<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
Commission File Number: 0-12806
DYNATEC INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0367267
- ---------------- ------------------------------
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
3820 Great Lakes Drive
Salt Lake City, Utah 84120
- --------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(801) 973-9500
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.[X] yes
[ ] no
The Company had 5,155,164 shares of common stock outstanding at May 1, 2000.
This number reflects a 208,000 share upward adjustment made on April 4, 2000 to
reflect an error made by the Company's former stock transfer agent, which error
was discovered by the Company in late March 2000.
The aggregate market value of voting stock held by non-affiliates of the Company
at May 1, 2000 was $6,284,453.
Transitional small business disclosure format. Yes [ ] No [X]
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999.................................................3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999, respectively....................5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999, respectively....................6
Notes to Condensed Consolidated Financial Statements..................8
Item 2. Management's Discussion and Analysis or Plan of Operation...........15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................21
Item 2(c). Recent Sales of Unregistered Securities..........................22
Item 6. Exhibits and Reports on Form 8-K.................................23
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 2000 December 31,
1999
--------------- ---------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 188,369 $ 244,755
Trade accounts receivable, net of allowance for doubtful accounts of $46,226
and $39,036, respectively 2,051,911 1,695,897
Inventories (note 2) 2,806,354 2,963,064
Prepaid expenses and other 255,934 415,921
--------------- --------------
Total current assets 5,302,568 5,319,637
--------------- --------------
BUILDING AND EQUIPMENT, at cost:
Building and improvements 2,865,000 2,865,000
Furniture, fixtures, and equipment 3,821,926 3,724,808
--------------- --------------
6,686,926 6,589,808
Less accumulated depreciation and amortization 2,597,073 2,471,862
--------------- --------------
Net building and equipment 4,089,853 4,117,946
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES, net (note 2) 183,589 194,743
DEFERRED LOAN COSTS, net of accumulated amortization of $36,839 and $30,452,
respectively
29,807 36,194
OTHER ASSETS 145,786 119,450
--------------- --------------
$9,751,603 $9,787,970
=============== ==============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 2000 December 31,
1999
--------------- ---------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Short-term note payable $ 2,058,176 $ 1,831,622
Convertible debentures (note 4) - 1,649,342
Current portion of long-term debt 82,500 82,500
Current portion of capital lease obligations 64,013 60,739
Accounts payable 1,941,945 1,581,463
Accrued expenses 513,797 525,038
Accrued advertising 150,403 300,000
Accrued royalties payable 75,757 80,150
--------------- -------------
Total current liabilities 4,886,591 6,110,854
DEFERRED GAIN ON SALE OF ASSET 241,282 244,363
LONG-TERM DEBT, net of current portion 60,550 81,175
CAPITAL LEASE OBLIGATIONS, net of current portion 2,942,313 2,957,740
--------------- -------------
Total liabilities 8,130,736 9,394,132
--------------- -------------
STOCKHOLDERS' EQUITY (note 3):
Common stock, $.01 par value; 100,000,000 shares authorized and 5,038,679
and 3,721,418 shares outstanding at March 31, 2000 and December 31, 1999,
respectively 50,387 37,214
Treasury stock, at cost, 91,515 shares (915,150) (915,150)
Additional paid-in capital 10,097,720 8,375,074
Accumulated deficit (7,612,090) (7,103,300)
--------------- -------------
Net stockholders' equity 1,620,867 393,838
--------------- -------------
COMMITMENTS AND CONTINGENCIES (note 6)
$9,751,603 $ 9,787,970
=============== =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
4
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 2000 March 31, 1999
---------------------- ----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
PRODUCT SALES $ 3,839,644 $ 3,643,679
COST OF SALES (2,161,197) (2,208,371)
----------------- -----------------
Gross Margin 1,678,447 1,435,308
----------------- -----------------
OPERATING COSTS AND EXPENSES:
Selling expenses 1,161,076 829,627
General and administrative 797,553 831,314
Research and development 94,966 26,012
----------------- -----------------
Total operating costs and expenses 2,053,595 1,686,953
----------------- -----------------
Loss from operations (375,148) (251,645)
----------------- -----------------
OTHER INCOME (EXPENSE):
Interest expense (note 4) (135,219) (273,289)
Other income 1,577 2,431
----------------- -----------------
Total other expense, net (133,642) (270,858)
----------------- -----------------
Loss before income tax provision (508,790) (522,503)
INCOME TAX PROVISION - 3,000
----------------- -----------------
Net loss $ (508,790) $ (525,503)
================= =================
BASIC AND DILUTED NET LOSS PER SHARE $ (.12) $ (.17)
================= =================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 4,268,896 3,111,223
================= =================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
5
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 2000 March 31, 1999
--------------------- ----------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (508,790) $ (525,503)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 136,935 118,317
Amortization of deferred loan costs 6,387 6,387
Amortization of deferred gain on sale of assets (3,082) -
Non-cash interest expense on convertible debentures (note 4) - 179,383
Forgiveness of liquidated damages related to convertible debenture
(note 4) (13,523) -
Loss (gain) on sale of assets (1,577) 625
Provision for losses on accounts receivable - 4,000
Changes in operating assets and liabilities:
Trade accounts receivable (356,014) 269,954
Inventