2200 E. Golf Road, Des Plaines, IL 60016. Another 15.4% of
sales in this product line were to S.P. Richards, whose headquarters are at P.O.
Box 1266, Smyrna, GA 30081. Boise Cascade, whose headquarters are at 800 West
Bryn Mawr Road, Itasca, IL 60143, accounted for another 13.6% of sales in this
product line.
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Home Storage and Organization
For the year ended December 31, 1999, 14.5% of the home storage and
organization products were distributed through Bed, Bath and Beyond, whose
headquarters are at 110 Bi-County Blvd., Suite 114, Farmingdale, NY 11735. An
additional 10.6% of the home storage and organization products sales were to
Wal-Mart, whose headquarters are at 702 S.W. 8th Street, Bentonville, AR 72716.
National Manufacturing, whose headquarters are at 1 First Avenue, Sterling IL
61081, accounted for another 10.2% of the distribution of home storage and
organization products.
Flashlights
For the year ended December 31, 1999, 18.0% of the flashlight products
were distributed through Aladdin Industries, LLC, whose headquarters are at 703
Murfreesboro Road, Nashville, TN 37224. Another 11.0% of the flashlight products
sales were to Lowe's Companies, Inc., whose headquarters are at P.O. Box 1111,
N. Wilkesboro, NC 28656.
Miscellaneous/Mass Market
Grandway China, a Hong Kong enterprise, accounted for substantially all
of the Company's mass-market revenues of $992,000 for the year ended December
31, 1999.
Competitive Conditions in the Market
The Company believes that it is engaged in highly competitive market
segments for each of its product lines. The generic design or function of the
telephone accessory products such as Softalk could probably be functionally
replicated without great difficulty. Although the Company owns or licenses
patents covering certain aspects of its Twisstop and Cord Manager products,
competing products having similar functionality are readily available. Many of
the home organization products, as with other housewares, must compete with
similar products from other manufacturers. Although the Company believes certain
key features of these products are proprietary, used by the Company under
license agreements, barriers to entry in this segment are relatively low and
multiple products having essentially identical functionality are readily
available. Competition in this segment is based primarily on marketing strength
and price competitiveness.
The Company believes that both the flashlight and telephonic headset
markets are also very competitive. However, the Company believes that its
proprietary rights for both flashlights and headsets, as well as the innovative
features of those products, enable the Company to compete in each of these
markets.
In all of the markets in which it operates the Company faces
competition from a number of sources, many, if not most of which, have
substantially more financial and other resources than the Company.
Environmental Regulation
The Company believes that it is in compliance with all environmental
quality regulations pertaining to such matters as emission, waste disposal,
safety equipment, and like procedures. The Company believes it is in compliance
with all state and local environmental statutes. The Company also believes that
it is in compliance with all Occupational, Safety, and Health Administration
standards in its work place.
Employees
The Company employs a full-time executive, sales, administrative and
clerical staff of 28 people. The Company also has an average monthly assembly,
warehouse and distribution staff of approximately 39 people. The number of
assembly, warehouse and distribution employees is subject to adjustment based
upon production demand, and ranged from a high of approximately 43 employees to
a low of approximately 35 employees during the year ended December 31, 1999.
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Risk Factors
There are certain significant risks facing the Company, many of which
are substantial in nature. The following risks and information should be
considered in connection with the other information contained in this Report.
Recent Net Losses
The Company had significant net operating losses in all of fiscal years
1996, 1997, 1998 and 1999. The Company's reported net losses for the years ended
December 31, 1999 and 1998 were $3,477,545 and $2,245,427, respectively. As a
result, the Company had accumulated deficits of $7,103,300 and $3,625,755 at
December 31, 1999 and 1998, respectively. In early 1999, the Company's executive
management was replaced entirely. New management continues its efforts to adopt
or implement a variety of business practices designed to improve the financial
condition and operating results of the Company. Nevertheless, there can be no
assurance that the Company will be able to achieve growth, that significant net
losses will not be incurred in future operating periods, or that the Company
will become profitable in the foreseeable future, if at all.
Need for Additional Funding
The Company has operated with negative cash flow for several fiscal
years and has substantial accumulated operating deficits. To finance its
operations, the Company likely will require additional financing. In November
1999, the Company completed a sale and lease transaction of the building that
houses its corporate headquarters, which transaction yielded to the Company
approximately $831,000 of proceeds, which have been used for operating capital.
Additionally, in February 2000, the Company completed a private placement of
restricted common stock that yielded proceeds of $1,600,000, $1,500,000 of which
was used to retire certain convertible debentures issued by the Company, and
$100,000 of which was used for general working capital. See "Management's
Discussion and Analysis - Liquidity and Capital Resources." The Company may and
likely will be required to seek additional sources of financing through future
offers and sales of its equity or debt securities or additional commercial
credit arrangements, to the extent available. Securities issued in such
offerings could substantially dilute the holdings of other shareholders. There
can be no assurance that the Company will be successful in obtaining such
financing or that financing will be available to the Company on terms and at
rates that are favorable to the Company. Absent such funding, however, the
Company's ability to continue its operations may be adversely affected.
Limited Market and Volatility of Stock Price
The trading price of the Company's common stock has been and is likely
to continue to be subject to wide fluctuations in response, among other things,
to variations in the Company's operating results, material announcements by the
Company or its competitors, governmental regulatory actions, conditions in the
Company's industry, or other events or factors, many of which are beyond the
Company's control. In addition, the stock market has historically experienced
extreme price and volume fluctuations which have particularly affected the
market prices of many public companies and which often have been unrelated to
the operating performance of such companies. Moreover, the Company has a limited
public market, and sales of a relatively small number of shares of common stock
may adversely affect the prevailing market price of shares currently issued and
outstanding and make the Company's common stock even more prone to volatility
than the securities of other businesses in similar industries. Given the
relatively small amount of trading in the Company's securities, there can be no
assurance that the prevailing market price of common stock will not be
artificially inflated or deflated by trading even of relatively small amounts of
common stock. See "Price Range of Common Stock."
Nasdaq SmallCap Market Delisting
The Company's common stock is listed on the Nasdaq SmallCap Market. To
keep the common stock listed on this market, the Company must meet Nasdaq's
listing maintenance standards and abide by Nasdaq's rules governing listed
companies. If the price of the Company's common stock falls below $1.00 per
share for an extended period, or if the Company fails to meet other Nasdaq
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standards or violates Nasdaq rules, its common stock could be delisted from the
Nasdaq SmallCap Market. Additionally, the corporate governance rules require
that the Company hold a meeting of its shareholders at least annually, in
connection with which the Company must solicit proxies. Although the Company
filed its proxy statement on Schedule 14A in anticipation of a meeting of its
shareholders during 1999, because that filing was being reviewed by the staff of
the Securities and Exchange Commission (the "SEC") in conjunction with a pending
registration statement, which never became effective, the Company was not, in
fact, able to hold a meeting in 1999. The Company therefore is technically in
violation of Nasdaq's rules. Although the Company intends to have an annual
meeting of its shareholders in the first half of 2000, has withdrawn the
registration statement and the proxy materials that were being reviewed by the
SEC staff as recently as January 2000, and has not been notified by the Nasdaq
Stock Market of any adverse proceeding or consequence, there can be no assurance
that the Company will be able to preserve the listing of its common stock on the
Nasdaq Stock Market.
If the Company's common stock were to be delisted from the Nasdaq
SmallCap Market, it would likely continue to be traded in the over-the-counter
market on an electronic bulletin board established for unlisted securities or in
what are commonly referred to as the "pink sheets." As a result, an investor
could find it more difficult to dispose of, or to obtain accurate quotations for
the price of, the Company's common stock. Therefore, such delisting could
adversely affect the prevailing market price of the common stock or the general
liquidity of an investment in the Company's common stock.
In addition, delisting from the Nasdaq SmallCap Market and failure to
obtain listing or quotation on such other market or exchange would subject the
Company's securities to so-called "penny stock" rules. These rules impose
additional sales practice and market-making requirements on broker-dealers who
sell and/or make a market in such securities. Consequently, if the Company's
common stock were to be delisted from the Nasdaq SmallCap Market, broker-dealers
may be less willing or able to sell and/or make a market in the Company's common
stock and purchasers of common stock may have more difficulty selling their
securities in the secondary market, resulting in a decrease in the market
liquidity of the Company's common stock.
Possible Adverse Effect of Pending Litigation and Administrative
Proceedings
The Company is engaged in litigation outside the ordinary course of its
business, the effect of which on its business condition or results of operations
could be materially adverse. Such litigation is described elsewhere in this
Report under the heading "Legal Proceedings." There can be no assurance that
such litigation and legal proceedings, either individually or in the aggregate
could have a material adverse effect on the operations and financial condition
of the Company.
Foreign Operations Risks
The Company out-sources most of its manufacturing to manufacturers
located outside the United States. There are numerous risks associated with
conducting business in foreign countries, including the distance from corporate
headquarters, problems associated with possible political risks, instability of
local governments, safety of personnel and equipment, the lack of spare parts or
adequate service assistance, the need for skilled labor and supervision, lack of
infrastructure and accessibility to sources of power and other supplies
necessary for operations, tariff restrictions, currency control regulations,
competing or conflicting manufacturing and production standards, governmental
approval, licensing and permit requirements and procedures, high inflation and
currency fluctuations which may erode profitability levels, and the difficulty
of obtaining and enforcing judgments in foreign courts and under foreign legal
systems that differ substantially from the United States all add to the risk of
foreign operations. Difficulties arising out of any of these risks could
adversely affect the Company's financial condition and operations.
Competition
The Company's current products are divided into three primary product
lines: telecommunications amplifiers, headsets and other telephone accessories,
flashlights and home storage and organization products. Although certain of the
Company's products in these product lines are subject to patent or other
intellectual property protections, barriers to entry for competing manufacturers
and distributors are relatively low for the majority of the Company's products.
See "Description of Business - Competition" Accordingly, there can be no
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assurance that competitors of the Company, many of which are likely to have
substantially greater financial resources, experience and marketing ability will
not be able to successfully compete with the Company, which successful
competition could adversely affect the Company's operations and financial
condition.
Dependence on Licensed Technology
The Company depends on licenses granted by third parties for certain
key elements of its product line. Some of these license agreements require that
the Company achieve minimum sales in order to retain the license rights. There
can be no assurance that the Company will meet the minimum sales requirements to
avoid cancellation of the licenses or a change in its rights or that such
license rights will continually be available to the Company. Certain details of
some of such licenses are not fully documented or were put in place by former
management with entities affiliated with prior management, but have no
affiliation with current management. The Company may not, therefore, be able to
fully enforce or benefit from its rights under such license arrangements.
Termination of any of such licenses or any restriction or limitation of the
Company's rights under such licenses or inability of the Company to fully
enforce such agreements may adversely affect the Company's operations and
financial condition.
Dependence on Third-Party Manufacturers and Suppliers
For the majority of its products, the Company is dependent on
third-party manufacturers to manufacture its products. Most of these third-party
manufacturers are located in foreign countries, primarily Taiwan. If any
manufacturer fails to supply any or all of the Company's requirements for
product, or if the Company's or its manufacturer's suppliers of raw materials or
parts fail to fulfill the Company's requirements there is no assurance the
Company will be able to secure alternate sources in a timely manner. If such
alternate sources of supply or manufacturing are not available on a timely basis
or on reasonable economic terms, the Company's results of operations could be
adversely affected.
Government Regulation
Various aspects of the Company's business are subject to both domestic
and foreign government regulation by such agencies as the Federal Trade
Commission, the Federal Communications Commission and taxing authorities, such
as the Internal Revenue Service. In addition, as a public company, the Company
is subject to reporting requirements and other regulations promulgated and
enforced by the SEC. The Company's failure to comply with such laws, rules and
regulations could have a material adverse effect on the Company, its business,
financial condition and results of operations. For example, if the Company were
found to be in violation of regulations or other laws governing its business, it
could be assessed with substantial penalties, fees and expenses, temporary or
permanent suspension of trading in its shares, or ultimately interruption or
shutdown of some or all of its operations. The Company may also from time to
time obtain and comply with local, state, provincial and federal permits or
other authorizations. Obtaining these permits can be very costly and take
significant amounts of time. Although the Company foresees no material problems
or delays, there can be no assurance that the Company can obtain the necessary
permits or continue existing operations or that the Company can maintain
economic operation in compliance with the necessary permits. There can be no
assurance that future changes in existing law or new legislation will not limit
or adversely impact the Company's business operations.
No Dividends
The Company has never declared or paid any cash dividends on its shares
and does not anticipate paying cash dividends in the foreseeable future.
Effect of Certain Anti-Takeover Provisions of Utah Law
Utah, the state in which the Company was organized, has adopted a
"Control Shares Acquisition Act" (the "Control Shares Act"). This act provides
that any person or entity that acquires 20% or more of the outstanding voting
shares of a publicly held Utah corporation is denied voting rights with respect
to the acquired shares, unless a majority of the disinterested stockholders of
the corporation elects to restore such voting rights. The provisions of the
Control Shares Act may discourage companies or persons interested in acquiring a
significant interest in or control of the Company, regardless of whether such
12
<PAGE>
acquisition may be in the interest of the Company's stockholders. See
"Description of Securities."
Item 2. Description of Property
The Company occupies the building located at 3820 Great Lakes Drive,
Salt Lake City, Utah 84120, at which its corporate headquarters, manufacturing
and warehouse operations are housed. This facility was built in 1996 on property
purchased by the Company for that purpose. The Company's facility has
approximately 54,000 square feet, of which approximately 6,000 square feet (11%)
is used for office and administrative purposes and 48,000 square feet (89%) is
used for manufacturing, assembly and warehouse area.
The Company owned the building until November 4, 1999, on which date
the Company closed a transaction providing for the sale and leaseback of the
building. The buyer was an unaffiliated third party and the parties negotiated
the sale and leaseback as an arms-length transaction. The total purchase price
for the building was $2,865,000. The proceeds to the Company, after payment of
the existing mortgage, closing costs, and brokerage fees associated with the
sale, were approximately $831,000, which the Company used for general corporate
purposes as operating capital. The lease is a triple net lease with a term of 20
years. The initial base rent is $330,000 per year. In connection with the sale
and leaseback transaction, and as additional consideration, the Company issued
33,948 shares of restricted common stock to the buyer.
The Company believes that the building and property are adequate for
its needs and currently has no plans to renovate the current facility or to find
additional or alternate facilities.
Item 3. Legal Proceedings
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 has not yet served the
complaint; the Company learned about the complaint through an unrelated third
party. The Company has demanded that Alpha Tech voluntarily dismiss the
complaint, which it has refused to do. The Company was notified in March 2000
that Alpha Tech intends to serve process, although service has not been
accomplished. In any event, the Company disputes the claims of Alpha Tech's
complaint and intends to vigorously defend this action if process is served.
On February 22, 1999, the Company received a demand letter from counsel
for Mag Instrument, Inc., a manufacturer and distributor of flashlights and one
of the Company's competitors ("Mag"). In the letter, Mag accused the Company of
infringing certain of Mag's patents and committing false advertising and unfair
competition. Attached to the demand letter was a copy of a complaint filed in
13
<PAGE>
the U.S. District Court for the Central District of California on February 19,
1999. The complaint alleges that the Company has infringed three patents owned
by Mag, and seeks (i) an order enjoining the Company from infringing Mag's
patents, (ii) the delivery to the Court of all flashlights which infringe Mag's
patents, (iii) that the Company identify all entities who have purchased,
distributed or sold any infringing products, (iv) that the Company deliver to
the Court all documents reflecting or relating to the purchase, sale or
distribution of any flashlights which infringe Mag's patents, (v) money damages
sustained by Mag by reason of the alleged patent infringement, including
interest, costs, and attorney's fees. During the second quarter of 1999, Mag and
the Company agreed to pursue efforts to settle the dispute and, pending such
discussions, the complaint would be dismissed without prejudice upon the joint
stipulation of the parties. The Company has expressly agreed with Mag, however,
that if the pending disputes are not settled, Mag may refile the complaint in
the same court and venue. Settlement negotiations with Mag are still ongoing.
On April 27, 1998, the Enforcement Division of the Securities and
Exchange Commission notified the Company that the SEC was anticipating filing an
administrative proceeding in the latter part of calendar year 1998 against
various individuals and entities who had engaged in transactions with a Canadian
corporation. The SEC Enforcement Division further indicated that the Company may
be named as a defendant in such administrative action. In July 1998, the Company
submitted a Wells Submission to clarify why, in the Company's estimation, it
should not be named in the administrative proceeding, if any. The Company
suggested in the Wells Submission that it should not be named in any
administrative proceeding because the Company never consummated either of the
two transactions with the subject Canadian company that the Company was
considering, and the Company received no consideration in connection with those
aborted transactions. Moreover, the Company believes that its conduct in
connection with those proposed but aborted transactions met applicable legal
requirements. As of December 31, 1999, the Company had received no response from
the Enforcement Division about whether the SEC plans to name the Company in any
administrative action.
In addition, the Company has previously disclosed that it has been
informed of an investigation by the Enforcement Division of the Securities and
Exchange Commission. The Company believes this investigation concerns certain
trading activity in the Company's common stock and other transactions involving
the Company's securities, however, the Company has not been informed of the
specifics of such investigation. The Company is cooperating fully with these
administrative proceedings. Any finding or order of the Commission adverse to
the Company or any judgment against the Company in any of the pending litigation
matters, would have an adverse effect on the business, financial condition or
results of operations of the Company, or the market for its common stock.
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 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
14
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information and Number of Stockholders. The Company's common
stock is listed on The Nasdaq SmallCap Market under the symbol "DYNX". As of
December 31, 1999 there were 1,223 shareholders of the Company's common stock
and 3,721,418 shares of common stock were outstanding.
Price Range of Common Stock. The following table sets forth the high
and low sale prices of the Company's common stock as reported by the Nasdaq
SmallCap Market during the indicated periods. The referenced quotations do not
reflect inter-dealer prices, dealer retail markup, markdown, or commissions, and
may not necessarily represent actual transactions.
PRICE RANGE OF COMMON STOCK
======================= ==================== ====================
Quarter & Year Market High Market Low
- ----------------------- -------------------- --------------------
1st 1998 $7.88 $6.06
- ----------------------- -------------------- --------------------
2nd 1998 $8.25 $4.75
- ----------------------- -------------------- --------------------
3rd 1998 $6.25 $2.25
- ----------------------- -------------------- --------------------
4th 1998 $5.75 $1.38
- ----------------------- -------------------- --------------------
1st 1999 $4.31 $2.25
- ----------------------- -------------------- --------------------
2nd 1999 $3.00 $1.63
- ----------------------- -------------------- --------------------
3rd 1999 $1.86 $0.81
- ----------------------- -------------------- --------------------
4th 1999 $1.25 $0.88
======================= ==================== ====================
Dividends. During the year ended December 31, 1999, the Company did not
declare or pay cash dividends. The Company has no history of declaring and
paying cash dividends to its common stockholders and has no intention of
declaring such dividends into the foreseeable future.
Recent Sales of Unregistered Securities. On November 4, 1999, the
Company entered into a Real Estate Purchase Contract with an unaffiliated third
party pursuant to which the Company sold the real property at which it corporate
offices are located. The Company simultaneously entered into a long-term lease
of that property. As part of that transaction, and as an inducement to the
purchaser-lessor, the Company issued a total of 33,948 shares of restricted
common stock. The Company issued such shares without registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act. Such
shares of common stock were issued as restricted securities, and the certificate
representing such shares was stamped with a standard legend to prevent any
resale without registration under the Securities Act or pursuant to an
exemption.
On December 1, 1999, one of the holders of the Company's Convertible
Debentures converted $13,000, together with interest accrued thereon, into a
total of 20,557 shares of common stock. The Company issued such shares without
registration under the Securities Act of 1933 in reliance on Section 4(2) of the
Securities Act, and the rules and regulations promulgated under that section
including Regulation D. Such shares of common stock were issued as restricted
securities and the certificate representing such shares was stamped with a
standard legend to prevent any resale without registration under the Securities
Act or pursuant to an exemption, except for that portion of such shares as were
subject to sales under Rule 144 under the Securities Act.
15
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operations
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in dollars
(rounded) and percentage changes from period to period. Data in the table
reflects the consolidated results of the Company for the years ended December
31, 1999 and 1998, respectively. As supplemental information, the table also
segregates the Company's revenues by product line type.
<TABLE>
<CAPTION>
For the Year Ended
---------------------------------------
% OF
CHG
FROM
DECEMBER DECEMBER 1998 to
31, 1999 31, 1998 1999
--------- --------- --------
Statement of Operations Data:
<S> <C> <C> <C>
Product sales............. $14,770,000 $16,579,000 (10.9)%
Cost of sales............. 9,648,000 10,246,000 (5.8)
----------- -----------
Gross margin...... 5,122,000 6,333,000 (19.1)
----------- -----------
Operating Costs and Expenses:
Selling expenses.......... 4,090,000 3,407,000 20.0
Research and development.. 170,000 69,000 146.4
General and administrative 3,459,000 3,297,000 4.9
----------- -----------
Total operating costs
and expenses......... 7,719,000 6,773,000 14.0
----------- -----------
Other Income (Expense), net:
Interest expense.......... (889,000) (1,773,000) (49.9)
Interest income........... 5,000 3,000 66.7
Other income (expense).... 3,000 (35,000) 108.6
------------ -----------
Net loss.................. $(3,478,000) $(2,245,000) 54.9%
========================
Supplemental Information:
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories............ $ 7,320,000 $7,640,000 (4.2)%
Home storage and organization 4,648,000 4,703,000 (1.2)
Flashlights.................. 1,810,000 989,000 83.0
Miscellaneous/Mass market. 992,000 3,247,000 (69.4)
------------ ----------
Total product sales and $14,770,000 $16,579,000 (10.9)%
other.......... ============ ===========
</TABLE>
Following are explanations of significant period to period changes for the years
ended December 31, 1999 and 1998:
Revenues
Total Product Sales. Total product sales decreased by $1,809,000, or
10.9%, from $16,579,000 to $14,770,000 for the year ended December 31, 1999
compared to the year ended December 31, 1998.
Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of telecommunication headsets and amplifiers and telephone accessories
decreased $320,000, or 4.2%, from $7,640,000 to $7,320,000 for the year ended
December 31, 1999 compared to the year ended December 31, 1998. This decrease is
attributable primarily to the decreased sales of $360,000 resulting from the
loss of a private label customer for the Company's "Twisstop" product, decreased
sales of the Company's shoulder rest products of approximately $96,000, and
decreased sales of telephone amplifiers and headsets of approximately $80,000.
These decreases were offset in part by increases in sales of Cord Manager and
other Twisstop sales of $216,000.
Overall gross margins for these products increased to 51.3%, from
49.8% for the years ended December 31, 1999 and 1998, respectively, as a result
of the sales mix, offset in part by a write down in inventory of $294,000.
Home Storage and Organization. Revenues in the home storage and
organization product line decreased $55,000, or 1.2%, from $4,703,000 to
$4,648,000 for the year ended December 31, 1999 compared to the year ended
16
<PAGE>
December 31, 1998. The decrease is primarily attributable to decreased sales of
$163,000 in several of the Company's miscellaneous organizational products,
namely shoe organizers, ironing boards and wire baskets and a decrease of
$46,000 in the doorstop product line, offset in part by an increase of $104,000
in the "Expand-A-Drawer" product line, and an increase of $50,000 in the
"Expand-A-Shelf" product line. Overall gross margins for products in this
category decreased to 26.7% for the year ended December 31, 1999 from 33.7% for
the year ended December 31, 1998. This decrease in gross margins was primarily
attributable to a write down in inventory of $297,000.
Flashlights. Flashlight revenues increased $821,000, or 83.0%, from
$989,000 to $1,810,000 for the year ended December 31, 1999 compared to the year
ended December 31, 1998. This increase was primarily the result of the addition
of five new major 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 32.2% to 6.8% for the year
ended December 31, 1999 as a result of various changes made to certain
flashlight products to increase the quality of these products, as well as
increased air freight costs necessitated by production difficulties resulting
from an earthquake in Taipei, Taiwan during the third quarter. Management is
addressing this gross margin decrease by working with its Asian supplier to more
effectively source various components from more reliable sub-assembly vendors
and to address the difficulties encountered by the Company's Asian suppliers as
a result of the earthquake.
Miscellaneous and Mass Market. Mass market revenues decreased
$2,255,000, or 69.4%, from $3,247,000 to $992,000 for the year ended December
31, 1999 compared to the year ended December 31, 1998. This decrease was
primarily the result of the Company's decision to substantially 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. During the year ended December 31, 1999
Grandway purchased the entire remaining inventory according to the terms of the
December 24, 1998 agreement. Overall gross margins for products in this category
decreased from 19.3% to 0.6% for the year ended December 31, 1999 as a result of
the "pass-through" effect. Management does not presently anticipate future
significant sales in this product line.
Operating Costs and Expenses
Selling Expenses. Selling expenses increased $683,000, or 20.0%, from
$3,407,000 to $4,090,000 for the year ended December 31, 1999 compared to the
year ended December 31, 1998. This increase is due in part to an increase in
advertising expense as the result of the Company securing additional pages in
certain office product catalogs, and trade show expenditures due to the Company
participation in more regional trade shows, as well as the hiring of two
marketing consultants to assist the Company in it's campaign to upgrade it's
packaging of products, and an increase in travel costs for the Company's
executives and sales managers.
Research and Development. Research and development expense increased by
$101,000, or 146.4%, from $69,000 to $170,000 for the year ended December 31,
1999 compared to the year ended December 31, 1998. This increase was
attributable to the addition of a full time Vice President of Research and
Development.
General and Administrative Expenses. General and administrative
expenses increased $162,000, or 4.9%, from $3,297,000 to $3,459,000 for the year
ended December 31, 1999 compared to the year ended December 31, 1998. The
increase in general and administrative expenses was primarily the result of the
payment of approximately $210,000 in combined severance to the Company's former
Chairman and CEO who resigned on January 14, 1999 and the former President of
the Company who resigned effective March 17, 1999. Also, travel expenditures
increased by approximately $106,000 resulting from increased international
travel associated with strengthening Asian supplier relationships. Additional
increases included $69,000 in employee recruitment and relocation expense, and
$92,000 in consulting fees. These increases were offset in part by a decrease in
legal expenses of $209,000, most of which relate to the Company's internal
investigation which commenced in 1998 and concluded on January 14, 1999,as well
as a decrease in corporate expense of $57,000 due to the Company's cancellation
of a lease on residential rental property in Park City, Utah in August of 1998.
Additional decreases were the result of a reduction in life insurance premiums
paid of $44,000 due to the resignation of the former Chairman and CEO, and
President of the Company, and reduced directors fees of $30,000 due to the
Company's decision in June 1999 to issue stock options to the non-employee
members of the Board of Directors in lieu of cash compensation.
17
<PAGE>
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $946,000, or 14.0%, from $6,773,000 to $7,719,000 for the year
ended December 31, 1999 compared to the year ended December 31, 1998, for the
reasons discussed above.
Interest Expense. Interest expense decreased $884,000, or 49.9%, from
$1,773,000 to $889,000 for the year ended December 31,1999 compared to the year
ended December 31, 1998. This decrease was primarily related to the recognition
of a one-time, non-cash charge for the fair value of common stock warrants and a
beneficial conversion premium totaling $426,000 and $237,000, respectively, both
associated with the issuance of $1,500,000 of convertible debentures (the
"Convertible Debentures") in May 1998. During the year ended December 31, 1999,
liquidated damages were assessed against the Company in the amount of $258,000
due to the Company's failure to have effective a registration statement covering
the shares of common stock issuable upon conversion of the Convertible
Debentures with the time specified in a registration rights agreement executed
in connection with the sale of the Convertible Debentures. Additionally, normal
non-cash interest was recognized on the Convertible Debentures in the amount of
$166,000 during the year ended December 31, 1999.
Interest Income. Interest income increased $2,000, from $3,000 to
$5,000 for the year ended December 31, 1999 compared to the year ended December
31, 1998. This increase was primarily the result of the Company utilizing its
revolving credit facility, under which "draws" are made by the Company. After a
draw is made a corresponding payable is established, when collections of
outstanding accounts receivable are received, collections are swept, daily, and
re-applied against outstanding draws. As a result the Company does not keep
excess cash on hand to invest.
Other Income/Expense and Income Taxes. Other income (expense) and
income taxes increased $38,000, from $(35,000) to $3,000 for the year ended
December 31, 1999 compared to the year ended December 31, 1998. This increase is
primarily the result of a smaller tax provision due to net operating loss
carryforwards. As well as an increase in the gain on sale of assets of
approximately $20,000 in 1999 compared with 1998.
Net Loss. Net loss increased by $1,233,000, or 54.9%, from a loss of
$2,245,000 to a loss of $3,478,000 for the year ended December 31, 1999 compared
to the year ended December 31, 1998 due to a combination of the factors
described above.
Liquidity and Capital Resources
General
The Company's principal sources of liquidity are cash flows from
operations, cash on hand and borrowing under the Company's existing secured
revolving credit facilities. On May 27, 1998, the Company obtained a secured
revolving credit facility from a regional financing institution for up to
$5,000,000, bearing interest at a rate of prime plus one percent, with interest
payable monthly. The credit facility is secured by both the Company's accounts
receivable and inventory. The note underlying the revolving credit line is due
May 26, 2001. Under the terms of the loan agreement, the Company is required to
maintain financial covenants and ratios, including book net worth, net income
and debt service coverage. On June 30, 1999, the Company and its lending
institution entered into a Fourth Amendment to the Credit Agreement (the "Fourth
Amendment"). Pursuant to the Fourth Amendment, certain definitions have been
modified, as follows: (i) the maximum line decreased from $5,000,000 to
$3,000,000; (ii) the inventory advance rate decreased from 48% to 40%; (iii) the
accounts receivable advance rate decreased from 85% to 78%; and (iv) the volume
rebate accrual increased from $15,000 on June 1, 1999 to $300,000 at January 1,
2000. This accrual goes to $-0- when the volume rebates are paid in the first
quarter of 2000, and will begin to accrue over the remainder of calendar year
2000 to the maximum $300,000 amount. On September 23, 1999 the Company and its
lending institution entered into a Fifth (the "Fifth Amendment") to the Credit
Agreement. The Fifth Amendment changed the terms of certain of the financial
covenants and ratios for the remainder of 1999 and the year 2000. The interest
rate presently applicable to the revolving credit line is prime plus three
percent, with interest payable monthly. At December 31, 1999 the Company was in
default of certain of these covenants, however, the Company has obtained a
waiver from the lending institution. The Company and the lending institution
have negotiated an amendment to the loan agreement which changed the terms of
certain of the financial covenants and ratios for 2000. At December 31, 1999,
the Company had $244,755 of cash and $1,168,000 of unused borrowings under its
credit facility, which amount is limited by the levels of inventory and
receivables.
18
<PAGE>
On May 22, 1998, the Company closed a transaction that provided net
capital proceeds of $1,335,000. The transaction was accomplished pursuant to a
Convertible Debenture and Private Equity Line of Credit Agreement (the "Credit
Agreement") between the Company and a group of five unaffiliated investors.
These funds were raised pursuant to the sale by the Company of Convertible
Debentures in the aggregate principal amount of $1,500,000. The Convertible
Debentures were convertible into the Company's common stock at the lesser of:
(i) 75% of the average of the three lowest closing bid prices of the common
stock as quoted on the Nasdaq SmallCap Market during the 22 trading-day period
immediately preceding the conversion date or (ii) $6.50, which was 100% of the
closing bid price on the trading day immediately preceding the closing date of
the Credit Agreement. In addition to the sale of the Convertible Debentures, the
Company also obtained the right to use a "put" mechanism to periodically draw
down up to $10,000,000 of additional equity capital the ("Equity Line"). Under
the terms of the Credit Agreement, the Company was obligated to draw down a
minimum of $1,000,000 under the Equity Line, and all amounts were to have been
drawn in increments of not less than $50,000. In return for the payment of
additional capital under the Equity Line, the Company would have been required
to issue shares of its common stock at a per share purchase price equal to 80%
of the average of the three lowest closing bid prices of the common stock during
a six day valuation period commencing three days before the draw date and ending
two days after the draw date. The Equity Line could not have been utilized, and
the Company had no obligation to exercise any portion of the put mechanism,
until after the effective date of the registration statement (the "Registration
Statement") for the underlying stock of the Credit Agreement. Additionally, upon
registration of the underlying shares which were issuable upon conversion of the
Convertible Debentures, the Company was obligated to issue an additional
$500,000 of Convertible Debentures. The Company filed the Registration Statement
on Form SB-2 as required by the Credit Agreement but it had not become effective
by June 1999.
On June 25, 1999, the Company and the Convertible Debenture holders
entered into a Modification Agreement ("Modification Agreement"), under which
the parties agreed to cancel the Equity Line and all of the parties' respective
obligations 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 obligation to have the Registration Statement declared effective
on or before August 28, 1998. Pursuant to the terms of the Credit Agreement, the
Company paid liquidated damages from September 23, 1998 through and including
February 23, 1999 in the aggregate amount of $210,000, of which $135,000 was
paid in the six-month period ended June 30, 1999. Under the Modification
Agreement, the Company was to accrue a total of $180,000 of liquidated damages
for the period from February 24, 1999 through and including June 23, 1999, which
accrued amount was payable at any time after October 1, 1999, upon request for
payment therefore by the Investors, in shares of the Company's common stock. The
number of shares of common stock issuable upon such payment was to have been
determined by dividing the total amount of damages accrued by 100% of the
average of the closing bid prices of the Company's common stock during the five
trading day period immediately preceding the date of such payment. Additionally,
under the Modification Agreement, the Company's obligation to pay liquidated
damages under the Credit Agreement was abated from June 24, 1999 through
September 23, 1999, provided that the Registration Statement was declared
effective on or before October 31, 1999. Additional liquidated damages in the
amount of $45,000 were to have accrued for the period between September 24, 1999
and October 23, 1999 if the Registration Statement was not declared effective
before October 31, 1999.
Although the Company filed an amendment to the registration statement
on July 2, 1999, the registration statement was not effective by the October 31,
1999 deadline set forth in the Modification Agreement. Moreover, because the
Company's pending preliminary proxy statement was being reviewed by the
Securities and Exchange Commission in tandem with the pending registration
statement, the Company was not able to hold its annual meeting of shareholders
by the October 31, 1999 deadline. On November 12, 1999, the Company and the
Investors executed an amendment to the Modification Agreement that substituted
February 15, 2000 for the October 31, 1999 deadline originally in the
Modification Agreement and made certain other changes to the Credit Agreement.
On December 8, 1999, the Company filed its third amendment to the
Registration Statement. The Registration Statement did not become effective,
however. The Company and the holders of the Convertible Debentures subsequently
executed a Convertible Debenture Retirement Agreement dated as of February 1,
2000, and which closed on February 23, 2000 (the "Retirement Agreement"). Under
the Retirement Agreement, and in exchange for payment to the holders of the
Convertible Debentures, pro rata, of $1,500,000 cash, the holders agreed to
19
<PAGE>
surrender for cancellation all but a small portion of the then unconverted
Convertible Debentures, to forgive or release the Company from its obligation to
pay accrued interest thereon, to release the Company from its obligation to pay
accrued but unpaid liquidated damages resulting from the Company's inability to
have the Registration Statement become effective, 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 February 14,
2000, or 94,450 shares. In light of the closing of the Retirement Agreement, the
Company has no ongoing obligations under the Credit Agreement, and has submitted
a request to the Securities and Exchange Commission to withdraw the pending
Registration Statement.
To allow the Company to consummate the transactions contemplated by the
Retirement Agreement, the Company completed a private placement of its
restricted common stock to seven offshore investors. The private placement was
accomplished pursuant to a Stock Purchase Agreement (the "Stock Purchase
Agreement") between the Company and the investors dated as of February 11, 2000,
which closed on February 23, 2000. Under the Stock Purchase Agreement, the
Company agreed to issue a total of 1,222,811 shares of restricted common stock.
The consideration paid by the investors was the greater of (i) $1.00 per share
or (ii) 100% of the average of the closing bid prices of the Company's common
stock as quoted by the Nasdaq Stock Market for the five trading days immediately
preceding the date the investors paid the purchase price or any portion thereof.
The total proceeds to the Company from the private placement were $1,600,000, of
which $1,500,000 was used to close the Retirement Agreement, and $100,000 was
used for general corporate purposes.
On November 4, 1999, the Company sold its corporate headquarters
facility for $2,865,000. Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The net proceeds to the
Company were $831,000, after paying long-term debt secured by the building,
broker and legal fees, and other ancillary charges. The proceeds from the sale
will be used for working capital purposes. The party that purchased the building
is not affiliated with or related to the Company or any of its officers or
directors.
Based on current operations and, after accounting for anticipated cost
savings through operating efficiencies and reductions in selling, and general
and administrative expenses, the Company believes that its present sources of
liquidity will be adequate to meet its projected requirements for working
capital, capital expenditures, scheduled debt service requirements and other
general corporate purposes during the year 2000. However, the Company
anticipates that it will pursue additional sources of liquidity in the form of
commercial credit or additional sales of the Company's debt or equity securities
during the second quarter of 2000 to fund a combination of short-term working
capital requirements and growth.
December 31, 1999 Compared to December 31, 1998
As of December 31, 1999, the Company had liquid assets (cash and cash
equivalents, accounts receivable - trade and other) of $1,941,000, a decrease of
13.0%, or $291,000, from December 31, 1998 when liquid assets were $2,232,000.
Cash increased $243,000 to $245,000 at December 31, 1999 from $2,000 at December
31, 1998. This increase in cash was primarily the result of the procedures
involving use of the Company's revolving credit facility, under which
collections of outstanding accounts receivable are swept the day after receipt
and re-applied against outstanding draws, therefore amounts collected on the
last day of the year would not be swept against draws until January 2000.
Accounts receivable - trade decreased $533,000, or 23.9%, to $1,696,000 at
December 31, 1999 from $2,229,000 at December 31, 1998. This decrease is
primarily the result of reduced sales during December 1999 and improved
collections.
Current assets decreased by $2,085,000, or 28.2%, to $5,320,000 at
December 31, 1999 from $7,405,000 at December 31, 1998. Of this decrease,
$533,000 was primarily the result of a decrease in accounts receivable - trade
discussed above and $1,894,000 was the result of decreased inventory levels
related to the Company's 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 obtained by the Company and earmarked for sale to
Dolgencorp. During the year ended December 31, 1999, Grandway purchased the
20
<PAGE>
entire remaining inventory. In addition to the inventory reduction resulting
from such sale, the Company wrote-down old inventory to the current market value
of the inventory. The decrease in current assets was offset in part by an
increase in cash as discussed above.
Long-term assets increased $334,000, or 8.1%, to $4,468,000 at December
31, 1999 from $4,134,000 at December 31, 1998. This increase was primarily the
result of the November 4, 1999 transaction in which the Company sold its
corporate headquarters facility for $2,900,000. Simultaneously with the sale,
the Company entered into a 20-year capital leaseback agreement with the
purchasing party. Such capital addition was offset in part by normal recurring
depreciation of fixed assets and amortization of deferred loan costs and other
intangibles.
Current liabilities increased by $62,000, or 1.0%, to $6,036,000 at
December 31, 1999 from $5,974,000 at December 31, 1998. Of this increase,
$442,000 was primarily the result of an increase in short-term note payable
related to additional borrowings on the Company's line of credit, and $63,000 is
the result of an increase in accounts payable-trade. These increases were
offset, in part, by decreases in accrued expenses, accrued advertising, the
current portion of long-term debt, and accounts payable-related.
The Company's working capital decreased by $2,147,000, or 150.0%, to
$(716,000) at December 31, 1999 from $1,431,000 at December 31, 1998, for the
reasons described above.
The Company used cash of $332,000 from operating activities during the
year ended December 31, 1999, primarily as a result of the net loss incurred
during the period, offset in part from decreased inventory levels.
The Company received $2,357,000 of cash from investing activities
during the year ended December 31, 1999, primarily from proceeds received from
the November 4, 1999 sale of the Company's corporate headquarters facility,
offset in part by the July 1999 purchase of Transworld Products, Inc., a
manufacturer of telephone shoulder rests and a main competitor of the Company in
that product line. The Company also incurred additional expenditures for new
computer equipment related to its Year 2000 preparations.
The Company used cash of $1,783,000 from financing activities during
the year ended December 31, 1999, due in part to the increase in payments on
long-term debt related to the pay-off of the mortgages on the Company's
corporate headquarters facility, as well as payments of liquidated damages
related to the company's convertible debentures, offset in part by the
borrowings on the Company's line of credit.
Inflation
Most of the Company's products are purchased in finished form and
packaged by the supplier or at the Company's headquarters. The Company uses a
premixed plastisol (a petroleum based raw material) to manufacture certain of
its telephone accessory products at its headquarters. The Company anticipates
usual inflationary increases in the price of its plastic products and the other
raw materials used in the manufacture of its products, whether such
manufacturing is done by the Company or its suppliers. Significant inflationary
pressure on such costs could materially affect the Company's profitability if
these cost increases cannot be passed on to customers. In general, the Company
does not believe that inflation has had a material effect on its results of
operations in recent years. However, there can be no assurance that the
Company's business will not be affected by inflation in the future.
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.
21
<PAGE>
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement on Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivatives Instruments and
Hedging Activities, in 1998. SFAS No. 133 establishes accounting and reporting
standards for 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 statement of financial position 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. As a result of SFAS No.137 the effective date
of SFAS No. 133 shall be in the first quarter of 2001. The Company does not
believe the adoption of SFAS No. 133 will have a material affect on the
financial position or results of operations of the Company.
On December 3, 1999 the SEC staff issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements. SAB No. 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company will incorporate the guidance of SAB 101 in the first quarter of fiscal
2001.
Year 2000 Compliance
The Year 2000 problem relates to the inability of many computer
programs and microchip-based products and equipment to operate properly on dates
approaching and following December 31, 1999. This inability to operate correctly
results from the use in many computer programs and embedded microchip code of a
two-digit rather than a four-digit date field. Thus, non Year 2000 compliant
software and firmware may misinterpret a date entry of "00" as 1900, rather than
2000, resulting in, among other things, a temporary inability to process
transactions, send invoices, or engage in similar business transactions.
The Company uses and is dependent upon computer systems and software
to conduct its business. In the fourth quarter of 1997, the Company began
implementing a new accounting and materials resource planning integrated
software system. The software system, Made2Manage, was purchased with the Year
2000 issue in mind, and is represented by its manufacturer to be Year 2000
compliant in all material respects. The Company has completed its Year 2000
evaluation and remediation of these various internal computer systems.
In its evaluation and remediation program, the Company utilized both
internal and external resources to reprogram or replace non-compliant software
for Year 2000 modifications. The total cost of the Year 2000 project to date is
approximately $195,000, which has been funded through operating cash flows and
the Company's existing secured credit facility. Of this cost, approximately
$122,000 was attributable to the purchase of new software or equipment that will
be capitalized. The remaining $73,000 has been expensed as incurred. The Company
does not anticipate incurring additional material expenses related to its Year
2000 remediation efforts in respect of its internal systems and operations.
As part of its Year 2000 compliance program, the Company also
initiated formal communications with all of its significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 problems. Additionally,
in March 1999, the Company, through its own information technology personnel and
its Chief Financial Officer, conducted on-site reviews of certain of its key
Asian suppliers to ascertain, to the extent possible, the Company's exposure to
manufacturing delays or stoppages as a result of those suppliers' failure to
remediate their Year 2000 problems.
Through December 31, 1999, and continuing to the date of this
Report, the Company had experienced no material impact to its operations and
financial condition, other than the expenditures summarized above, as a result
of the Year 2000 problem, either as a result of internal problems or problems
encountered by its suppliers or customers. There remains a possibility that
residual consequences stemming from the change to the year 2000 could occur and,
if these consequences become widespread, they could have a material adverse
effect on the Company, its operations and financial condition. However,
management considers this possibility remote and does not anticipate any
significant problems due to the Year 2000 issue.
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
22
<PAGE>
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, and the Company's ability
to obtain additional working capital to fund future growth, as well as the other
factors described elsewhere in this Report under the heading "Description of
Business Risk Factors".
23
<PAGE>
Item 7. Financial Statements
Independent Auditors' Report
The Board of Directors
Dynatec International, Inc.:
We have audited the accompanying consolidated balance sheets of Dynatec
International, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dynatec
International, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Salt Lake City, Utah
March 1, 2000
24
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
--------------- --------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 244,755 $ 2,268
Trade accounts receivable, net of allowance for doubtful accounts of $39,036
in 1999 and $30,190 in 1998, respectively (note 6) 1,695,897 2,229,267
Inventories (notes 3 and 6) 2,963,064 4,857,241
Prepaid expenses and other 415,921 316,347
--------------- --------------
Total current assets 5,319,637 7,405,123
--------------- --------------
LAND, BUILDING AND EQUIPMENT, at cost (notes 7 and 8):
Land - 365,860
Building and improvements 2,865,000 2,214,144
Furniture, fixtures, and equipment 3,724,808 3,554,045
--------------- --------------
6,589,808 6,134,049
Less accumulated depreciation and amortization 2,471,862 2,336,427
--------------- --------------
Net land, building and equipment 4,117,946 3,797,622
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES, net (note 4) 194,743 205,102
DEFERRED LOAN COSTS, net of accumulated amortization of $30,452 in
1999 and $4,903 in 1998, respectively (note 2) 36,194 61,743
OTHER ASSETS 119,450 69,337
--------------- --------------
$9,787,970 $11,538,927
` =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------------- -------------
CURRENT LIABILITIES:
<S> <C> <C>
Short-term note payable (note 6) $ 1,831,622 $ 1,389,223
Convertible debentures (note 9) 1,649,342 1,667,079
Current portion of long-term debt (note 7) 82,500 246,855
Current portion of capital lease obligations (note 8) 60,739 17,881
Accounts payable 1,581,463 1,518,316
Accounts payable - other - 9,000
Accounts payable - related party (note 13) - 98,403
Accrued expenses 525,038 637,051
Accrued advertising 300,000 320,000
Accrued royalties payable 80,150 70,246
------------- -------------
Total current liabilities 6,110,854 5,974,054
LONG-TERM DEBT, net of current portion (note 7) 81,175 2,006,518
DEPOSIT FOR STOCK ISSUANCE (note 11) - 1,000,000
DEFERRED GAIN ON SALE OF ASSET 244,363 -
CAPITAL LEASE OBLIGATIONS, net of current portion (note 8) 2,957,740 28,654
------------- -------------
Total liabilities 9,394,132 9,009,226
------------- -------------
STOCKHOLDERS' EQUITY (note 11):
Common stock, $.01 par value; 100,000,000 shares authorized and 3,721,418
and 2,901,627 shares outstanding at December 31, 1999 and 1998,
respectively 37,214 29,016
Treasury stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 8,375,074 7,041,590
Accumulated deficit (7,103,300) (3,625,755)
------------- -------------
Net stockholders' equity 393,838 2,529,701
------------- -------------
COMMITMENTS AND CONTINGENCIES ( note 6, 7, 8, 9, 15, and 19)
$ 9,787,970 $ 11,538,927
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
PRODUCT SALES $ 14,770,244 $ 16,578,694
COST OF SALES (9,647,770) (10,246,369)
--------------- ---------------
Gross Margin 5,122,474 6,332,325
--------------- ---------------
OPERATING COSTS AND EXPENSES:
Selling expenses 4,089,515 3,406,558
General and administrative 3,458,644 3,297,555
Research and development 170,247 68,708
--------------- ---------------
Total operating costs and expenses 7,718,406 6,772,821
--------------- ---------------
Loss from operations (2,595,932) (440,496)
--------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (note 9) (888,992) (1,773,079)
Interest income 4,534 3,340
Other income (expense) 2,845 (20,192)
--------------- ---------------
Total other expense, net (881,613) (1,789,931)
--------------- ---------------
Loss before income tax provision (3,477,545) (2,230,427)
INCOME TAX PROVISION (note 10) - (15,000)
--------------- ---------------
Net loss $ (3,477,545) $ (2,245,427)
=============== ===============
BASIC AND DILUTED NET LOSS PER SHARE $ (1.03) $ (.80)
=============== ===============
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 3,384,598 2,792,738
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
--------------------------
Treasury Additional Net
Number of Stock Paid-in Accumulated Stockholders'
Shares Amount At Cost Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1997 2,869,940 $28,699 (915,150) 5,596,740 (1,380,328) 3,329,960
Shares issued pursuant to employee
stock option plans 11,687 117 - (117) - -
Issuance of convertible debentures
and equity line-of-credit
(note 9) 20,000 200 - 864,968 - 865,168
Capital addition (note 11) - - - 580,000 - 580,000
Net loss (2,245,427) (2,245,427)
--------- ------- ----------- ----------- ------------- ------------
- - - -
BALANCE DECEMBER 31, 1998 2,901,627 29,016 (915,150) 7,041,590 (3,625,755) 2,529,701
Shares issued pursuant to conversion
of deposit payable
(note 11) 500,000 5,000 - 995,000 - 1,000,000
Shares issued pursuant to conversion
of convertible debenture (note 9) 285,843 2,858 - 303,824 - 306,682
Shares issued pursuant to
sale/leaseback of company
headquarters building (note 11) 33,948 340 - 34,660 - 35,000
Net loss (3,477,545) (3,477,545)
--------- ------- ----------- ----------- ------------- ------------
- - - -
BALANCE DECEMBER 31, 1999 3,721,418 $37,214 $ (915,150) $8,375,074 $ (7,103,300) $ 393,838
========= ======= =========== =========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (3,477,545) $ (2,245,427)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 588,146 504,991
Amortization of deferred loan costs 25,549 97,415
Non-cash interest expense on convertible debentures (note 9) 423,945 1,004,996
Loss (gain) on sale of assets (2,935) 20,192
Provision for losses on accounts receivable 39,000 77,125
Changes in operating assets and liabilities:
Trade accounts receivable 494,370 (330,373)
Inventories 1,894,177 (2,335,092)
Prepaid expenses (99,574) 21,553
Other assets (50,113) (38,294)
Accounts payable 63,147 525,684
Accounts payable - other (9,000) (76,000)
Accounts payable - related party (98,403) 98,403
Accrued expenses (112,013) 573,136
Accrued advertising (20,000) (30,000)
Accrued royalties 9,904 52,365
----------------- -----------------
Net cash used in operating activities (331,345) (2,079,326)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of assets 2,693,698 63,706
Purchase of building and equipment (252,219) (394,365)
Cash paid for asset acquisition (note 5) (85,000) -
----------------- -----------------
Net cash provided by (used in) investing activities 2,356,479 (330,659)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 442,399 58,054
Debt issuance costs - (298,986)
Net payments on long-term debt (2,089,698) (744,459)
Principal payments on capital lease obligations (35,348) (15,250)
Payment of liquidated damages related to convertible debenture (note 9) (135,000) -
Proceeds from issuance of common stock related to sale of building
(note 11) 35,000 -
Proceeds from capital addition (note 11) - 580,000
Proceeds from convertible debenture offering (note 9) - 1,500,000
Proceeds from deposit for stock issuance (note 11) 1,000,000
-------------------- -----------------
-
Net cash provided by (used in) financing activities (1,782,647) 2,079,359
-------------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 242,487 (330,626)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,268 332,894
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 244,755 $ 2,268
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEAR ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid for interest $ 552,928 $ 685,573
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Share certificate cancelled - 250,000
Debt issuance costs attributable to warrants to placement agent - 426,000
Convertible debt discount associated with warrants to investors - 426,000
Property and equipment acquired under capital leases 3,007,292 -
Conversion of Convertible Debentures and accrued interest for
common stock 306,682 -
Issuance of 500,000 shares of restricted stock 1,000,000 -
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Dynatec International, Inc., a Utah corporation (Dynatec or the
Company), is a manufacturer and distributor of consumer products comprising the
following major product lines: telecommunication headsets and amplifiers and
telephone accessories, home storage and organization, flashlights and other
miscellaneous products sold to mass market merchandisers. Dynatec is located in
Salt Lake City, Utah. The Company conducts most of its operations through four
wholly owned subsidiaries: Softalk, Inc., Arnco Marketing, Inc., Nordic
Technologies, Inc. and SofTalk Communications, Inc. Unless specified to the
contrary herein, references to Dynatec or to the Company refer to the Company
and its subsidiaries on a consolidated basis.
The Company's business follows seasonal trends. As a result the Company
experiences its highest revenues in the fourth quarter. Because the Company
sells its products primarily to major retailers, the Company's sales performance
is significantly dependent on the performance of those retailers.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities at the date of purchase of three months or less to be cash
equivalents.
Inventories
Effective January 1, 1998, the Company changed its method of
determining the value of inventory from last-in, first-out (LIFO) to first-in,
first-out (FIFO). Historically, the difference between the LIFO and FIFO values
of inventories has been immaterial. Raw materials inventory is stated at the
lower of cost or market. Work-in-process and finished goods are stated on the
basis of accumulated manufacturing costs, but not in excess of market (net
realizable value).
31
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Building and Equipment
Depreciation on building and equipment is computed on the straight-line
method over the following useful lives: Capital Leases 3-20 years Equipment 5-10
years Office Equipment & Fixtures 3-7 years Vehicles 5 years Signs and Show
Booths 3-7 years
Assets held under capital leases and leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term or
estimated useful life of the asset.
Accounting for Impairment of Long-Lived Assets
Long-lived assets, goodwill, and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount of fair value less costs to sell.
Intangible Assets
Intangible assets include purchased patents, product licenses, and
other agreements allowing the Company non-exclusive rights to manufacture,
produce, and sell various products. Such costs are amortized on a straight-line
basis over their estimated useful lives of 5 to 40 years. Other intangible
assets such as agreements not to compete are being amortized using the
straight-lined method over five years.
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 (note 5).
Deferred Loan Costs
Deferred loan costs totaling $66,646 resulted from issuance costs
related to the Company's revolving credit facility, and are being amortized as
interest expense over thirty-six months using a basis that approximates the
effective-interest rate method (note 6).
Revenue Recognition
The Company recognizes revenue from product sales at the time of
shipment. The Company has established programs, which under specified conditions
enable its customers to return product. The effect of these programs is
estimated and current period sales and cost of sales are reduced accordingly.
32
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
The Company employs the footnote disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 encourages entities to adopt a fair-value based
method of accounting for stock options or similar equity based compensation
using the intrinsic-value method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25). The Company has elected to continue to apply the provisions of APB 25
and provide proforma footnote disclosures required by SFAS No. 123.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company provides credit to its customers in the normal course of business, and
accordingly performs ongoing credit evaluations and maintains allowances for
potential credit losses. Concentrations of credit risk with respect to trade
receivables are limited due to the Company's large number of customers and their
dispersion across many geographic areas.
For the year ended December 31, 1999, one customer accounted for 11.3%
and no other customer accounted for more than 10% of the Company's total
revenues.
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be settled or recovered. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
The Company has recognized no tax benefit for the net operating losses
incurred during the years ended December 31, 1999 and 1998 due to uncertainties
about the Company's ability to generate future earnings to offset such losses.
Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is calculated based upon the weighted
average number of common shares outstanding during the periods presented.
Diluted loss per common share is the amount of loss for the period available 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 years ended December 31, 1999, and 1998,
warrants and options to purchase 1,581,000, and 1,687,500 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.
33
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A reconciliation between the basic and diluted weighted-average number
of shares outstanding as of December 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
-------------- -------------
<S> <C> <C
Basic weighted average number of common shares................... 3,384,598 2,792,738
Weighted average number of common stock options.................. - -
============== =============
Diluted weighted average number of shares.................. 3,384,598 2,792,738
============== =============
</TABLE>
Advertising
Advertising costs are expensed as incurred. The Company does not
participate in direct response advertising. Advertising expense amounted to
$956,106 and $531,949 in 1999 and 1998, respectively.
Comprehensive Loss
The company adopted SFAS No. 130, Reporting Comprehensive Income,
effective January 1, 1998. SFAS No. 130 establishes standards for reporting and
display of comprehensive loss and its components in financial statements. For
the years ended December 31, 1999 and 1998 comprehensive loss was equal to the
net loss as presented in the accompanying statements of operations.
Reclassifications
Certain reclassifications have been made in 1998 to conform with the
1999 presentation.
(3) INVENTORIES
Inventories, consisting principally of telecommunication headsets and
amplifiers and telephone accessories, home storage and organization,
flashlights, and other miscellaneous products sold to mass market merchandisers
as of December 31, 1999 and 1998, respectively, are summarized as follows:
1999 1998
------------ ------------
Raw materials............................ $ 886,377 902,703
Work-in-Process.......................... 135,931 309,815
Finished Goods........................... 1,940,7561 3,644,723
------------ ------------
$ 2,963,064 4,857,241
============ ============
34
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(4) INTANGIBLE ASSETS
Intangible assets are comprised of the following as of December 31:
Est. Useful
1999 1998 Life (years)
--------- -------- ------------
Goodwill 34,307 - 2
License agreement 203,509 203,509 40
Product rights 296,262 301,263 5-10
Non-compete agreements 112,500 87,500 5
--------- --------
646,578 592,272
Less accumulated amortization 451,835 387,170
--------- --------
$194,743 $205,102
========= ========
(5) ASSET ACQUISITION
On July 15, 1999, the Company purchased certain assets of Transworld at
a purchase price of $85,000. The acquisition was accounted for by the purchase
method. Transworld is a manufacturer of telephone shoulder rests and was a main
competitor of the Company in that product line. In exchange for the purchase
price payment, the Company acquired machinery and equipment, inventory, and
intangible assets that include a non-compete agreement and goodwill.
The allocation of the $85,000 purchase price among the tangible and
intangible assets is summarized as follows:
Amortization
Period
(years)
-------------
Purchase price allocation:
Net tangible assets acquired $25,693
Intangible assets:
Non-compete agreement 25,000 5
Goodwill 34,307 2
--------
Total purchase price $85,000
========
(6) SHORT-TERM NOTE PAYABLE
The short-term note payable consists of a revolving line-of-credit
obtained on May 27, 1998 from a regional financial institution that provides up
to $3,000,000 bearing interest at a rate of prime plus three percent with
interest payable monthly (11.5% and 9.75% at December 31, 1999 and 1998,
respectively). The note is secured by accounts receivable and inventory and is
due May 26, 2001. As of December 31, 1999 and 1998, direct outstanding
borrowings totaled $1,831,622 and $1,389,223, respectively. The amount of unused
borrowings under the Company's credit facility is limited to the then-current
levels of inventory and receivables discounted at 40% and 78%, respectively.
Under the terms of the loan agreement, the Company is required to maintain
financial covenants and ratios, including book net worth, net income and debt
service coverage. At December 31, 1999 the Company was in default of certain of
these covenants, however, the Company has obtained a waiver. The Company and the
lending institution have negotiated an amendment to the agreement which amended
the terms of certain of the financial covenants and ratios for 2000.
35
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(6) SHORT-TERM NOTE PAYABLE (Continued)
Maximum and average borrowings as well as weighted average interest
rate for the years ended December 31, 1999 and 1998 are as follows:
1999 1998
-------------- --------------
Maximum Outstanding $2,503,277 $2,416,638
Average Outstanding $2,048,824 $1,780,576
Weighted Average Interest Rate 10.83% 8.25%
(7) LONG -TERM DEBT
Long-term debt consists of the following at December 31, 1999 and 1998:
1999 1998
-------- --------
Term note payable to a bank, interest
at prime plus 1%, due May 26, 2001,
secured by equipment 163,675 266,175
Note payable to a company; due in monthly
installments of $6,807 plus interest at 6%;
due October 31, 2000, unsecured - 149,755
Note payable to a financial institution;
due in monthly installments of $455 with
interest at 8.75%, due November 29, 2001,
secured by a vehicle - 13,976
Note payable to a bank; due in monthly
installments of $10,234 with interest at
8.75%, due November 1, 2010, secured by
land and building - 882,782
Note payable to the Small Business
Administration; due in monthly
installments of $8,541 with interest at
7.32%; due August 14, 2016,
secured by land and building as well as
assets of a former officer of the Company - 940,685
--------- ---------
Total long-term debt 163,675 2,253,373
Less current portion 82,500 246,855
--------- ---------
Total long-term debt excluding current
portion $ 81,175 $2,006,518
========= ==========
36
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(7) LONG -TERM DEBT (Continued)
Aggregate maturities subsequent to December 31, 1999, are as follows:
2000 82,500
2001 81,175
Total long-term debt $163,675
(8) LEASES
The following represents assets under capital lease at December 31,
1999 and 1998:
1999 1998
------------ -----------
Equipment $ 206,938 $ 82,357
Building 2,865,000 -
------------ -----------
3,071,938 82,357
Less accumulated depreciation 71,172 33,704
------------ -----------
Net property under capital lease $ 3,000,766 $ 48,653
============ ===========
Amortization of assets held under capital lease is included with
depreciation expense. Rental expense for operating leases during the years ended
December 31, 1999 and 1998 was $31,189 and $21,407, respectively.
On November 4, 1999, the Company sold its corporate headquarters
facility for $2,865,000. Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The party that
purchased the building is not affiliated with or related to the Company or any
of its officers or directors, and the terms of the transaction were the result
of arms-length negotiations. In connection with the sale/leaseback the Company
recorded a deferred gain of $246,417, which is being amortized on a
straight-line basis over the term of the related lease as a reduction to
interest expense.
At December 31, 1999 the Company is obligated under the terms of
non-cancelable leases on the Company headquarters and warehouse building,
machinery and equipment, and automobiles. The leases have the following minimum
lease commitments:
Capital Operating
leases leases
---------- ----------
Year ended December 31: 2000 $407,033 $ 11,170
2001 407,817 6,501
2002 371,938 6,076
2003 330,915 6,076
2004 335,724 3,038
Later 5,992,975 -
---------- ---------
Total minimum lease payments 7,846,402 $ 32,861
=========
Less amount representing interest (at
rates ranging from 3.38% to 29.69%) 4,827,923
Present value of total minimum capital
lease payments 3,018,479
Less current portion 60,739
----------
Capital lease obligations excluding
current portion $2,957,740
==========
(9) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT
On May 22, 1998, the Company closed a transaction that provided net
capital proceeds of $1,335,000. The transaction was accomplished pursuant to a
Convertible Debenture and Private Equity Line of Credit Agreement (the "Credit
Agreement") between the Company and a group of five unaffiliated investors.
These funds were raised pursuant to the sale by the Company of Convertible
Debentures (the "Convertible Debentures") in the aggregate principal amount of
$1,500,000 due May 22, 2001. The Convertible Debentures are convertible into
shares of the Company's common stock at the lesser of: (i) 75% of the average of
the three lowest closing bid prices of the Company's common stock during the
22-trading-day period immediately preceding the conversion date or (ii) $6.50,
which was 100% of the closing bid price on the trading day immediately preceding
the closing date of the Credit Agreement.
As of December 31, 1999 the investors had converted the following
amounts of principal and interest accrued thereon into the following amounts of
common stock :
37
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(9) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
<TABLE>
<CAPTION>
Date of Conversion Principal Number of Number of
Conversion Price/Share Amount Shares Interest Amount Shares
----------- ----------- --------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
6/10/99 $1.3438 $132,500 98,604 $11,180 8,320
7/8/99 $1.1250 $ 75,000 66,667 $10,680 9,157
10/8/99 $0.7500 $ 53,000 70,666 $ 8,904 11,872
12/1/99 $0.7500 $ 13,000 17,333 $ 2,418 3,224
</TABLE>
Accordingly, as of December 31, 1999, there was a total principal
amount of outstanding Convertible Debentures of $1,226,500 and $422,842 of
accrued interest and penalties. Assuming a hypothetical conversion of this
entire remaining principal amount of the Convertible Debentures outstanding as
of December 31, 1999, and all interest accrued thereon at the rate of 12% per
annum as of December 31, 1999, the Convertible Debentures would be convertible
into approximately 1,649,000 shares of the Company's common stock. The
Convertible Debentures are callable by the holders thereof.
In addition to the sale of the Convertible Debentures, under the Credit
Agreement, the Company also obtained the right to use a "put" mechanism to
periodically draw down up to $10,000,000 of additional equity capital (the
"Equity Line"). Under the terms of the Credit Agreement, the Company was
obligated to draw down a minimum of $1,000,000 of the Equity Line, and all
amounts were to have been drawn in increments of not less than $50,000. In
return for the payment of additional capital under the Equity Line, the Company
would have been required to issue shares of its common stock at a per share
purchase price equal to 80% of the average of the three lowest closing bid
prices of the common stock during a six day valuation period commencing three
days before the draw date and ending two days after the draw date. The Equity
Line could not have been utilized, and the Company would have had no obligation
to exercise any portion of the put mechanism, until after the effective date of
a registration statement covering the shares of common stock issuable under the
Credit Agreement (the "Registration Statement"). Additionally, upon the
effectiveness of the Registration Statement, the Company was obligated to issue
an additional $500,000 principal amount of Convertible Debentures, pro rata to
the investors.
On June 25, 1999, the Company and the 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 obligation to have the Registration Statement declared effective
on or before August 28, 1998. Pursuant to the terms of the Credit Agreement, the
Company paid liquidated damages from September 23, 1998 through and including
February 23, 1999 in the aggregate amount of $210,000, of which $135,000 was
paid during the year ended December 31, 1999 and $75,000 was paid during the
year ended December 31, 1998. Under the Modification Agreement, the Company is
to accrue atotal 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. The number
of shares of common stock issuable upon such payment was to have been determined
by dividing the total amount of damages accrued by 100% of the average of the
closing bid prices of the Company's common stock during the five trading day
period immediately preceding the date of such payment. Additionally, under the
Modification Agreement, the Company's obligation to pay liquidated damages under
the Credit Agreement was abated from June 24, 1999 through September 23, 1999,
provided that the Registration Statement was declared effective on or before
October 31, 1999. Additional liquidated damages in the amount of $45,000 were to
have accrued for the period between September 24, 1999 and October 23, 1999 if
the Registration Statement was not declared effective 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
38
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(9) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
allowing the Company to pay liquidated damages in common stock rather than cash
were subject to rescission at the option of the investors. Except to the extent
specifically modified by the Modification Agreement, the terms and conditions of
the Credit Agreement and the documents and instruments incorporated in the
Credit Agreement were not affected in any way by the Modification Agreement.
Although the Company filed an amendment to the Registration Statement
on July 2, 1999, the Registration Statement was not effective by the October 31,
1999 deadline set forth in the Modification Agreement. On November 12, 1999, the
Company and the investors executed an amendment to the Modification Agreement
that substituted February 15, 2000 for the October 31, 1999 deadline originally
in the Modification Agreement. Consequently, the accrual of liquidated damages
will be deferred from June 24, 1999 until February 15, 2000, provided that the
Registration Statement becomes effective and shareholder approval of the
transaction is obtained on or before that date. Liquidated damages from February
24, 1999 through June 23, 1999 have been accrued and continue to be payable by
the Company as specified in the Modification Agreement. The November 12, 1999
agreement also amended the Convertible Debentures such that, even if the
Convertible Debentures are still outstanding at their maturity date, May 22,
2001, the Convertible Debentures will not automatically be converted into common
stock unless the holders so elect. See note 18 for discussion of The Convertible
Debenture Retirement Agreement ("The Retirement Agreement").
Also in connection with the Credit Agreement, the investors and
placement agent were issued warrants. These warrants were issued as Series A and
Series B as follows:
<TABLE>
<CAPTION>
Placement Exercise
Investors Agent Price
----------------- ---------------- ---------------
<S> <C> <C> <C>
Series A Warrants....................... 150,000 150,000 $6.50
Series B Warrants....................... 150,000 300,000 $7.15
</TABLE>
Under the Credit Agreement, the Company was obligated to issue 50,000 additional
Series A warrants to both the placement agent and the investors, collectively,
upon the issuance of the additional $500,000 of Convertible Debentures. Because
the Modification Agreement cancelled irrevocably the Company's obligations with
respect to the additional $500,000 of Convertible Debentures, the Company will
not issue additional Series A warrants. Of the warrants that were issued,
one-sixth of the market value of the Series A and B warrants was allocated to
the Convertible Debenture and five-sixths was allocated to the Equity Line. This
allocation was based on the relative notional amounts of the two elements of the
Credit Agreement as of the date of the Credit Agreement. The value of the
warrants issued to the investors was written off in 1998 as a one-time, non-cash
debt issuance cost, because the warrants were immediately exercisable. The value
of the warrants issued to the placement agent and allocated to the Convertible
Debentures, and $500,000, representing the intrinsic value of the beneficial
conversion premium, were written off as non-cash expense in the fourth quarter
of 1998, when the Convertible Debentures became callable by the investors.
The Company also issued, as part of the transaction involving the
Credit Agreement, consideration of up to 80,000 shares of its common stock as a
fee to the placement agent. Of these shares, 20,000 were issued at the time of
the closing. The remaining 60,000 shares were deposited into escrow and were to
be released in 6,000 share increments as each $1,000,000 was drawn down under
the Equity Line established under the Credit Agreement. Because under the
Modification Agreement the Equity Line was cancelled, and therefore the
placement agent never would have been entitled to the 60,000 additional shares
of common stock deposited in escrow, the escrow was terminated, and the 60,000
shares of common stock were returned to the Company for cancellation.
(10) INCOME TAXES
Income tax expense (benefit) attributable to income from continuing
operations consists of:
39
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(10) INCOME TAXES (Continued)
Current Deferred Total
Year ended December 31, 1999
Federal $ - $ - $ -
State - - -
----------- ---------- ----------
$ - $ - $ -
=========== ========== ==========
Year ended December 31, 1998
Federal $ 19,386 $ (4,386) $ 15,000
State 650 (650) -
----------- ---------- ----------
$ 20,036 $ (5,036) $ 15,000
=========== ========== ==========
Income tax expense (benefit) from continuing operations differed from
the amounts computed by applying the U.S. federal income tax rate of 34 percent
to pretax loss from continuing operations as a result of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computed "expected" tax benefit $ (1,182,365) $ (983,952)
Change in the valuation allowance for deferred tax
assets allocated to income tax expense 1,108,011 269,952
Non-deductible financing costs 152,828 682,733
State income tax benefit net of federal tax effect (99,015) (23,974)
Other 20,541 70,241
-------------- ------------
Total $ - $ 15,000
============== ============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998, are presented below.
1999 1998
---- ----
Deferred tax assets:
Inventory capitalization $ 32,249 $ 60,041
Allowance for bad debts 14,560 11,261
Compensated absences accrued for financial
reporting purposes 13,928 25,784
Net operating loss carry-forward 1,814,205 649,945
Intangibles, principally due to differences
in amortization 31,380 17,701
Warranty and other reserve 56,208 8,837
Research and experimentation credit - 25,000
------------ -----------
Gross deferred tax assets 1,962,530 798,569
Less valuation allowance 1,864,244 756,233
----------- -----------
Deferred tax assets 98,286 42,336
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation 98,286 42,336
----------- -----------
Deferred tax liabilities 98,286 42,336
=========== ===========
Net deferred tax assets (liabilities) $ - $ -
=========== ===========
40
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(10) INCOME TAXES (Continued)
The valuation allowance for deferred tax assets as of January 1, 1998
was $486,281. The net change in the total valuation allowance for the years
ended December 31, 1999 and 1998 was $ 1,108,011 and $ 269,952, respectively.
Subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of December 31, 1999 will be reported as a
reduction of income tax expense from continuing operations.
The Company has $4,863,370 of net operating loss carryforwards at
December 31, 1999. Of the total net operating loss carryforwards, $525,792,
$490,219, $847,359 and 3,000,000 expire in the years ended December 31, 2011,
2012, 2018, and 2019 respectively.
As measured under the rules of the Tax Reform Act of 1986, the Company
has undergone a greater than 50 percent change in ownership since 1986.
Consequently, use of the Company's net operating loss carryforward against
future taxable income in any one year may be limited. The maximum amount of
carryforwards available in a given year is limited to the product of the
Company's fair market value on the date of ownership change and the federal
long-term tax-exempt rate, plus any limited carryforward not utilized in prior
years. Management does not believe that these rules will adversely impact the
Company's ability to utilize the above losses in the aggregate.
(11) STOCKHOLDERS' EQUITY
On February 4, 1999, the Company entered into a Deposit Payable
Conversion Agreement, whereby a $1,000,000 deposit received by the Company in
early 1998 and recorded as a liability in the accompanying balance sheet, was
cancelled and the Company issued 500,000 shares of restricted common stock under
Regulation D to the depositor.
On November 4, 1999, the Company sold its corporate headquarters
facility for $2,865,000. Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The net proceeds to the
Company were $831,000, after paying long-term debt secured by the building,
broker and legal fees, and other ancillary charges. The proceeds from the sale
will be used for working capital purposes. As an additional inducement to the
purchaser, the Company issued a total of 33,948 shares of its restricted common
stock to the purchaser having a market value of $35,000 based on the fair market
value of the restricted stock on the date of issue. The party that purchased the
building is not affiliated with or related to the Company or any of its officers
or directors, and the terms of the transaction were the result of arms-length
negotiations.
In March 1998, the Company received $580,000 as a nonrefundable payment
under an agreement with a third party pursuant to which the third party acquired
nonexclusive rights to market certain of the Company's products internationally.
The cash paid to the Company was obtained from the sale of the Company's common
stock by such third party. The Company is therefore of the opinion that the
proceeds of such transaction were not attributable to the culmination of an
earnings process. Consequently, such proceeds have been accounted for as an
addition to capital in the accompanying consolidated financial statements.
41
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(12) BUSINESS SEGMENT INFORMATION
Information as to the operations of the Company in different business
segments (rounded to the nearest thousandth) is set forth below based on the
nature of the products and services offered. Management evaluates performance
based on several factors, of which the primary financial measure is business
segment operating income before noncash amortization of intangible assets
("EBITDA"). The accounting policies of the business segments are the same as
those described in the summary of significant accounting policies.
YEARS ENDED DECEMBER 31,
----------------------------------
REVENUES: 1999 1998
- ------------------------------------------ ------------- ------------
Telecommunication Headsets and
Amplifiers and Telephone Accessories... $ 7,320,000 $ 7,640,000
Home Storage and Organization............. 4,648,000 4,703,000
Flashlights............................... 1,810,000 989,000
Miscellaneous/Mass Market................. 992,000 3,247,000
------------- ------------
Total.............................. $14,770,000 $ 16,579,000
=========== ============
YEARS ENDED DECEMBER 31,
--------------------------------
OPERATING INCOME (LOSS): 1999 1998
- -------------------------------------------- --------- --------
Telecommunication Headsets and Amplifiers
and Telephone Accessories................ $ (603,000) $ 904,000
Home Storage and Organization............... (1,022,000) (496,000)
Flashlights................................. (977,000) (696,000)
Miscellaneous/Mass Market................... 6,000 (152,000)
-------------- ------------
Total................................ $ (2,596,000) $ (440,000)
============== ============
YEARS ENDED DECEMBER 31,
--------------------------------
DEPRECIATION AND AMORTIZATION (1): 1999 1998
- --------------------------------------------- ---------- ----------
Telecommunication Headsets and Amplifiers
and Telephone Accessories................. $ 312,000 $ 206,000
Home Storage and Organization................ 198,000 183,000
Flashlights.................................. 78,000 93,000
Miscellaneous/Mass Market.................... - 23,000
----------- -----------
Total................................. $ 588,000 $ 505,000
=========== ===========
(1) Amortization includes all amortization relating to product license rights,
goodwill, non-competes and purchased patents.
42
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(12) BUSINESS SEGMENT INFORMATION (Continued)
Information as to the assets and capital expenditures of the Company is
as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
ASSETS (1): 1999 1998
- --------------------------------------------- ------------ -------------
Telecommunication Headsets and Amplifiers
and Telephone Accessories................. $ 4,827,000 $ 4,795,000
Home Storage and Organization................ 2,468,000 3,200,000
Flashlights.................................. 1,676,000 1,728,000
Miscellaneous/Mass Market.................... - 1,366,000
------------ -------------
Total assets for reportable segments.... 8,971,000 11,089,000
Other assets................................. 156,000 319,000
Deferred loan costs and other assets not
allocated to segments..................... 661,000 131,000
============ =============
Consolidated total.................... $ 9,788,000 $ 11,539,000
============ =============
YEARS ENDED DECEMBER 31,
--------------------------------
CAPITAL EXPENDITURES: 1999 1998
- --------------------------------------------- ------------- -------------
Telecommunication Headsets and Amplifiers
and Telephone Accessories................. $ 179,000 $ 157,000
Home Storage and Organization................ 114,000 162,000
Flashlights.................................. 44,000 69,000
Miscellaneous/Mass Market.................... - 6,000
------------- -------------
Total................................. $ 337,000 $ 394,000
============= =============
(12) BUSINESS SEGMENT INFORMATION (Continued)
Information as to the Company's operations in different geographical
areas is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
REVENUES: 1999 1998
- ----------------------------------- ----------- -----------
United States...................... $ 14,596,000 $ 16,402,000
Other (1).......................... 174,000 177,000
------------ ------------
Total....................... $ 14,770,000 $ 16,579,000
============= ============
(1) Includes Canada, Europe and other miscellaneous.
YEARS ENDED DECEMBER 31,
-----------------------------
OPERATING LOSS: 1999 1998
- -------------------------------- -------- ---------
United States................... $ (2,596,000) $ (440,000)
============= ===========
YEARS ENDED DECEMBER 31,
------------------------------
ASSETS: 1999 1998
- -------------------------------- -------- --------
United States................... $ 9,418,000 $ 11,089,000
Asia............................ 370,000 450,000
------------ -------------
Total........................... $ 9,788,000 $ 11,539,000
============ =============
43
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(13) RELATED PARTY TRANSACTIONS
The Company's subsidiary Softalk, Inc., licenses certain patent and
trademark rights associated with the Company's Softalk product line pursuant to
a royalty agreement with WAC Research Inc., a Utah corporation ("WAC"). The
Company believes that Donald M. Wood, who, until January 14, 1999, was the
Company's Chairman and Chief Executive Officer, owns a one-half equity interest
in WAC. WAC obtained the patent and trademark rights for the Softalk products in
August 1986, when WAC purchased them from the inventor of Softalk and related
products in a private transaction. The purchase price for such patent and
trademark rights was $1,000,000 to $2,000,000, which was paid to Practical
Innovations, Inc. by a combination of the Company's common stock and cash. At
that time, the Company acquired license rights to the Softalk patents and
trademark, in return for which it agreed to pay a 10% royalty on all Softalk
sales. That royalty rate subsequently was reduced to 5%. During the years ended
December 31, 1999 and 1998, the Company paid royalties to WAC of $298,420 and
$172,669, respectively.
In September 1998 WAC advanced $98,403 to the Company as reimbursement
to the Company of Mr. Wood's salary for the first six months of 1998. The
Company subsequently determined that this amount was a payable to WAC, and at
December 31, 1998 the Company had recognized the $98,403 in accounts payable -
related party, in the accompanying consolidated balance sheet. In February 1999,
the Company repaid this amount to WAC.
Donald M. Wood, who served as the Company's Chief Executive Officer during
the entirety of 1998 and until January 14, 1999, owned a residential rental
property in Park City, Utah until August 1998. The Company leased this property
from him to use for Company-related travel, promotional work, lodging, and
entertainment for customers, suppliers, and employees. The monthly rental
payment for this property was $7,000. The Company paid $-0- and $56,000 for each
of the years ending December 31, 1999 and 1998, respectively. This cost also
covered operating and maintenance costs, and general care of the property. In
August 1998, this property was sold by Mr. Wood. As a result, the Company is no
longer obligated to pay rental fees, and paid no such rental fees during 1999.
In July 1998, the Company's Board of Directors commenced an internal
investigation into the facts and circumstances of a number of transactions
between the Company and certain of its officers and directors as well as several
general corporate and management concerns brought to the attention of the
Company's independent directors. The Company engaged an unrelated third party to
conduct the investigation, which concluded in January 1999. Thereafter, the
Company's former Chairman and CEO resigned and retired from the Company. The
Company does not anticipate taking further action, legal or otherwise, with
respect to the matters and individuals investigated, although the Company,
through its new management, has identified several areas in which new corporate
governance policies have been adopted or old policies changed. In connection
with the investigation, several of the Company's directors engaged independent
legal counsel. An aggregate of $112,938 of such legal fees were reimbursed by
the Company pursuant to action by the Company's Board of Directors at the
commencement of the investigation.
The Company grants various options under both non-qualified and
incentive stock options plans. These options are described in detail in Note 15.
The non-qualified plans included 537,500 options granted to Muito Bem Ltd., an
entity controlled by Donald M. Wood, the former Chairman and Chief Executive
Officer of the Company, at an exercise price of $2.50 per share. Mr. Wood agreed
in 1999 to cancel all stock options issued to Muito Bem.
In May 1989, the Company engaged Alpha Tech Stock Transfer Company
("Alpha Tech") as the Company's stock transfer agent. Alpha Tech served in that
capacity until January 13, 1999, when the Company terminated Alpha Tech's agency
and instructed Alpha Tech to transfer the Company's records to American Stock
Transfer Company, New York, New York. James W. Farrell, the principal of Alpha
Tech, is the brother-in-law of Donald M. Wood, the Company's former Chairman and
Chief Executive Officer who resigned from the Company effective January 14,
1999. During the years ended December 31, 1999 and 1998, the Company paid Alpha
Tech a total of $-0- and $1,530, respectively, in fees for services rendered.
The Company believes that the fees paid to Alpha Tech during these periods were
roughly comparable to the fees it would have paid to a similar local transfer
agent for similar services.
44
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Financial instruments are included in the consolidated balance sheets at
carrying cost. The carrying amounts approximate fair value for cash, trade
accounts receivable, prepaid expenses and other current assets, other assets,
accounts payable, and accrued expenses because of the short maturity of these
instruments. Because the blended interest rate of debt approximates the current
interest rates available, the carrying value of debt instruments also
approximates fair market value.
(15) STOCK OPTIONS
The Company has established three stock option programs under which it
has granted both non-qualified and incentive stock options to employees, board
members, and certain related entities. Under the Company's 1996-1997
non-qualified stock option program ( the "Non-Qualified Plan"), the Company
granted options to acquire 1,640,000 shares of common stock. The 1996 Incentive
Option Plan ("1996 Plan") provides for grants of qualified stock options to
acquire a maximum of 300,000 shares of common stock, of which 200,000 options
have been granted to date. The exercise price of options granted to employees
under either option program equals the market price on the date of grant, and as
a result no compensation expense has been recognized in the accompanying
financial statements.
In January 1999, the Company's former Chairman and CEO, and holder of
900,000 of the options granted in December 1996 (500,000 shares) and January
1997 (400,00 shares) under the Non-Qualified Plan, agreed to cancel those
options. In addition to the non-qualified options granted to employees to date,
the Company granted options to purchase 537,500 shares of common stock to Muito
Bem Ltd., an entity controlled by a shareholder and former CEO of the Company,
at a strike price of $2.50 per share in December 1996. The shareholder and
former executive officer of the Company who owns Muito Bem, Ltd. agreed in
January 1999 to cancel all stock options issued to Muito Bem, Ltd.
In May 1999, the Company's Board of Directors adopted the Company's
1999 Stock Option And Incentive Plan (the "1999 Plan"). Under the 1999 Plan, a
total of 640,000 shares were reserved for issuance in the form of non-qualified
stock options or qualifying Incentive Stock Options. During the year ended
December 31, 1999, the compensation committee of the Company's Board of
Directors has granted stock options under the 1999 Plan to purchase a total of
634,500 shares of common stock to various executives, employees and directors of
the Company. Such options were granted as non-qualified options having terms of
10 years from the date of grant. All such options have an exercise price of
between $1.00 and $1.75 per share, with a weighted average price of $1.495 per
share. The exercise price for the options were 100% of the fair market value on
the grant date.
The Company's qualified options issued to employees December 1996 and
January 1997 may be exercised upon the holder-employee's continued employment
with the Company for six years and the Company's achievement of profitable
operations for three out of those six years. Such options expire ten years from
the date of the grant. Options granted under the 1996 non-qualified Plan become
exercisable as of the date of grant and expire five years from the date of
grant, or three months following termination, or 24 months following death of
the employee.
45
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(15) STOCK OPTIONS (Continued)
Summary of stock options is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
---------------------------- -----------------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
FIXED OPTIONS: (000's) Price (000's) Price
-------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 909 $2.500 934 $2.500
Granted.................................. 635 $1.495 -- --
Exercised................................ -- -- (17) $2.500
Canceled................................. (607) $2.500 (8) $2.500
=========== --------
Outstanding at end of year............... 937 $1.819 909 $2.500
=========== ========
Options exercisable at year-end.......... 547 $1.708 171 $2.500
=========== ========
Weighted average fair value of
options granted during the year....... $ 1.495 --
Weighted average remaining
contractual life for exercisable
options at year-end................... 8.5 years 2.5 years
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
VARIABLE OPTIONS: Shares Exercise Shares Exercise
(000's) Price (000's) Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 1,640 $2.00 1,640 $2.00
Granted.................................. --
Canceled................................. (1,315) $2.00 -- --
========== =========
Outstanding at end of year............... 325 $2.00 1,640 $2.00
========== =========
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about stock options
outstanding at December 31, 1999:
FIXED OPTIONS
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------ ------------------------------------------------- --------------------------------
Weighted-average
remaining Weighted-average Weighted-average
Range of Outstanding contractual exercise Exercisable exercise
exercise prices as of life price as of price
12/31/99 12/31/99
------------------ -------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 - 1.50 137,250 10 $1.03 72,594 $1.03
$ 1.51 - 2.25 497,250 10 $1.63 372,812 $1.63
$ 2.26 - 2.50 302,000 7.3 $2.50 102,000 $2.50
------------- ------------
936,500 547,406
============= ============
</TABLE>
The Company applies the intrinsic value method under APB No. 25 in
accounting for stock-based employee compensation arrangements. Had compensation
cost for the Company's stock option plans been determined pursuant to the fair
value method under SFAS No. 123, the Company's net loss and net loss per share
would have increased accordingly. The fair value of options granted under the
Company's 1999 stock option plan has been estimated using the Black-Scholes
option pricing model with the following weighted average assumptions: dividend
yield of 0%, risk free interest rate of 5.8%, expected volatility of 81.8% and
expected lives of 10 years. No options were granted in 1998.
1999 1998
---------------- -------------
Net loss As reported $(3,477,545) $(2,245,427)
Pro Forma $(4,157,777) $(2,245,427)
Basic and diluted
loss per share As reported $ (1.03) $ (0.80)
Pro Forma $ (1.23) $ (0.80)
46
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(16) EMPLOYEE BENEFITS
The Company also has a defined contribution plan which is a qualified
retirement plan under section 401(k) of the Internal Revenue Code. Under the
terms of the Plan, employees may make contributions to the Plan and are eligible
to participate in the Plan immediately. The Company has not made matching
contributions to the Plan.
(17) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivatives Instruments and Hedging Activities, in 1998. SFAS No.
133 establishes accounting and reporting standards for 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 statement of financial position 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. As a result of SFAS No. 137 the effective date for SFAS No. 133 shall be
in the first quarter of 2001. The Company does not believe the adoption of SFAS
No. 133 will have a material affect on the financial position or results of
operations of the Company.
On December 3, 1999 the SEC staff issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements. SAB No. 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company will incorporate the guidance of SAB 101 in the first quarter of fiscal
2001.
(18) SUBSEQUENT EVENTS
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 forgive or release the Company from its obligation to
pay accrued interest thereon, to release the Company from its obligation to pay
accrued but unpaid liquidated damages resulting from the Company's inability to
have the Registration Statement become effective, 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 February 14,
2000, or 94,450 shares. In light of the closing of the Retirement Agreement, the
Company has no ongoing obligations under the Credit Agreement, and has submitted
a request to the Securities and Exchange Commission to withdraw the pending
Registration Statement.
To allow the Company to consummate the transactions contemplated by the
Retirement Agreement, the Company completed a private placement of its
restricted common stock to seven offshore investors. The private placement was
accomplished pursuant to a Stock Purchase Agreement (the "Stock Purchase
Agreement") between the Company and the investors dated as of February 11, 2000,
which closed on February 23, 2000. Under the Stock Purchase Agreement, the
Company agreed to issue a total of 1,222,811 shares of restricted common stock.
The consideration paid by the investors was the greater of (i) $1.00 per share
or (ii) 100% of the average of the closing bid prices of the Company's common
stock as quoted by the Nasdaq Stock Market for the five trading days immediately
preceding the date the investors paid the purchase price or any portion thereof.
The total proceeds to the Company from the private placement were $1,600,000, of
which $1,500,000 was used to close the Retirement Agreement, and $100,000 was
used for general corporate purposes.
47
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(19) CONTINGENCIES
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 $1,162,245.98. 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. Alpha Tech is in the process of transferring the Company's stock
transfer records to American Stock Transfer, New York, New York. The complaint
alleges that the Company breached its service contract with Alpha Tech by
failing to pay $132,165 to Alpha Tech for transfer agent services rendered and
reimbursement for legal expenses incurred by Alpha Tech. Alpha Tech has not yet
served the complaint; the Company learned about the complaint through an
unrelated third party. The Company has demanded that Alpha Tech voluntarily
dismiss the complaint, which it has refused to do. The Company was notified in
March 2000 that Alpha Tech intends to serve process, although service has not
been accomplished. In any event, the Company disputes the claims of Alpha Tech's
complaint and intends to vigorously defend this action if process is served.
On February 22, 1999, the Company received a demand letter from counsel
for Mag Instrument, Inc., a manufacturer and distributor of flashlights and one
of the Company's competitors ("Mag"). In the letter, Mag accused the Company of
infringing certain of Mag's patents and committing false advertising and unfair
competition. Attached to the demand letter was a copy of a complaint filed in
the U.S. District Court for the Central District of California on February 19,
1999. The complaint alleges that the Company has infringed three patents owned
by Mag, and seeks (i) an order enjoining the Company from infringing Mag's
patents, (ii) the delivery to the Court of all flashlights which infringe Mag's
patents, (iii) that the Company identify all entities who have purchased,
distributed or sold any infringing products, (iv) that the Company deliver to
the Court all documents reflecting or relating to the purchase, sale or
distribution of any flashlights which infringe Mag's patents, (v) money damages
sustained by Mag by reason of the alleged patent infringement, including
interest, costs, and attorney's fees. During the quarter ended June 30, 1999,
Mag and the Company agreed to pursue efforts to settle the dispute and, pending
such discussions, the complaint would be dismissed without prejudice upon the
joint stipulation of the parties. The Company has expressly agreed with Mag,
however, that if the pending disputes are not settled, Mag may refile the
complaint in the same court and venue. Settlement negotiations with Mag are
still ongoing.
48
<PAGE>
DYNATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(19) CONTINGENCIES (Continued)
On April 27, 1998, the Enforcement Division of the Securities and
Exchange Commission notified the Company that the SEC was anticipating filing an
administrative proceeding in the latter part of calendar year 1998 against
various individuals and entities who had engaged in transactions with a Canadian
corporation. The SEC Enforcement Division further indicated that the Company may
be named as a defendant in such administrative action. In July 1998, the Company
submitted a Wells Submission to clarify why, in the Company's estimation, it
should not be named in the administrative proceeding, if any. The Company
suggested in the Wells Submission that it should not be named in any
administrative proceeding because the Company never consummated either of the
two transactions with the subject Canadian company that the Company was
considering, and the Company received no consideration in connection with those
aborted transactions. Moreover, the Company believes that its conduct in
connection with those proposed but aborted transactions met applicable legal
requirements. As of December 31, 1999, the Company had received no response from
the Enforcement Division about whether the SEC plans to name the Company in
any administrative action.
In addition, the Company has previously disclosed that it has been
informed of an investigation by the Enforcement Division of the Securities and
Exchange Commission. The Company believes this investigation concerns certain
trading activity in the Company's common stock and other transactions involving
the Company's securities, however, the Company has not been informed of the
specifics of such investigation. The Company is cooperating fully with these
administrative proceedings. Any finding or order of the Commission adverse to
the Company or any judgment against the Company in any of the pending litigation
matters, would have an adverse effect on the business, financial condition or
results of operations of the Company, or the market for its common stock.
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.
49
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
During the Company's two most recent fiscal years and the subsequent
interim period, there have been no disagreements on financial disclosures or
accounting matters and no resignation by or dismissal of the independent public
accountants engaged by the Company.
50
<PAGE>
PART III
Item 9. Directors and Officers of the Registrant; Compliance With Section
16(a) of the Exchange Act
The following table sets forth certain information regarding the
executive officers and directors of Dynatec as of March 10, 2000.
Name Age Title
Frederick W. Volcansek, Sr... 53 Chairman of the Board of Directors and
Chief Executive Officer
Lloyd M. "Tag" Taggart....... 55 Executive Vice President Sales
Michael L. Whaley............ 43 Senior Vice President and Chief Financial
Officer
Reed Newbold................. 52 Director
Wayne L. Berman.............. 42 Director
John P. Schmitz.............. 44 Director
Mr. Volcansek was employed by the Company's Board of Directors as the
Company's Chief Executive Officer on February 6, 1999. On that same day he was
appointed Chairman of the Company's Board of Directors. Prior to that time, Mr.
Volcansek served as an outside director of the Company from 1988 to February 6,
1999. Before accepting full-time employment as the Chief Executive Officer of
the Company, from June 1996 to February 1999 Mr. Volcansek was the Vice
President of Development for TM Global Power, LLC and the President of Mosbacher
Power do Brasil Ltda. in Houston, Texas. Mr. Volcansek also has several years'
experience in international market development and as a political consultant for
several large multi-national corporations, including US West, Enron and Ogden
Corp. President Bush appointed Mr. Volcansek Deputy Under Secretary of the U.S.
Department of Commerce (International Trade Administration) from June 19, 1992,
after serving as Deputy Assistant Secretary of Commerce for Trade and
Development from June 1990. Mr. Volcansek received a B.S. degree in 1967 from
Texas Tech University.
Mr. Taggart joined the Company in April 1999. Prior to joining the
Company, from 1994 to 1999, Mr. Taggart was the President and CEO of Sweet Water
Ranch, Inc., a manufacturer of custom, handmade reproductions of the legendary
western style Molesworth furniture. Mr. Taggart expanded distribution of that
company's products from twenty-three states to all fifty states and eight
foreign countries. After service in the United States Navy, in 1972, Mr. Taggart
joined the Clorox Company's brand management team in Oakland, California. He
also served for three terms as a Commissioner of the Colorado River Commission,
a board that controls and markets $25,000,000 of hydro electrical power
generated by the Hoover Dam and 5,000,000,000 GPM of water allocated to Nevada
from the Colorado River. Mr. Taggart received a B.S. degree from Brigham Young
University in 1968.
Mr. Whaley joined the Company as Senior Vice President and Chief
Financial Officer on October 29, 1999. Prior to joining the Company, Mr. Whaley
worked for a year as an Engagement Manager for Prism Consulting International of
Bethesda, Maryland, a strategy and operations consulting firm. Before that, he
worked as the Director of Westinghouse Electric Corporation's Government
Privatization Activities Division from February 1997 though August 1998, and as
the Chief Financial Officer of Westinghouse's Commercial Nuclear Fuel Division
from January 1993 through February 1997. Mr. Whaley received his B.S. degree in
accounting from Norfolk State University in Norfolk, Virginia, and received a
Certificate of Completion of the Harvard Business School Program for Management
Development in 1996.
Mr. Newbold has been an outside Director of the Company since 1988. In
1991, Mr. Newbold founded Newbold Financial, a financial planning and mortgage
brokerage services company located in Salt Lake City, Utah. Since its founding,
Mr. Newbold has been the founding principal of Newbold Financial. Prior to his
founding of Newbold Financial, Mr. Newbold served as Vice President of Tracy
Collins Bank & Trust in Salt Lake City, Utah.
Mr. Berman was appointed to the Company's Board of Directors on March
5, 1999. Mr. Berman presently is Managing Director of Park Strategies, L.L.C.,
an international business consultancy he founded in 1999. In that capacity, he
advises companies including Lockheed Martin, American International Group, US
West, BMW Corporation, AON Corporation and Philip Morris on matters relating to
new business opportunities, international financing strategies and strategic
relationships. Mr. Berman also is currently a Fellow at the Center for Strategic
and International Studies and was recently appointed to the Library of Congress'
Board of Trustees. From 1993 to 1999, Mr. Berman was Managing Director of Berman
51
<PAGE>
Enterprises, an international consultancy. Prior to that, Mr. Berman was
Managing Partner of American Mercantile Group, a private merchant bank, in which
capacity he developed and managed a $100 million merchant banking fund
specializing in middle-market American companies with underdeveloped exports. In
January 1989, President George Bush appointed Mr. Berman Assistant Secretary of
Commerce for Policy, a position he occupied until January 1991. He has held
numerous other political positions, including Vice Presidential Campaign
Director for Dole-Kemp (1996), member of the Budget and Policy Priorities
Committee of the Pataki transition team (1994), Deputy Director and Executive
Producer, 1992 Republican National Convention, Senior Staff and Director of
Congressional Relations, Bush Campaign (1988), and Deputy Director of the
Reagan-Bush Transition Team (1981). Mr. Berman received his Bachelor of Arts at
the University of Buffalo and attended graduate school at Georgetown University.
Mr. Schmitz was appointed to the Company's Board of Directors on
September 16, 1999. Since 1993, he has been a partner at the Washington, D.C.
office of the law firm of Mayer, Brown & Platt where his practice specializes in
the areas of energy and environment, government and international. From 1989 to
1993 he was Deputy Counsel to President George Bush, and from 1985 to 1989 was
Deputy Counsel to Vice President George Bush. From 1984 to 1985, he was an
attorney at the firm of Wilmer, Cutler & Pickering, Washington, D.C. In 1984 he
was employed at the Robert Bosch Foundation Fellowship, Office of Bundestag
Member Matthias Wissmann, Bonn, and Office of General Counsel, Robert Bosch,
GmbH, Stuttgart, Germany. From 1983 to 1984 he was law clerk to The Honorable
Antonin Scalia, U.S. Court of Appeals for the District of Columbia, Washington,
D.C. Mr. Schmitz received his J.D. from the Stanford Law School in 1981, his
M.S. from the California Institute of Technology in 1978, and his B.A. from
Georgetown University in 1976. His recent professional activities include, among
other activities, the Carnegie Endowment for International Peace, Study Group on
American-European Community Relations, 1993 to date; the International
Republican Institute, Rule of Law Advisory Board, 1993 to date; U.S.
Representative, Joint U.S.-Panama Commission on the Environment, 1993-1994;
Member, U.S. Delegation, United Nations Conference on Environment and
Development (UNCED), Rio de Janeiro, June 1992. He is admitted to the bars of
Pennsylvania and the District of Columbia.
During the entirety of the year ended December 31, 1998, Donald M. Wood
served as the Company's Chairman and Chief Executive Officer, positions he had
held since 1982. Effective January 14, 1999, Mr. Wood resigned and retired from
the Company. In the several months leading up to his resignation, Mr. Wood
suffered from several adverse health conditions. Moreover, certain transactions
between Mr. Wood and the Company or between entities owned by or affiliated with
Mr. Wood and the Company, and certain activities conducted by the Company's
executives during Mr. Wood's tenure were the subject of an internal
investigation conducted by the Company's Board of Directors with the assistance
of an independent third party. Specifically, the investigation focused on the
propriety of Mr. Wood's conduct in causing the Company to employ certain of his
family members; his conduct with respect to his use of Company assets, such as
Company owned or leased vehicles, a houseboat timeshare interest; his conduct in
causing the Company to insure his personal watercraft; his conduct in causing
the Company to rent certain real property owned by Mr. Wood at rates that
potentially were in excess of fair market rates; the propriety of certain option
grants made to Mr. Wood or entities controlled by or affiliated with him; and
other miscellaneous transactions and matters. By January 1999, the third party
investigator had completed its review of available information pertinent to the
investigation. Although the investigator made certain conclusions and
representations, those conclusions and representations were strongly disputed by
Mr. Wood, were not legally conclusive, by their own terms were inconclusive in
certain respects, and, in some cases, involved situations that occurred as much
as twelve years prior to the investigation. In light of his health condition and
the pendency and status of the investigation, Mr. Wood agreed to retire and
resign from the Company, effective January 14, 1999. In return for his agreement
to retire and resign, the independent directors of the Company agreed not to
take further action with respect to the investigation, although the Company,
through its new management, has identified several areas in which new corporate
governance policies have been adopted or old policies changed.
Additionally, during the entirety of the year ended December 31, 1998,
F. Randy Jack served the Company's President and Chief Operating Officer. Mr.
Jack also served on the Company's Board of Directors from 1986 to August 24,
1998, when he resigned from the Board of Directors. On March 17, 1999, Mr. Jack
resigned as the Company's President and Chief Operating Officer.
From October 1998 through October 8, 1999, Paul A. Boyer served as
Senior Vice President and Chief Financial Officer of the Company. Effective
October 8, 1999, he resigned from the Company for personal reasons. Mr. Boyer
52
<PAGE>
also was a director of the Company from January 14, 1999 through September 18,
1999. Prior to joining the Company, from November 1996 to October 1998, Mr.
Boyer served as Director of Finance for Mrs. Fields' Original Cookies, Inc.,
where he was responsible for mergers and acquisitions, corporate budgeting,
financial planning and strategic analysis. Mr. Boyer also served as Chief
Financial Officer of Wasatch Education Systems, an educational software
development company from October 1990 to November 1996 . Mr. Boyer received his
Masters in Accountancy from San Diego State University in 1987.
Compliance with Section 16(a) of the Exchange Act
During the year ended December 31, 1999, as far as the Company is
aware, all officers and directors prepared and timely filed all Forms 3, 4 and 5
required by Section 16(a) of the Exchange Act.
Board Compensation
From March 1, 1999 until June 30, 1999, members of the Company's Board
of Directors, other than officers of the Company, were compensated $2,000 per
month for their services rendered. Before March 1, 1999, board members were
compensated in the amount of $10,000 annually. In June 1999, the Company issued
stock options to the non-employee members of the Board of Directors, which
option grants replace future cash compensation. As of July 1, 1999, Employee
directors are not compensated for their services on the Board of Directors,
although until July 1, 1999 they received compensation according to the
historical rate of $10,000 per annum.
Board Committees
Two functioning committees of the Company's Board of Directors have
been organized including (i) Compensation Committee and (ii) Audit Committee.
Following is a brief description of each of these committees.
Compensation Committee. The Compensation Committee is composed of
Messrs. Berman (Chairman) Newbold and Vo1cansek. The purpose of this committee
is to ensure that the Company has a broad plan of executive compensation that is
competitive and motivating to the degree that it will attract, hold and inspire
performance of managerial and other key personnel of a quality nature and that
will enhance the growth and profitability of the Company.
Audit Committee. The Audit Committee is comprised of Messrs. Newbold
(Chairman), Berman and Volcansek. The purpose of the Audit Committee is to
provide oversight and review of the Company's accounting and financial
reporting process in consultation with the Company's independent auditors.
Indemnification and Compensation
The Company's Bylaws authorize the Company to indemnify its present and
former directors and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding upon receipt of
an undertaking by or on behalf of such individuals to repay such amounts if so
required.
53
<PAGE>
Item 10. Executive Compensation
The following table sets forth information with regard to compensation
for services rendered in all capacities to the Company by the (i)Chief Executive
Officer, (ii)the four most highly compensated executive officers other than the
CEO who were serving as executive officers at the end of the last completed
fiscal year and (iii)two additional individuals for whom disclosure would have
been provided, but for the fact that the individual was not serving as an
executive officer at the end of the last completed fiscal year. Information set
forth in the table reflects compensation earned by such individuals for services
with the Company or its subsidiaries.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------- --------------------- ----------------------
Securities
Other Restricted Underlying
Name and Annual Stock Options/ LTIP All Other
Principal Position Salary Bonus (1) Compensation Award(s) SARs (2) Payouts Compensation
- ------------------
Year ($) ($) ($) ($) (#) ($) ($)
---- ------------ ----------- ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frederick W. Volcansek, Sr. 1999 175,795 - 38,902 - 125,000 - -
(3) 1998 - - - - - - -
Chairman and CEO 1997 - - - - - - -
Donald M. Wood (4) 1999 40,550 - - - - - -
Former Chairman and CEO 1998 193,723 1,624 12,500 - - - -
1997 194,433 3,249 14,000 - 14,000 - -
Lloyd M. Taggart (5) 1999 107,267 - 3,570 - 110,000 - -
Executive Vice President 1998 - - - - - - -
Sales 1997 - - - - - -
Michael L. Whaley (6) 1999 24,167 - 85 - 100,000 - -
Sr. Vice President and 1998 - - - - - - -
Chief Financial Officer 1997 - - - - - - -
Paul A. Boyer (7) 1999 117,267 - 7,500 - 110,000 - -
Former Sr. Vice President 1998 28,745 - 3,130 - - - -
and Chief Financial Officer 1997 - - - - - - -
</TABLE>
- -----------------
(1) Bonus compensation includes time in service bonus.
(2) An incentive stock option plan was implemented in November 1996 and May
1999. Options were granted as approved by the Board of Directors on January
2, 1997 and July 6, 1999 respectively.
(3) Employed as Company's Chief Executive Officer on February 6, 1999. Other
annual compensation includes directors fees of $7,500, personal use of a
company vehicle of $1,848, premiums paid on life insurance of $6,259 and
non-deductible moving expenses of $23,295.
(4) Resigned from Company on January 14, 1999.
(5) Employed as Company's Executive Vice President of sales on April 6, 1999.
Other annual compensation includes personal use of a company vehicle of
$371, and premiums paid on life insurance of $3,199.
(6) Employed as Company's Sr. Vice President and Chief Financial Officer on
October 29, 1999. Other annual compensation consists of personal use of a
company vehicle.
(7) Employed as Company's Sr. Vice President and Chief Financial Officer from
October 19, 1998 to October 8, 1999. Other annual compensation consists of
directors fees.
In November 1996, the Company's shareholders approved an Incentive
Stock Option plan for the benefit of the officers and employees of the Company.
No formal criteria have been established to determine the amount of benefits to
be granted pursuant to the 1996 plan, except that the Plan authorizes grants of
no more than 300,000 shares. The Plan provides that options are granted at
exercise prices equal to the market value as of the date the option is granted.
On January 2, 1997 and December 30, 1996, the Board of Directors approved the
issuance of 105,000 and 95,000 options to purchase stock pursuant to the 1996
incentive stock option plan. Further description of the Plan and the exercise
prices are provided in the Notes to the accompanying Consolidated Financial
Statements.
54
<PAGE>
Employment Agreements
Mr. Wood and Mr. Jack had employment contracts with the Company that
were terminated upon their respective resignations.
Mr. Volcansek, Lloyd M. "Tag" Taggart, the Company's Executive Vice
President Sales, and Michael L. Whaley, the Company's Senior Vice President and
Chief Financial Officer, each have employment agreements that provide for a
period of employment of four years from the date of the agreements, subject to
termination and extension provisions. The agreements permit each of them to
participate in any incentive compensation plan adopted by the Company and
benefit and equity-based plans or arrangements. If the Company terminates either
of Mr. Volcansek's, Mr. Taggart's, or Mr. Whaley's employment for cause, or if
either of them terminates their employment without good reason, the Company has
no further obligation to pay them under their respective agreements. If the
Company terminates either of them without cause, the terminated executive may
receive severance pay equal to two years of his then current annual salary. In
the event of a merger, acquisition, dissolution or transfer of substantially all
of the Company's assets, the employment agreements must then be honored by the
surviving entity or it must purchase the agreements for a sum equal to three (3)
years' base salary. The employment agreements prohibit each of Messrs.
Volcansek, Taggart, and Whaley for two years from the date of termination of
their respective employment under the agreements, from becoming an employee,
owner (except for investments in up to 5% of the equity securities of a company
listed or traded on a national securities exchange or the NASDAQ Stock Market),
officer, agent or director of a firm or person that competes with the Company in
the consumer products industry. The employment agreements have customary
provisions for vacation, fringe benefits, payment of expenses and automobile
allowances. Mr. Volcansek's base salary is $205,000, Mr. Taggart's base salary
is $167,500, and Mr. Whaley's base salary is $145,000.
55
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 13, 2000 the number of
shares of Common Stock of the Company beneficially owned by all persons known to
be holders of more than five percent of the Company's Common Stock and by the
executive officers and directors of the Company individually and as a group.
Unless indicated otherwise, the address of the shareholder is the Company's
principal executive offices, 3820 West Great Lakes Drive, Salt Lake City, Utah
84120.
BENEFICIAL OWNERS HOLDING FIVE PERCENT OR MORE OF THE SECURITIES
Percent of
Name, Title, and Address of Common Stock Class as of
Beneficial Owner Beneficially Owned March 13, 2000
---------------- ------------------ --------------
Touchstone Transport Services 457,660 9.1%
5% Beneficial Owner
c/o Oxford International Management, Inc.
Suite 1402, 14th Floor
PDCP Bank Centre, 8737 Paseo De Roxas
Cor. Makati Avenue, Makati City
Phillipines
Wilford A. Cardon 320,831 (1) 6.4%
5% Beneficial Owner
1819 East Southern Avenue, Suite B-10
Mesa, Arizona 85204-5219
Frederick W. Volcansek, Sr. 94,850 (2) 1.8%
Chairman and Chief Executive Officer
Lloyd M. "Tag" Taggart 75,000 (3) 1.5%
Executive Vice President Sales & Marketing
Michael L. Whaley 75,000 (5) 1.5%
Chief Financial Officer
Reed Newbold 24,050 (4) *
Director
Wayne L. Berman 18,750 (3) *
Director
John P. Schmitz 18,750 (6) *
Director
Directors and Officers as a group 306,400 5.7%
- -------------------------
* Less than one percent.
(1) Includes 158,831 shares and 162,000 shares owned respectively
by two entities affiliated with Mr.Cardon.
(2) Includes 93,750 shares issuable on exercise of options having
an exercise price of $1.625 per share, and 1,100 shares.
(3) All shares issuable on exercise of options having an exercise
price of $1.625 per share.
(4) Includes 18,750 shares issuable on exercise of options having
an exercise price of $1.625 per share, and 5,300 shares.
(5) All shares issuable on exercise of options having an exercise
price of $1.031 per share.
(6) All shares issuable on exercise of options having an exercise
price of $1.000 per share.
56
<PAGE>
During 1996, the Company's Board of Directors authorized grants of
non-qualified stock options that are tied to the profitability of the Company
and based upon minimum years of employment. Options to purchase a total of
840,000 shares at an exercise price of $2.00 per share were granted. To vest,
the holder-employee must continue his employment with the Company through the
year 2001 and the Company must be profitable three out of four years commencing
January 1, 1998. Additional non-qualified stock options for 800,000 shares with
similar terms were granted on January 2, 1997. To vest, the holder-employee must
continue his employment with the Company through the year 2001 and the Company
must be profitable three out of four years commencing January 1, 1998.
In 1996, the Company granted 537,500 non-qualified stock options to
Muito Bem Ltd., an entity owned by Donald M. Wood, the Company's former Chief
Executive Officer, at an exercise price of $2.50 per share in consideration of
all knowledge, trade secrets and a continuing non-compete, regarding the
telephone headset product line, as well as personal real estate pledged as
collateral on Company debts by Mr. Wood. In addition, WAC Research, Inc., an
entity affiliated with Mr. Wood, was granted 200,000 options having terms
identical to the Muito Bem options. These options are not exercisable until
December 30, 2000. In January 1999, upon his resignation from the Company, Mr.
Wood agreed to the cancellation of all of the Muito Bem options.
57
<PAGE>
Item 12. Certain Relationships and Related Transactions
The Company's subsidiary Softalk, Inc., licenses certain patent and
trademark rights associated with the Company's Softalk product line pursuant to
a royalty agreement with WAC Research Inc., a Utah corporation ("WAC"). The
Company believes that Donald M. Wood, who, until January 14, 1999, was the
Company's Chairman and Chief Executive Officer, owns a one-half equity interest
in WAC. WAC obtained the patent and trademark rights for the Softalk products in
August 1986, when WAC purchased them from the inventor of Softalk and related
products in a private transaction. The purchase price for such patent and
trademark rights was $1,000,000 to $2,000,000, which was paid to Practical
Innovations, Inc. by a combination of the Company's common stock and cash. At
that time, the Company acquired license rights to the Softalk patents and
trademark, in return for which it agreed to pay a 10% royalty on all Softalk
sales. That royalty rate subsequently was reduced to 5%. During the years ended
December 31, 1999 and 1998, the Company paid WAC $298,420 and $172,669,
respectively, in royalties.
In September 1998 WAC advanced $98,403 to the Company as reimbursement
to the Company of Mr. Wood's salary for the first six months of 1998. The
Company subsequently determined that this amount was a payable to WAC, and at
December 31, 1998 the Company had recognized the $98,403 in accounts payable -
related party, in the accompanying consolidated balance sheet. In February 1999,
the Company repaid this amount to WAC.
Donald M. Wood, who served as the Company's Chief Executive Officer
during the entirety of 1998 and until January 14, 1999, owned a residential
rental property in Park City, Utah August 1998. The Company leased this property
from him to use for Dynatec-related travel, promotional work, lodging, and
entertainment for customers, suppliers, and employees. The monthly rental
payment for this property was $7,000. The Company paid $-0- and $56,000 for each
of the years ending December 31, 1999 and 1998, respectively. This cost also
covered operating and maintenance costs, and general care of the property. In
August 1998, this property was sold by Mr. Wood. As a result, the Company is no
longer obligated to pay rental fees, and paid no such rental fees during 1999.
In July 1998, the Company's Board of Directors commenced an internal
investigation into the facts and circumstances of a number of transactions
between the Company and certain of its officers and directors as well as several
general corporate and management concerns brought to the attention of the
Company's independent directors. The Company engaged an unrelated third party to
conduct the investigation, which concluded in January 1999. Thereafter, the
Company's former Chairman and CEO resigned and retired from the Company. The
Company does not anticipate taking further action, legal or otherwise, with
respect to the matters and individuals investigated, although the Company,
through its new management, has identified several areas in which new corporate
governance policies have been adopted or old policies changed. In connection
with the investigation, several of the Company's directors engaged independent
legal counsel. An aggregate of $112,938 of such legal fees were reimbursed by
the Company pursuant to action by the Company's Board of Directors at the
commencement of the investigation.
During 1997 the Board of Directors authorized grants of various options
under both non-qualified and incentive stock options plans. These options are
described in detail in Note 14. The non-qualified plans included 537,500 options
granted to Muito Bem Ltd., an entity controlled by Donald M. Wood, the former
Chairman and Chief Executive Officer of the Company, at an exercise price of
$2.50 per share. Mr. Wood agreed in 1999 to cancel all stock options issued to
Muito Bem. Additionally, in 1997, 200,000 options were granted to WAC, at an
exercise price of $2.50 per share in consideration for certain royalty
reductions and abatements.
In May 1989, the Company engaged Alpha Tech Stock Transfer Company
("Alpha Tech") as the Company's stock transfer agent. Alpha Tech served in that
capacity until January 13, 1999, when the Company terminated Alpha Tech's agency
and instructed Alpha Tech to transfer the Company's records to American Stock
Transfer Company, New York, New York. James W. Farrell, the principal of Alpha
Tech, is the brother-in-law of Donald M. Wood, the Company's former Chairman and
Chief Executive Officer who resigned from the Company effective January 14,
1999. During the years ended December 31, 1999 and 1998, the Company paid Alpha
Tech a total of $-0- and $1,530, respectively, in fees for services rendered.
The Company believes that the fees paid to Alpha Tech during these periods were
roughly comparable to the fees it would have paid to a similar local transfer
agent for similar services.
58
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
3.1 Restated Articles of Incorporation of the Company.
(Incorporated by reference from Registration
Statement on Form SB-2 (File No. 333-57921) filed by
the Company with the Securities and Exchange
Commission (the "SEC") on June 25, 1998).
3.2 Amended and Restated Bylaws of the Company.
(Incorporated by reference from Registration
Statement on Form SB-2 (File No. 333-57921) filed by
the Company with the SEC on June 25, 1998).
10.1 Convertible Debenture and Equity Line of Credit
Agreement between the Company and five investors
dated as of May 28, 1998. (Incorporated by reference
from Current Report on Form 8-K filed by the Company
with the SEC on June 8, 1998).
10.2 Form of Convertible Debentures issued in May 1998.
(Incorporated by reference from Current Report on
Form 8-K filed by the Company with the SEC on June 8,
1998).
10.3 Form of A Warrants issued in conjunction with
Convertible Debentures. (Incorporated by reference
from Current Report on Form 8-K filed by the Company
with the SEC on June 8, 1998).
10.4 Form of B Warrants issued in conjunction with
Convertible Debentures. (Incorporated by reference
from Current Report on Form 8-K filed by the Company
with the SEC on June 8, 1998).
10.5 Registration Rights Agreement entered into with the
holders of Convertible Debentures. (Incorporated by
reference from Current Report on Form 8-K filed by
the Company with the SEC on June 8, 1998).
10.6 Modification Agreement between the Company and the
holders of Convertible Debentures, dated as of June
25, 1999. (Incorporated by reference from Quarterly
Report on Form 10-QSB for the period ended June 30,
1999).
10.7 Amendment to Modification Agreement between the
Company and the holders of Convertible Debentures,
dated as of November 12, 1999. (Incorporated by
reference from Quarterly Report on Form 10-QSB for
the period ended September 30, 1999.)
10.8 Convertible Debenture Retirement Agreement between
the Company and the holders of the Convertible
Debentures, dated as of February 1, 2000.
10.9 Stock Purchase Agreement between the Company and
seven investors, dated as of February 11, 2000.
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).
59
<PAGE>
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.)
11 Computation of Per Share Earnings for the Year Ended
December 31, 1999; and for the Year Ended December
31, 1998.
21 List of Subsidiaries of the Registrant (See,
"Subsidiaries of the Company" at page 5).
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
60
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DYNATEC INTERNATIONAL, INC.
/s/ Fredierick W. Volcansek March 28, 2000
- ---------------------------- --------------
Frederick W. Volcansek, Sr. Date
Chief Executive Officer
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Frederick W. Volcansek, Sr.
- ----------------------------- Chairman of the Board of Directors March 28,
(Frederick W. Volcansek, Sr.) and Chief Executive Officer 2000
(Principal Executive Officer)
/s/ Michael L. Whaley
- ----------------------------- Senior Vice President, Chief March 28,
(Michael L. Whaley) Financial Officer, Director 2000
and Secretary (Principal
Accounting Officer)
/s/ Wayne L. Berman
- ----------------------------- Director March 28,
(Wayne L. Berman) 2000
/s/ Reed Newbold
- ----------------------------- Director March 28,
(Reed Newbold) 2000
/s/ John P. Schmitz
- ----------------------------- Director March 28,
(John P. Schmitz) 2000
62
<PAGE>
CONVERTIBLE DEBENTURE RETIREMENT AGREEMENT
CONVERTIBLE DEBENTURE RETIREMENT AGREEMENT dated as of February 1, 2000
(the "Agreement"), among the entities listed on Schedule A attached hereto
(referred to individually as a "Purchaser" collectively as "Purchasers"),
SETTONDOWN CAPITAL INTERNATIONAL LTD. (the "Placement Agent" and together with
the Purchasers, referred to individually as a "Holder" or collectively as
"Holders") located at Charlotte House, Charlotte Street, P.O. Box N. 9204,
Nassau, Bahamas, a corporation organized under the laws of the Bahamas, and
DYNATEC INTERNATIONAL, INC., a corporation incorporated under the laws of the
State of Utah, and having its principal place of business at 3820 West Great
Lakes Drive, Salt Lake City, Utah 84120 (the "Company").
Recitals
WHEREAS, the parties to this Agreement previously have entered into a
Convertible Debenture and Private Equity Line of Credit Agreement dated as of
May 22, 1998 (the "Credit Agreement"), a Registration Rights Agreement dated as
of May 15, 1998 (the "Registration Rights Agreement"), and an Escrow Agreement
dated as of May 15, 1998 (the "Escrow Agreement," and together with the Credit
Agreement, the Registration Rights Agreement, and the other instruments and
documents executed in connection therewith, the "Funding Agreements"); and
WHEREAS, pursuant to the Credit Agreement, the Company caused to be
issued to the Purchasers convertible debentures ("Convertible Debentures") of
the Company in the aggregate principal amount of $1,500,000, which Convertible
Debentures are subject to the terms and conditions described therein and in the
Funding Agreements; and
WHEREAS, pursuant to the Credit Agreement, the Company caused to be
issued to the Holders the Company's A Warrants ("A Warrants") to purchase a
total of 300,000 shares of the Company's common stock and the Company's B
Warrants ("B Warrants") to purchase a total of 450,000 shares of the Company's
common stock (the A Warrants and the B Warrants are collectively referred to in
this Agreement as the "Warrants"); and
WHEREAS, as of the date of this Agreement, the Purchasers own
Convertible Debentures in the aggregate principal amount of $1,226,500; the
principal amount of Convertible Debentures owned by each of the Purchasers,
together with interest accrued thereon as of February 14, 2000, and the number
of Warrants owned by each of the Holders is set forth on Schedule B attached
hereto; and
WHEREAS, the Company and the Holders entered into a Modification
Agreement dated as of June 25, 1999 (the "Modification Agreement"), pursuant to
which the parties agreed to certain modifications to the Funding Agreements as
set forth therein; and
1
<PAGE>
WHEREAS, the Purchasers agreed to certain amendments to the terms and
conditions of the Modification Agreement pursuant to an Amendment to the
Modification Agreement dated as of November 13, 1999; and
WHEREAS, subject to the terms and conditions of this Agreement, (a) the
Company desires to pay, retire and cancel certain of the presently issued and
outstanding Convertible Debentures and to pay or otherwise obtain a waiver of
all of the interest accrued thereon and otherwise to satisfy and discharge all
of its obligations to the Purchasers and the Placement Agent under the Funding
Agreements, (b) the Purchasers desire to have certain of the Convertible
Debentures owned by them retired and cancelled and (c) the Holders desire to
tender to the Company for cancellation all of the Warrants owned by them and to
amend the terms and conditions of the Funding Agreements as set forth below.
Agreement
NOW, THEREFORE, in consideration of the covenants and mutual promises
below and other good and valuable consideration, the receipt and legal
sufficiency of which the parties acknowledge by their signatures appearing
below, and intending to be legally bound hereby, the parties to this Agreement
hereby agree as follows:
1. Primary Terms of Transaction.
1.1 Retirement of Convertible Debentures. In consideration of
payment by the Company to each of the Purchasers in the amounts set forth on
Schedule B hereto, which payment in the aggregate shall consist of One Million
Five Hundred Thousand Dollars (U.S. $1,500,000) (the "Cash Payment"), the
Purchasers, and each of them, shall tender to the Company for cancellation
Convertible Debentures owned by each such Purchaser in the amounts set forth on
Schedule B hereto, which Convertible Debentures each shall be marked "Paid or
Cancelled". Each of the Purchasers shall hold, after payment of the Cash
Payment, the principal amount of Convertible Debentures set forth opposite their
names on Schedule B (the "Residual Convertible Debentures").
(a) Payment of Cash Payment. The Cash Payment shall
be paid to the Purchasers, c/o Grushko & Mittman IOLTA Account, Attn.
Edward M. Grushko, Esq., Grushko & Mittman, P.C., 277 Broadway, Suite
801, New York, New York 10007. The Cash Payment shall be paid via
wire transfer according to instructions to be provided by the
Purchasers or their agent prior to Closing, as that term is defined in
Section 2.
(b) Conversion of Residual Debentures. At Closing,
the Purchasers shall be deemed to have converted that number of
Residual Convertible Debentures owned by each of them after the payment
of the Cash Payment, which amounts are set forth on Schedule B hereto.
In connection with such conversion, the Company shall deliver at
Closing certificates representing shares of the Company's restricted
common stock to each of the Purchasers in the amounts set forth on
Schedule B (the "Residual Conversion Shares").
2
<PAGE>
(c) Debenture Payoff . As of the Closing Date,
defined below, subject to the payment of the Cash Payment and the
conversion of the Residual Convertible Debentures as described above,
the Convertible Debentures shall be deemed paid in full and canceled,
and all of the rights and obligations of the Purchasers and the Company
under the Convertible Debentures shall automatically terminate.
1.2 Cancellation of Warrants. At Closing, the Holders shall
surrender for cancellation all of the Warrants issued and outstanding as of the
date hereof, consisting of a total of A Warrants to purchase 300,000 shares of
the Company's common stock and B Warrants to purchase 450,000 shares of the
Company's common stock. The number of Warrants owned by each of the Holders is
set forth on Schedule B.
1.3 Funding Agreements Terminated. As of the Closing Date, the
Funding Agreements, as such may have been amended or modified to date, shall
automatically be and become null and void and of no further force and effect,
and all of the rights and obligations of the Company and the Holders or their
successors and assigns under the Funding Agreements shall automatically
terminate. Without limiting the generality of the foregoing sentence, the
parties hereto agree that (x) the Company may and should take such action as the
Company's management deems appropriate to withdraw the registration statement on
Form SB-2 that was filed with the U.S. Securities and Exchange Commission (the
"SEC") pursuant to the Registration Rights Agreement, and is pending but not
effective with the SEC as of the date of this Agreement, and the Company shall
have no obligation whatsoever with respect to registration of any securities
owned by any of the Holders, and (y) the Company's performance under this
Agreement shall constitute payment or discharge of all of the Company's
obligations under all of the Funding Agreements, including without limitation,
any obligation of the Company to pay any liquidated or other damages or
penalties of any kind whatsoever otherwise payable to the Holders, regardless of
whether any such damages are accrued or liquidated as of the date hereof.
1.4 Releases.
(a) Release of the Company. Each of the Holders, for
themselves and their affiliates and assigns, hereby agrees to discharge
and release the Company and each of its subsidiaries, divisions and
affiliated corporations, each of the Company's current or former
officers, directors, employees, managers, agents, attorneys and
representatives, as well as all of the Company's current or former
shareholders, owners, insurers, predecessors, successors and assigns,
from any and all claims or demands that any of the Holders may have in
connection with or arising out of or related in any way to the Funding
Agreements or the purchase and sale of the Convertible Debentures and
the Warrants. The release set forth in this Section 1.4(a) includes a
release of any rights or claims that any of the Holders may have based
on any facts or events, whether known or unknown by any of the Holders,
that occurred on or before the date hereof or the Closing Date,
whichever shall be later, or any of the events contemplated by this
Agreement.
3
<PAGE>
(b) Release of the Holders. The Company, for itself
and its affiliates and assigns, hereby agrees to discharge and release
each of the Holders and each of their respective subsidiaries,
divisions and affiliated corporations, and each of the Holders'
respective current or former officers, directors, employees, managers,
agents, attorneys and representatives, as well as all of the Holders'
respective current or former shareholders, owners, insurers,
predecessors, successors and assigns, from any and all claims or
demands that the Company may have against any of them in connection
with or arising out of or related in any way to the Funding Agreements
or the purchase and sale of the Convertible Debentures and the
Warrants. The release set forth in this Section 1.4(b) includes a
release of any rights or claims that the Company may have based on any
facts or events, whether known or unknown by the Company, that occurred
on or before the date hereof or the Closing Date, whichever shall be
later, or any of the events contemplated by this Agreement.
1.5 Indemnification.
(a) Indemnification By the Holders. The Holders
severally, and not jointly, shall indemnify, defend and hold harmless
the Company and each of its subsidiaries, divisions and affiliated
corporations, each of the Company's current or former officers,
directors, employees, managers, agents, attorneys and representatives,
as well as all of the Company's current or former shareholders, owners,
insurers, predecessors, successors and assigns, against any and all
claims, demands, losses, expenses, costs, obligations, defenses and
liabilities, including interest, penalties, and reasonable attorneys'
fees, that the Company and each of its subsidiaries, divisions and
affiliated corporations, each of the Company's current or former
officers, directors, employees, managers, agents, attorneys and
representatives, as well as all of the Company's current or former
shareholders, owners, insurers, predecessors, successors and assigns
may incur by reason of (i) any breach of, or failure by the
indemnifying Holder to perform, any of its obligations, covenants, or
agreements set forth in this Agreement, (ii) any inaccuracy in the
representations and warranties of the indemnifying Holder in Section 4
of this Agreement, or (iii) the failure of the indemnifying Holder to
release fully and effectively the Company from its obligations under
the Convertible Debentures and the Funding Agreements, pursuant to
Section 1.4(a), above.
(b) Indemnification By the Company.The Company shall
indemnify, defend and hold harmless each of the Holders and each of
their subsidiaries, divisions and affiliated corporations, each of
their current or former officers, directors, employees, managers,
agents, attorneys and representatives, as well as all of the Holders'
current or former shareholders, owners, insurers, predecessors,
successors and assigns, against any and all claims, demands, losses,
expenses, costs, obligations, defenses and liabilities, including
interest, penalties, and reasonable attorneys' fees, that any of the
Holders and each of their subsidiaries, divisions and affiliated
corporations, each of their current or former officers, directors,
employees, managers, agents, attorneys and representatives, as well as
all of the Holders' current or former shareholders, owners, insurers,
predecessors, successors and assigns may incur by reason of (i) any
breach of, or failure by the Company to perform, any of its
4
<PAGE>
obligations, covenants, or agreements set forth in this Agreement, (ii)
any inaccuracy in the representations and warranties of the Company in
Section 3 of this Agreement, or (iii) the failure of the Company to
release fully and effectively the Holders from its obligations under
the Convertible Debentures and the Funding Agreements pursuant to
Section 1.4(b), above.
1.6 Effect of Failure to Close. In the event that the Closing
shall not occur as described herein on or prior to the Closing Date, except for
such changes or delays as the Purchasers may expressly waive at or before
Closing, this Agreement shall have no effect whatsoever on the status of the
Convertible Debentures or the Company's obligations thereunder, or on any of the
Funding Agreements, which shall continue according to their terms, as amended or
modified prior to the date hereof. Furthermore, in such event, and if the
Company does not obtain the approval of its shareholders as required under
Section 6.13 of the Credit Agreement within ninety (90) days after this
Agreement ceases to have effect pursuant to this Section 1.6, the Company shall
have a period of thirty (30) days during which to seek a waiver from the Nasdaq
Stock Market from any applicable shareholder approval requirements, failing
which the Company shall take such action as shall be necessary to cause its
common stock to be delisted from the Nasdaq SmallCap Market and shall thereafter
honor all conversions of the Convertible Debentures without regard to the 20%
limitation described in Section 6.13 of the Credit Agreement. To the extent the
Company honors such conversion, the Company's obligation to pay liquidated or
other monetary damages under Section 6.13 of the Credit Agreement shall be
proportionally discharged.
1.7 Condition Precedent; Consent. An express condition
precedent to the Company's obligations under this Agreement shall be the
completion, on or before February 11, 2000, by the Company of a private
placement of its equity securities yielding aggregate proceeds to the Company of
at least $1,500,000 and involving a corresponding number of shares of the
Company's common stock, which shares shall be valued at the greater of (i) one
hundred percent (100%) of the average closing bid prices of the Company's common
stock as quoted on the Nasdaq Stock Market for the five (5) trading days
immediately preceding the closing of such private placement, or (ii) one dollar
(US $1.00). By their signatures appearing below, the Holders waive any rights
any of them may have with respect to any subsequent equity offering by the
Company arising under the Funding Agreements or otherwise, including without
limitation, any right of consent to or participation in such equity offering.
2. Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement shall occur at the offices of Durham Jones &
Pinegar, P.C., 50 South Main Street, Suite 800, Salt Lake City, Utah 84144,
counsel for the Company, on or before February 14, 2000 or such later date as
the parties may mutually agree in writing (the "Closing Date").
2.1 Deliveries of the Company at Closing. At the Closing, the
Company shall deliver to the Purchasers: (i) the Cash Payment (payable as
described in Section 1.1(a) above), (ii) a certificate of the corporate
secretary of Company as to the incumbency of the officer executing this
Agreement on behalf of the Company; (iii) certified copies of resolutions of the
Company's board of directors authorizing the Company's execution of and
5
<PAGE>
performance under this Agreement; and (iv) certificates representing the
Residual Conversion Shares.
2.2 Deliveries of the Purchasers or Holders at Closing. At the
Closing, (i) the Purchasers shall deliver to the Company the original execution
copies of all of the Convertible Debentures, marked "Paid in Full" across the
face of the Convertible Debentures and signed by the Purchasers who own the
Convertible Debentures, and (ii) the Holders shall deliver to the Company for
cancellation the original execution copies of all of the Warrants presently
issued and outstanding. If any of the instruments required to be delivered at
Closing by the Holders have been lost, stolen or destroyed, the Company shall
accept in lieu thereof from any Holder a completed and fully executed Lost
Instrument Certificate in the form attached to this Agreement as Exhibit "A".
3. Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to the Holders, and
the Company warrants that the following are true and accurate as of the date
hereof and shall be true and accurate on the Closing Date:
3.1 Organization; Qualification. The Company is a corporation
duly organized and validly existing under the laws of the State of Utah and is
in good standing under such laws. The Company has all requisite corporate power
and authority to own, lease and operate its properties and assets, and to carry
on its business as presently conducted. The Company is qualified to do business
as a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a material adverse effect on the Company.
3.2 Authorization. The Company has all requisite corporate
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Company, its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company and the performance of the Company's obligations hereunder have been
taken. When this Agreement has been duly executed and delivered by the Company
it shall constitute a legal, valid and binding obligation of the Company
enforceable in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies,
and to limitations of public policy as they may apply to the indemnification
provisions set forth in this Agreement.
3.3 No Conflict. The execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, (i) any provision of the Articles of
Incorporation and any amendments thereto, or the By-laws and any amendments
thereto of the Company, (ii) any material mortgage, indenture, lease or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
6
<PAGE>
Company, its properties or assets and which would have a material adverse effect
on the Company's business and financial condition, or (iii) any law, judgment,
order, arbitration award, rule, regulation, ordinance, writ, injunction or
decree of any governmental agency or instrumentality or court applicable to or
having jurisdiction over the Company or any of its assets or properties.
3.4 Consents. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of the Company is required in connection with the valid execution and delivery
of this Agreement or the consummation of any transaction contemplated hereby.
3.5 Solvency. As of the date of this Agreement the Company is,
and as of the Closing Date the Company shall be, able to pay its current debts
and liabilities when and as due.
3.6 Fair Value. The Cash Payment and the other performance of
the parties under this Agreement represents a fair present value of that portion
of the Convertible Debentures, the interest accrued thereon, and any damages and
penalties payable under any of the Funding Agreements, based on the relevant
risks, the nature of the Convertible Debentures, the market for the Company's
common stock, the value of the Warrants and the present status of the
transactions contemplated by the Funding Agreements.
4. Representations and Warranties of the Purchasers. Each of the
Purchasers hereby makes the following representations and warranties to the
Company, and each of the Purchasers warrants that the following are true and
accurate on the date hereof and will be true and correct on the Closing Date,
provided that each Purchaser's representations and warranties as set forth below
shall be deemed to pertain only to that Purchaser, and no Purchaser shall be
deemed to have made any representation or warranty for, on behalf of or about
any other Purchaser:
4.1 Holder of Debenture. The Purchaser is the sole and
complete owner and, in such capacity owns and holds all of the rights and has
all of the obligations under the Convertible Debentures owned by such Purchaser
as indicated on Schedule B hereto, free and clear of all liens, encumbrances,
security agreements, assignments, charges, restrictions or any other claims of
any type, kind or nature whatsoever.
4.2 No Liens. The Purchaser has not caused any lien,
encumbrance, security agreement, charge, restriction, or any other claim of any
type, kind or nature whatsoever, to be recorded or filed against any of the
property or assets of the Company.
4.3 Authorization. The Purchaser has all requisite corporate
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Purchaser, and its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Purchaser and the performance of the Purchaser's obligations hereunder have been
taken. When this Agreement has been duly executed and delivered by the Purchaser
it shall constitute a legal, valid and binding obligation of the Purchaser
7
<PAGE>
enforceable in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies,
and to limitations of public policy as they may apply to the indemnification
provisions set forth in this Agreement.
4.4 No Conflict. The execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, (i) any provision of the certificate or
articles of incorporation or any other charter or organization documents, and
any amendments thereto or the By-laws, operating agreements or similar
documents, and any amendments thereto of the Purchaser, (ii) any material
mortgage, indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Purchaser, its properties or assets and which would
have a material adverse effect on the Purchaser's business and financial
condition, or (iii) any law, judgment, order, arbitration award, rule,
regulation, ordinance, writ, injunction or decree of any governmental agency or
instrumentality or court applicable to or having jurisdiction over the Purchaser
or any of its assets or properties.
4.6 Valid Corporate Organization and Good Standing. To the
extent the Purchasers are not natural persons, each of the Purchasers is a
corporation, partnership, limited liability company or other entity duly
organized, validly existing and in good standing under the laws of the state,
country or jurisdiction of its organization or incorporation, and has the
corporate or other entity power and authority necessary and appropriate to own
its properties and to engage in the business in which it is presently engaged.
4.9 Fair Value. The Cash Payment and the other performance of
the Company under this Agreement represents a fair present value of that portion
of the Convertible Debentures, the interest accrued thereon, and any damages and
penalties payable under any of the Funding Agreements based on the relevant
risks, the nature of the Convertible Debentures, the market for the Company's
common stock, the value of the Warrants and the present status of the
transactions contemplated by the Funding Agreements.
4.10 Investment Intent. In respect of the Residual Conversion
Shares, the Purchasers represent that they are and will be the sole and true
parties in interest, and no other person or entity has or will have upon the
issuance of the Residual Conversion Shares any beneficial interest in the
Residual Conversion Shares or any portion of the Residual Conversion Shares,
whether direct or indirect. The Purchasers shall receive the Residual Conversion
Shares for its own account for investment purposes only and not with a view to
or for distributing or reselling the Residual Conversion Shares or any part
thereof or interest therein, without prejudice, however, to each Purchaser's
right at all times to sell or otherwise dispose of all or any part of the
Residual Conversion Shares pursuant to an effective registration statement under
the Securities Act, as that term is defined below, and in compliance with
applicable state securities laws or under an exemption from such registration.
8
<PAGE>
4.11 Accredited Investor. As of the date of this Agreement,
the Purchasers are, and on the Closing Date they will be, "accredited investors"
as defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as
amended (the "Securities Act").
4.12 No Representations. The Purchasers acknowledge that the
Company files reports under the Securities Exchange Act of 1934, as amended,
with the SEC, which reports are available to the public. The Purchasers have had
access to such reports and other publicly available information as they have
deemed appropriate. Without limiting the generality of the foregoing, the
Purchasers acknowledge that they have read the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, and the Quarterly Reports on Form
10-QSB for the periods ended March 31, June 30 and September 30, 1999. No
representative, director, officer, employee, shareholder or agent of the Company
has made any representation of any kind about the Company, its operations or
financial condition other than as set forth in publicly available reports.
4.13 Transfer Restrictions; Legends. The Purchasers
acknowledge that the Residual Conversion Shares may only be disposed of pursuant
to an effective registration statement under the Securities Act, to the Company
or pursuant to an available exemption from or in a transaction not subject to
the registration requirements thereof. In connection with any transfer of any of
the Residual Conversion Shares, the Company may require the transferor thereof
to provide to the Company an opinion of counsel selected by the transferor, the
form and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require registration under
the Securities Act. The parties agree to the imprinting of the following legend
on the certificate or certificates representing the Residual Conversion Shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
APPLICABLE STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT, AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR
IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Nothwithstanding the foregoing, the Company acknowledges generally that the
Purchasers shall be able to sell the Residual Conversion Shares to the full
extent permitted by Rule 144 under the Securities Act, and specifically that, as
amended to date, Rule 144(d)(3)(ii) under the Securities Act would allow the
Purchasers to deem any Residual Conversion Shares to have been acquired by the
Purchasers at the same time as the Residual Convertible Debentures were
acquired.
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<PAGE>
5. Miscellaneous Provisions.
5.1 Costs. The Purchasers and the Company shall each pay all
of their own costs and expenses incurred or to be incurred by each of them
respectively in negotiating and preparing this Agreement and in taking whatever
actions may be necessary or appropriate to consummate the transactions
contemplated by this Agreement, including the costs of obtaining any consents or
approvals.
5.2 Further Acts. The parties, at any time before or after the
Closing, will execute, acknowledge, and deliver any assignments, releases,
conveyances, and other assurances, documents, and instruments of transfer,
reasonably requested by any other party, and will take any other action
consistent with the terms of this Agreement that may reasonably be requested by
any other party.
5.3 Captions. The subject headings or captions of the sections
and subsections of this Agreement are included only for purposes of convenience
and shall not affect the construction or interpretation of any provision
contained herein.
5.4 Entire Agreement. This Agreement (together with all
schedules and exhibits to this Agreement) constitutes the entire agreement
between the parties pertaining to the subject matter hereof, and supersedes any
and all prior or contemporaneous written or oral negotiations, agreements,
representations, and understandings of the parties with respect to such subject
matter.
5.5 Expenses. If any legal action or any arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled.
5.6 Modification, Amendment or Waiver. This Agreement may not
be amended, supplemented or otherwise modified, and none of its terms may be
waived, unless such amendment, supplement, modification or waiver is in writing
and executed by the party or parties to be bound thereby. The failure of any
party at any time or times to require performance of any provision hereof shall
not affect the right of such party at a later time to enforce the same, and no
waiver of any term or provision hereof on any one occasion shall be deemed to be
a waiver of the same or any other provision hereof at any subsequent time or
times.
5.7 Binding Effect; Assignment. This Agreement shall be
binding upon, and shall enure to the benefit of and be enforceable by, the
parties hereto, and their respective heirs, successors, assigns and legal
representatives; provided, however, that no assignment of any rights or
delegation of any obligations provided for herein may be made by any party to
this Agreement without the prior written consent of the other parties hereto.
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<PAGE>
5.8 Construction. This Agreement shall be construed in
accordance with its intent and without regard to any presumption or any other
rule requiring construction against the party causing the same to be drafted.
The parties acknowledge that this Agreement, and the terms hereof, were arrived
at after negotiations between the parties, and each provision hereof shall be
construed as having been drafted by each and all of the parties hereto.
5.9 Governing Law. The laws of the State of New York shall
govern the validity, performance and enforcement of this Agreement. Each of the
parties consents to the jurisdiction of the U.S. District Court sitting in the
Southern District of the State of New York or the state courts of the State of
New York sitting in Manhattan in connection with any dispute arising under this
Agreement.
5.10 Counterparts; Facsimile Signatures. This Agreement may be
executed in counterparts, each of which shall be deemed an original and all of
which taken together shall constitute the same instrument. A facsimile copy of
an original signature shall have the same effect as an original signature.
5.11 No Third Parties Benefited. This Agreement is made and
entered into for the sole protection and benefit of the Company and the Holders,
their respective successors and assigns, and no other person or persons shall
have any right of action hereon.
5.12 Severability. If any provision of this Agreement, or any
portion of any provision, shall be deemed invalid or unenforceable for any
reason whatsoever, such invalidity or unenforceability shall not affect the
enforceability and validity of the remaining provisions hereof.
5.13 Definitions. Capitalized terms used in this Agreement but
not specifically defined in this Agreement shall have the meanings set forth in
the Funding Agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
THE COMPANY: THE PURCHASERS:
DYNATEC INTERNATIONAL, INC. ELLIS ENTERPRISES
By: /s/ Frederick W. Volcansek, Sr. By: /s/ Illegible
------------------------------------- -----------------------------------
Its: Chief Executive Officer Its: Director
By: /s/ Michael Whaley TLG REALTY
------------------------------------
Its: Chief Financial Officer
By: /s/ Illegible
----------------------------------
Its: President
PLACEMENT AGENT:
SETTONDOWN CAPITAL BALMORE FUNDS, S.A.
INTERNATIONAL, LTD.
By: /s/ Illegible By: /s/ Illegible
------------------------------------ -----------------------------------
Its: Director Its:
-------------------------------- -------------------------------
AUSTOST ANSTALT SCHAAN
By: /s/ Illegible
-----------------------------------
Its:
-------------------------------
HEWLETT FUND
By: /s/ Illegible
-----------------------------------
Its:
-------------------------------
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Schedule A
Purchasers
Austost Anstalt Schaan
733 Fuerstentum Liechtenstein
Landstrasse 163
Balmore Funds S.A.
Trident Chambers
P.O. Box 146
Roadstown, Tortula BVI
Ellis Enterprises
12A Waterloo Road
London NW2 7UF, England
Hewlett Fund
1615 Avenue I
Brooklyn, NY 11230
TLG Realty
c/o Melo
525 West 52nd St.
New York, NY 10019
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<PAGE>
Schedule B
<TABLE>
<CAPTION>
- ---------------------------- -------------------------- -------------------------- ----------------- --------------- --------------
Holder Convertible Debentures Warrants Owned Residual Common Stock Purchase
At February 14, 2000 At February 14, 2000 Principal Issuable Upon Price Payable
Amount of Conversion
Principal Interest A B Convertible
Amount Accrued Warrants Warrants Debentures
- ---------------------------- -------------------------- -------------------------- ----------------- --------------- --------------
- ---------------------------- ------------- ------------ ------------ ------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Austost Anstalt Schaan $531,000 $ 112,041 62,500 62,500 $25,325 40,891 $ 649,409
Balmore Funds, S.A. 531,000 112,041 62,500 62,500 $25,325 40,891 649,409
Ellis Enterprises 57,000 12,027 10,000 10,000 $ 2,718 4,389 69,711
Hewlett Fund 25,000 5,275 5,000 5,000 $ 1,192 1,925 30,575
TLG Realty 82,500 17,407 10,000 10,000 $ 3,935 6,354 100,896
Settondown Capital 0 0 82,500 0 0 0 0
International
Manchester Asset Management 0 0 67,500 50,000 0 0 0
Limited
Avalon Capital Limited 0 0 0 125,000 0 0 0
Avalon Capital, Inc. 0 0 0 125,000 0 0 0
Totals $ 1,226,500 $ 258,792 300,000 450,000 58,495 94,450 $1,500,000
- ---------------------------- ------------- ------------ ------------ ------------- ----------------- --------------- --------------
</TABLE>
14
<PAGE>
EXHIBIT "A"
LOST INSTRUMENT CERTIFICATE
The undersigned, is the holder of the following instrument(s) issued by
Dynatec International, Inc., a Utah corporation (the "Company"), on May 22,
1998, in connection with the closing of the transactions contemplated by that
certain Convertible Debenture and Private Equity Line of Credit Agreement by and
among the Company, Settondown Capital International, Ltd., Ellis Enterprises,
TLG Realty, Balmore Funds, S.A., Austost Anstalt Schaan and Hewlett Fund, dated
as of May 22, 1998 [Check all that apply]:
Convertible Debenture No. ________ in the principal amount of
_________________ Dollars ($___________); and/or
A Warrant No. _________ entitling the holder thereof to acquire
____________ (____________) shares of the Company's common stock;
and/or
B Warrant No. _________ entitling the holder thereof to acquire
____________ (____________) shares of the Company's common stock.
The undersigned hereby certifies that said instrument(s) as indicated
immediately above is(are) lost or has(have) been destroyed and cannot be located
and agrees that, in the event such instrument(s) is(are) found, the undersigned
will forthwith deliver such instrument(s) to Dynatec International, Inc., 3820
West Great Lakes Drive, Salt Lake City, Utah 84120, Attn. Michael L. Whaley,
Chief Financial Officer. Further, the undersigned represents and warrants that
the securities or other rights represented by such instrument(s) have not been
encumbered, transferred, assigned or pledged by the undersigned to any other
person or entity and the undersigned is the lawful owner of and has marketable
title to all such securities or other rights. The undersigned further agrees to
indemnify and hold the Company and its officers, directors, representatives,
agents and attorneys and their successors and assigns, harmless for any and all
loss, expense (including counsel fees and damages) or liability the Company or
any of such persons may suffer due to such lost instrument(s) or as a result of
any of the statements made herein by the undersigned being untrue.
Dated: , 2000
-------------------------
-------------------------------
Signature:
-------------------------------
Printed Name:
--------------------------------
THE SECURITIES THAT ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE, AND WILL BE OFFERED AND SOLD IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF FEDERAL AND STATE LAW BY VIRTUE
OF THE COMPANY'S INTENDED COMPLIANCE WITH SECTION 4(2) OF THE ACT, THE
PROVISIONS OF REGULATION D PROMULGATED THEREUNDER, AND PARALLEL EXEMPTIONS UNDER
STATE LAW. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY
REGULATORY AUTHORITY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
STOCK PURCHASE AGREEMENT
Dynatec International, Inc.
Attn. Frederick W. Volcansek, Sr.
3820 West Great Lakes Drive
Salt Lake City, Utah 84120
Dear Sirs:
The undersigned hereby agree to purchase shares of the common stock of
Dynatec International, Inc., a Utah corporation ("Dynatec" or the "Company"),
according to the terms and conditions set forth in this Stock Purchase Agreement
(the "Agreement").
1. Purchase of Shares. Subject to the terms and conditions of this
Agreement, the undersigned hereby agree to acquire from the Company that number
of shares of the Company's common stock, par value $.01 per share (the
"Shares"), equal to ONE MILLION SIX HUNDRED THOUSAND DOLLARS (US $1,600,000)
(the "Purchase Price") divided by the greater of (i) $1.00 per share or (ii) One
Hundred Percent (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 (5) trading days
immediately preceding the date the undersigned pays all or a portion of the
Purchase Price payable by it, him or her. The undersigned agree to purchase that
number of Shares, and pay that amount of the Purchase Price, as shall be set
forth in Schedule "A", which is attached to and incorporated into this Agreement
by this reference.
2. Closing; Issuance of Shares. The closing (the "Closing") of the
purchase and sale of the Shares as described in this Agreement shall occur upon
receipt by the Company of the Purchase Price, which closing shall occur on or
before 5:00 p.m., M.S.T. on February 11, 2000 or such later date as the parties
may agree (the "Closing Date"). The Company shall cause its stock transfer agent
to issue certificates representing the Shares as soon as possible after the
Closing Date, but in all events within five (5) business days after the Closing
Date. Payment of the Purchase Price to the Company on or before the Closing Date
shall be accomplished by wire transfer of the Purchase Price to the Company,
according to wire transfer instructions that shall be provided to the
undersigned on or before the Closing Date.
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3. Representations and Warranties of the Company. The Company
represents and warrants to each of the undersigned as follows:
a. Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, with the
requisite corporate power and authority to own and use its properties
and assets and to carry on its business as currently conducted. The
Company has no subsidiaries other than those set forth on Schedule 3(a)
attached hereto (collectively the "Subsidiaries" and individually a
"Subsidiary"). Each of the Subsidiaries is a corporation, duly
incorporated validly existing and in good standing under the laws of
the jurisdiction of its incorporation, with the requisite corporate
power and authority to own and use its properties and assets and to
carry on its business as currently conducted. Each of the Company and
the Subsidiaries is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or
in good standing, as the case may be, does not, individually or in the
aggregate, (x) adversely affect the legality or validity of the Shares
or this Agreement, or (y) have or result in a material adverse effect
on the results of operations, assets, prospects, or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as
a whole (either of (x) or (y) a "Material Adverse Effect").
b. Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by this Agreement, and otherwise to carry out
its obligations hereunder. The execution and delivery of this Agreement
by the Company and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary action
on the part of the Company and no further action is required by the
Company. This Agreement has been duly executed by the Company and, when
delivered in accordance with the terms hereof, will constitute the
legal, valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to or affecting
generally the enforcement of creditors' rights and remedies or by other
equitable principles of general application. Neither the Company nor
any Subsidiary is in material violation of any of the provisions of its
respective articles of incorporation, bylaws or other charter
documents.
c. Capitalization. The number of authorized, issued and
outstanding shares of capital stock of the Company is set forth in
Schedule 3(c) attached hereto. No shares of common stock are entitled
to preemptive or similar rights, nor is any holder of common stock
entitled to preemptive or similar rights arising out of any agreement
or understanding with the Company by virtue of this Agreement. Except
as disclosed in Schedule 3(c), there are no outstanding options,
warrants, script rights to subscribe to, calls or commitments of any
character whatsoever relating to, or, except as a result of the
purchase and sale of the Shares, rights or obligations convertible into
or exchangeable for, or giving any Person, as that term is defined
below, any right to subscribe for or acquire any common shares, or
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contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional
common shares, or securities or rights convertible or exchangeable into
common shares. "Person" means an individual or corporation,
partnership, trust, incorporated or unincorporated association, joint
venture, limited liability company, joint stock company, government (or
an agency or subdivision thereof) or other entity of any kind. The
amount of the Company's authorized but previously unissued common stock
is sufficient to allow for the issuance by the Company of the Shares.
d. Issuance of the Shares. The Shares are duly authorized,
and, when issued and paid for in accordance with the terms hereof,
shall have been validly issued, fully paid and nonassessable, free and
clear of all liens, encumbrances and rights of first refusal of any
kind (collectively, "Liens").
e. No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby do not and will not (i) conflict
with or violate any provision of its Articles of Incorporation, By-laws
or other charter documents (each as amended through the date hereof),
(ii) subject to obtaining the Required Approvals (as defined below),
conflict with, or constitute a default (or an event which with notice
or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of, any
agreement, credit facility, indenture or instrument (evidencing a
Company debt or otherwise) to which the Company or any Subsidiary is a
party or by which any property or asset of the Company or any
Subsidiary is bound or affected, or (iii) result in a violation of any
law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company
is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company is bound
or affected, except in the case of each of clauses (ii) and (iii)
above, as does not, individually or in the aggregate, have or result in
a Material Adverse Effect, provided, that in the case of clauses (ii)
and (iii) above, the Company makes no representation or warranty about
the extent to which the transactions contemplated by this Agreement
will comply with the rules and regulations of the principal market or
exchange on which its common stock is listed or traded.
f. Consents and Approvals. Except as is set forth in the
Disclosure Materials, as hereafter defined, neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or
order of, give any notice to, or make any filing or registration with,
any court or other federal, state, local or other governmental
authority or other Person in connection with the execution, delivery
and performance by the Company of this Agreement, other than (i) an
application to the Nasdaq Stock Market for the listing therewith of the
Shares, (ii) the filing of a Form D with the U.S. Securities and
Exchange Commission, (iii) applicable state "Blue Sky" filings, and
(iv) in all other cases where the failure to obtain such consent,
waiver, authorization or order, or to give such notice or make such
filing or registration could not have or result in, individually or in
the aggregate, a Material Adverse Effect (the consents, waivers,
authorizations, orders, notices and filings
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referred to in clauses (i)-(iv) of this Section 3(f)and identified in
the Disclosure Materials, collectively, the "Required Approvals").
g. Litigation; Proceedings. Except as specifically disclosed
in the Disclosure Materials (as hereinafter defined), there is no
action, suit, written notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their
respective properties before or by any court, governmental or
administrative agency or regulatory authority (federal, state, county,
local or foreign) which (i) adversely affects or challenges the
legality, validity or enforceability of this Agreement or the Shares or
(ii) could, individually or in the aggregate, have or result in a
Material Adverse Effect.
h. Private Offering. Assuming the accuracy of the
representations and warranties of each of the undersigned set forth in
Section 4, the offer, issuance and sale of the Shares to the
undersigned as contemplated hereby are exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities
Act"). Neither the Company nor any Person acting on its behalf has
taken any action that could subject the offering, issuance or sale of
the Shares to the registration requirements of the Securities Act.
i. SEC Reports. The Company has filed all reports required to
be filed by it under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including pursuant to Section 13(a) or 15(d)
thereof, for the one year preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the
foregoing materials being collectively referred to herein as the "SEC
Reports" and, together with the Schedules or other written disclosure
provided by the Company to the undersigned in connection with this
Agreement the "Disclosure Materials") on a timely basis or has received
a valid extension of such time of filing and has filed any such SEC
Reports prior to the expiration of any such extension. To the Company's
knowledge, as of their respective dates, the SEC Reports complied in
all material respects with the requirements of the Securities Act and
the Exchange Act and, the rules and regulations promulgated thereunder.
j. Patents and Trademarks. The Company has, or has rights to
use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and
rights (collectively, the "Intellectual Property Rights") that are
necessary for use in connection with its business as currently
conducted, or which the failure to have would have a Material Adverse
Effect. To the best knowledge of the Company, all such Intellectual
Property Rights are enforceable and there is no existing infringement
by another Person of any of the Intellectual Property Rights. Except to
the extent described in the Disclosure Materials, no action for patent
infringement is pending or threatened against the Company in writing
and, to the Company's knowledge, the Company is not infringing on any
patent or other intellectual property rights of any third party.
k. Regulatory Permits. The Company and its Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses as described in the SEC Reports, except
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where the failure to possess such permits could not, individually or in
the aggregate, have or result in a Material Adverse Effect ("Material
Permits"), and neither the Company nor any such Subsidiary has received
any written notice of proceedings relating to the revocation or
modification of any Material Permit.
4. Representations and Warranties of Undersigned. To induce the
Company's acceptance of this Agreement, the undersigned each hereby severally
and not jointly represent and warrant to the Company and its agents and
attorneys as follows:
a. Organization; Authority. The undersigned, if not a natural
person, is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, with the requisite
corporate or other entity power and authority to enter into and to
consummate the transactions contemplated by this Agreement and
otherwise to carry out its obligations thereunder. The purchase by the
undersigned of the Shares hereunder has been duly authorized by all
necessary action on the part of the undersigned. This Agreement has
been duly executed and delivered by the undersigned and constitutes the
valid and legally binding obligation of the undersigned, enforceable
against it in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to or affecting
generally the enforcement of creditors' rights and remedies or by other
equitable principles of general application.
b. Accredited Status. The undersigned is an "accredited investor"
within the meaning of Section 501(a) of Regulation D under the
Securities Act.
c. Investment Intent. The undersigned is acquiring the Shares
for its own account for investment purposes only and not with a view to
or for distributing or reselling the Shares or any part thereof or
interest therein, without prejudice, however, to the undersigned's
right, subject to the provisions of this Agreement, at all times to
sell or otherwise dispose of all or any part of the Shares pursuant to
an effective registration statement under the Securities Act and in
compliance with all applicable state securities laws or under an
exemption from such registration requirements.
d. Access to Information. The undersigned acknowledges that
it, he or she has been afforded (i) the opportunity to ask such
questions as it, he or she has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and
conditions of the offering of the Shares and the merits and risks of
investing in the Shares; (ii) access to information about the Company
and the Company's financial condition, results of operations, business,
properties, management and prospects sufficient to enable it to
evaluate its, his or her investment; and (iii) the opportunity to
obtain such additional information which the Company possesses or can
acquire without unreasonable effort or expense that is necessary to
make an informed investment decision with respect to the investment and
to verify the accuracy and completeness of the information contained in
the Disclosure Materials. The undersigned further acknowledges that it,
he or she understands that the Company is subject to the periodic
reporting requirements of the Exchange Act, and the undersigned has
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reviewed or received copies of any such reports that have been
requested by it, her or him. Without limiting the generality of the
foregoing, the undersigned represents that it, he or she has read the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998, and the Company's Quarterly Reports on Form 10- QSB
for the periods ended March 31, June 30 and September 30, 1999.
e. Liquidity. The undersigned presently has sufficient liquid
assets to pay the Purchase Price to be paid by it. The undersigned's
overall commitments to investments that are not readily marketable is
not disproportionate to the undersigned's net worth, and the
undersigned's investment in the Company will not cause such overall
commitment to become excessive. The undersigned has adequate means of
providing for its current needs and contingencies and has no need for
liquidity in the undersigned's investment in the Company or for a
source of income from the Company. The undersigned is capable of
bearing the economic risk and the burden of this investment, including,
but not limited to, the possibility of the complete loss of the value
of the Shares and the limited transferability of the Shares, which may
make the liquidation of the Shares impossible in the near future.
f. Sole Party in Interest. The undersigned represents that it
is the sole and true party in interest with respect to that portion of
the Shares to be acquired by it, and no other person has or will have
upon the issuance of the Shares any beneficial ownership interest in
the Shares or any portion of the Shares, whether direct or indirect.
g. Knowledge and Experience. The undersigned, or its
management or agent, as the case may be, is experienced in evaluating
and making speculative investments, and has the capacity to protect the
undersigned's interests in connection with the acquisition of the
Shares. The undersigned, or its management, as the case may be, has
such knowledge and experience in financial and business matters that it
is capable of evaluating the merits and risks of the undersigned's
investment in the Company. The undersigned has been informed that an
investment in the Shares is speculative and has concluded that its
proposed investment is appropriate in light of its overall investment
objectives and financial situation.
h. Exclusive Reliance on this Agreement. In making the
decision to purchase the Shares, the undersigned has relied exclusively
upon information included in this Agreement or other information
contained in the Company's publicly available reports and other
materials that have been provided to the undersigned, and
investigations made by the undersigned or the undersigned's managers
and agents, and not on any other representations, promises or
information, whether written or verbal, by any person.
i. Advice of Counsel. The undersigned understands the terms
and conditions of this Agreement, has investigated all issues to the
undersigned's satisfaction, has consulted with such of the
undersigned's own legal counsel or other advisors as the undersigned
deems necessary, and is not relying, and has not relied on the Company
for an explanation of the terms or conditions of this Agreement. The
undersigned further acknowledges, understands and agrees that, in
arranging for the preparation of this Agreement, the Company has not
attempted to procure legal representation for the undersigned's
interests.
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j. No Conflict With Other Instruments, Agreements or
Obligations. The undersigned's purchase of the Shares will not result
in the breach of any term or provision of, constitute an event of
default under, or require the consent or approval of any third-party
pursuant to any contract, agreement, instrument, relationship or legal
obligation to which the undersigned is subject or to which any of its
properties, operations or management are subject.
k. No Brokers or Finders. The undersigned agrees that no third
person has in any way brought the parties together or been instrumental
in the negotiation, execution, or consummation of this Agreement. The
undersigned agrees to indemnify the Company and its officers,
employees, agents and representatives from and against any claim by any
third person for any commission, brokerage fee, finders fee, or other
payment with respect to this Agreement or the transactions contemplated
hereby based upon any alleged agreement or understanding between such
party and such third person, whether expressed or implied, arising from
the actions of such party. The covenants set forth in this section 3(n)
shall survive the Closing Date and the consummation of the transactions
contemplated by this Agreement.
l. Source of Purchase Price. The undersigned represents that no
portion of the Purchase Price was obtained by a loan from any third
party.
m. Manner of Sale. At no time was the undersigned presented with
or solicited by or through any leaflet, public promotional meeting,
television advertisement or any other form of general solicitation or
advertising.
n. Restricted Shares. The undersigned understands and
acknowledges that the Shares have not been registered under the Act, or
any state securities laws, and will be issued in reliance upon certain
exemptions from the registration requirements of those laws, and thus
cannot be resold unless they are registered under the Act or unless the
Company has first received an opinion of competent securities counsel
that an exemption from registration is available for such resale. With
regard to the restrictions on resales of the Shares, the undersigned is
aware (i) of the limitations and applicability of Securities and
Exchange Commission Rule 144; (ii) that the Company will issue stop
transfer orders to its stock transfer agent in the event of attempts to
improperly transfer the Shares; and (iii) that a restrictive legend
will be placed on the certificates representing the Shares, which
legend will read substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ISSUED PURSUANT TO A CLAIM OF EXEMPTION FROM THE REGISTRATION
OR QUALIFICATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND STATE SECURITIES LAWS AND THEREFORE
HAVE NOT BEEN REGISTERED UNDER THE ACT OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT COMPLIANCE WITH
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THE REGISTRATION OR QUALIFICATION PROVISIONS OF THE ACT OR
APPLICABLE STATE LAWS, OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. FURTHERMORE,
THE COMPANY WILL INSTRUCT ITS STOCK TRANSFER AGENT NOT TO
RECOGNIZE ANY SALE OF THESE SECURITIES UNLESS THE COMPANY HAS
FIRST RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE
COMPANY AND ITS SECURITIES COUNSEL, THAT AN EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS IS AVAILABLE.
o. Reliance. The undersigned understands and acknowledges that (i)
the Shares are being offered and sold to it, him or her without
registration under the Securities Act in a private placement that is
exempt from the registration provisions of the Securities Act and
(ii) the availability of such exemption depends in part on, and the
Company will rely upon the accuracy and truthfulness of, the
representations in this Section 4, and the undesigned hereby
acknowledges and consents to such reliance.
p. No Group. The undersigned presently have no agreement,
understanding or arrangement to act together for the purpose of
acquiring, holding or voting the Shares or any other voting capital
stock of the Company, or any other relationship, understanding or
agreement that would make them a "group" for purposes of Rule 13d-5(b)
under the Exchange Act, and the undersigned will not enter into any
such agreement or arrangement in writing or otherwise after the
Closing.
q. Residency. The undersigned, if an entity, represents that its
jurisdiction of incorporation is as indicated on Schedule A hereto,
and, if a natural person, represents that its state or country of
residences is as indicated on Schedule A hereto.
r. Accuracy of Representations and Information. All
representations made by the undersigned in this Agreement, and all
information provided by the undersigned to the Company or its agents or
representatives concerning the undersigned is correct and complete as
of the date hereof. If there is any material change in such information
before the actual issuance of the Shares, the undersigned immediately
will provide such information in writing to the Company.
5. Management Proxy.The parties acknowledge and agree that they intend
that this Agreement shall not result in a change of control with respect to the
ownership of voting control of the Company. In furtherance of such intent, the
parties agree that, to the extent any of the undersigned agree and are entitled
to obtain under this Agreement (i) in excess of 19.9% of the common stock of the
Company issued and outstanding immediately before the Closing Date, or (ii) that
number of Shares which, when aggregated with any shares of the Company's common
stock owned by such undersigned party immediately before the Closing Date, would
cause such undersigned party to own in excess of 19.9% of the common stock of
the Company issued and outstanding immediately before the Closing Date, such
undersigned party hereby grants an irrevocable proxy to the Company's Chief
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Executive Officer to vote any shares of such undersigned party in excess of
the 19.9% limits specified in clauses (i) and (ii) above, which proxy shall
be executed by such officer in direct proportion to the voting of all of the
shares of the Company's common stock voted by the Company's shareholders on
any matter being submitted for the vote of the Company's shareholders. The proxy
granted by this Section 5 shall expire automatically at the earlier of the
following: (x) such time any of the undersigned who are deemed to grant a
proxy pursuant to this Section 5, or its, his or her successor, shall
beneficially own less than 19.9% of the Company's common stock; or (y) such
time as the Company's shareholders at an annual or special meeting of
shareholders, shall vote to approve the transactions contemplated by this
Agreement.
6. Indemnification.
a. Indemnification By the Company. The Company agrees to
indemnify each of the undersigned and hold each of the undersigned
harmless from and against any and all liability, damage, cost or
expense, including reasonable attorneys' fees, incurred on account or
arising out of: (i) any inaccuracy in the representations and
warranties of the Company set forth herein; and (ii) any action, suit
or proceeding based upon (A) the claim that said representations or
warranties were inaccurate or misleading or otherwise cause for
obtaining damages or redress from the undersigned; or (B) the
disposition of the Shares or any portion thereof.
b. Indemnification By the Undersigned. The undersigned
severally and not jointly agree to indemnify the Company and hold the
Company harmless from and against any and all liability, damage, cost
or expense, including reasonable attorneys' fees, incurred on account
or arising out of: (i) any inaccuracy in the representations and
warranties of the undersigned set forth herein; (ii) the disposition of
the Shares, or any portion thereof, by the undersigned contrary to the
representations and warranties set forth herein and any restrictions on
transfer that may be noted on the certificates representing the Shares;
and (iii) any action, suit or proceeding based upon (A) the claim that
said representations or warranties were inaccurate or misleading or
otherwise cause for obtaining damages or redress from the Company; or
(B) the disposition of the Shares or any portion thereof.
7. Use of Proceeds. The Company intends to use the proceeds of the
Purchase Price received from the undersigned as follows. Approximately
$1,500,000 will be used to retire the Company's obligations under a Convertible
Debenture and Private Equity Line of Credit Agreement dated as of May 22, 1998
by and among the Company, five separate investors and a placement agent,
pursuant to which the Company issued a total of $1,500,000 principal amount of
the Company's convertible debentures. Additionally, the Company intends to use
the remaining $100,000 of such proceeds for operating capital and for the
payment of trade payables and selling, general and administrative expenses.
8. Alternative Structure as Convertible Debt. If, and only if, the
Nasdaq Stock Market shall for any reason determine that approval of the
Company's shareholders shall be required as a precondition to the consummation
of the transactions contemplated by this Agreement in order to preserve the
listing of the Company's common stock on the Nasdaq Stock Market, the
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undersigned agree that the Company shall proceed as follows: (i) the Company
shall issue to the undersigned, pro rata, as many shares of common stock as
shall be allowed by the Nasdaq Stock Market and shall receive therefor a pro
rata portion of the Purchase Price anticipated by this Agreement; and (ii) the
Company shall receive any additional portion of the total Purchase Price
anticipated by this Agreement as an unsecured loan ("Provisional Loans") from
the undersigned in the amount of Purchase Price received from each of the
undersigned as indicated in Schedule "A" and for which the undersigned will not
receive shares of the Company's common stock. The Provisional Loans shall bear
simple interest at the lowest applicable federal rate of imputed interest as
determined by reference to the Internal Revenue Code of 1986, as amended, which
interest shall be calculated by reference to a 360-day year. Interest on the
Provisional Loans shall be payable only in cash. The principal amount of
the Provisional Loans shall be automatically converted into the number
of shares of common stock otherwise issuable (but not yet issued) under this
Agreement upon the approval by the Company's shareholders of the transactions
contemplated by this Agreement. The Company agrees, if Provisional Loans
are made pursuant to this Section 8, to seek the approval of its shareholders on
the transactions contemplated by this Agreement at the earliest practical
opportunity. In the event the Company's shareholders shall refuse to approve
the transactions contemplated by this Agreement, the Provisional Loans shall
become immediately due and payable at any time after the annual or special
meeting of the Company's shareholders at which such shareholders refuse to
approve such transactions.
9. Miscellaneous Provisions.
a. Attorneys' Fees. In the event of a default in the performance
of this Agreement, the defaulting party or parties, in addition to all
other obligations of performance hereunder, shall pay reasonable
attorneys' fees and costs incurred by the non-defaulting party or
parties to enforce performance of this Agreement.
b. Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah, without
regard to choice of law rules. Each of the parties consents to the
exclusive jurisdiction and venue of the U.S. District Court sitting
in the District of Utah or the state courts of the State of Utah
located in Salt Lake City, Salt Lake County, Utah, in connection with
any dispute arising under this Agreement and hereby waives, to the
maximum extent permitted by law, any objection including any
objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions.
c. Counterparts. This Agreement may be executed in one or more
counterparts, which when signed shall constitute a single contract.
d. Entire Agreement. This Agreement contains the entire agreement
between the parties relating to the purchase of the Shares, and may be
amended only by a written document signed by all of the parties hereto.
e. Headings. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do
not constitute a part of this Agreement.
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f. Severability. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable, all other
provisions of this Agreement shall be given effect separately from the
provision or provisions determined to be illegal or unenforceable and
shall not be affected thereby.
g. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the undersigned and undersigned's
successors, but shall not be assignable by the undersigned without the
prior written consent of the Company. The undersigned's subscription
shall inure to the benefit of the Company, and upon its acceptance
by the Company, shall be binding upon the Company and its successors
and assigns.
h. Warranties Survive Closing. All warranties, representations,
indemnities and agreements hereunder shall survive the date of this
Agreement and the offering of the Shares by the Company.
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[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
February 11, 2000.
ARAGON AGENTS LIMITED TERRANO INVESTMENTS LIMITED
By: /s/ Illegible By: /s/ Illegible
------------------------------------ -----------------------------------
Its: Principal Its: Director
----------------------------------- ----------------------------------
CYBERWORLD LIMITED GOLD DRAGON INDUSTRIES LIMITED
By: /s/ Illegible By: /s/ Illegible
------------------------------------ -----------------------------------
Its: Sole Director Its: Director
----------------------------------- ----------------------------------
/s/ Raymond Haskins /s/ Andrew Fletcher
- --------------------------------------- --------------------------------------
RAYMOND HASKINS ANDREW FLETCHER
/s/ Maria Lorna Navarro
- ---------------------------------------
MARIA LORNA NAVARRO
DYNATEC INTERNATIONAL, INC.
By: /s/ Frederick W. Volcansek, Sr.
------------------------------------
Frederick W. Volcansek, Sr.
Chairman and Chief Executive Officer
12
<PAGE>
Schedule A
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Per Share Total
Funding Purchase Purchase Price
Name and Address of Investor Date Price No. of Shares Paid
ARAGON AGENTS LIMITED 1/20/00 $1.0188 19,265 $ 19,626.91
17th Floor 53-55 Lockhart Road 2/9/00 $1.3156 74,591 98,134.54
Wanchai 2/10/00 $1.3250 111,096 147,201.82
Hong Kong 2/11/00 $1.4000 35,048 49,067.27
--------------- ----------------
240,000 $ 314,030.54
TERRANO INVESTMENTS LIMITED 1/20/00 $1.0188 16,055 $16,355.76
12th Floor 2/9/00 $1.3156 62,159 81,778.79
152 Queens Road 2/10/00 $1.3250 92,580 122,668.18
Central 2/11/00 $1.4000 29,207 40,889.39
--------------- ----------------
Hong Kong 200,000 $ 261,692.12
CYBERWORLD LIMITED 1/20/00 $1.0188 19,265 $ 19,626.91
3rd Floor, 121 Min Sheng E. Road 2/9/00 $1.3156 74,591 98,134.54
Section 3, Taiwan 2/10/00 $1.3250 111,096 147,201.82
TAIPEI 2/11/00 $1.4000 35,048 49,067.27
--------------- ----------------
240,000 $ 314,030.54
Gold Dragon Industries Limited 1/20/00 $1.0188 19,265 $ 19,626.91
80 Raffles Place 2/9/00 $1.3156 74,591 98,134.54
#16-20 UOB Plaza 2 2/10/00 $1.3250 111,096 147,201.82
048624 SINGAPORE 2/11/00 $1.4000 35,048 49,067.27
--------------- ----------------
240,000 $ 314,030.54
Raymond Haskins 1/20/00 $1.0188 8,027 $ 8,177.88
Apartment 2, 6th Floor 2/9/00 $1.3156 31,079 40,889.39
177 Ho Ping East Road 2/10/00 $1.3250 46,290 61,334.09
Taipei, TAIWAN 2/11/00 $1.4000 14,603 20,444.70
--------------- ----------------
100,000 $ 130,846.06
Andrew Fletcher 1/20/00 $1.0188 8,027 $ 8,177.88
Apartment 1205 2/9/00 $1.3156 31,079 40,889.39
Peria Mansion 2/10/00 $1.3250 46,290 61,334.09
Carlos Palanca 2/11/00 $1.4000 14,603 20,444.70
--------------- ----------------
Makati Metro Manilla 100,000 $ 130,846.06
PHILIPPINES
Maria Lorna Navarro 1/20/00 $1.0188 8,253 $ 8,407.76
72-19 Dembrobium Street 2/9/00 $1.3156 31,953 42,038.79
Timog Park 2/10/00 $1.3250 47,591 63,058.19
Pampanga 2/11/00 $1.4000 15,014 21,019.40
--------------- ----------------
PHILIPPINES 102,811 $ 134,524.14
</TABLE>
13
<PAGE>
Schedule 3(a)
Subsidiaries of Dynatec International, Inc.
Nordic Technologies, Inc., a Utah corporation
Softalk, Inc., a Utah corporation
Softalk Communications, Inc., a Utah corporation
Arnco Marketing, Ltd., a California corporation
14
<PAGE>
Schedule 3(b)
Capitalization
Shares outstanding as of 2/11/00 3,721,418
Adjustments:
Convertible debenture shares 94,500
Private placement shares 1,222,811
------------
1,317,311
Total shares outstanding after adjustments 5,038,729
Options:
1996 Fixd Options @$2.50 77,000
1996 Variable Options @$2.00 180,000
1996 Fixed Options @$1.46 516,750
------------
773,750
Total potential shares outstanding 5,812,479
15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000752208
<NAME> DYNATEC INTERNATIONAL, INC.
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 244,755
<SECURITIES> 0
<RECEIVABLES> 1,734,933
<ALLOWANCES> (39,036)
<INVENTORY> 2,963,064
<CURRENT-ASSETS> 5,319,637
<PP&E> 6,589,808
<DEPRECIATION> 2,471,862
<TOTAL-ASSETS> 9,787,970
<CURRENT-LIABILITIES> 6,110,854
<BONDS> 0
0
0
<COMMON> 37,214
<OTHER-SE> 356,624
<TOTAL-LIABILITY-AND-EQUITY> 9,787,970
<SALES> 14,770,244
<TOTAL-REVENUES> 14,770,244
<CGS> 9,647,770
<TOTAL-COSTS> 17,366,176
<OTHER-EXPENSES> 881,613
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 888,992
<INCOME-PRETAX> (3,477,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,477,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,477,545)
<EPS-BASIC> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
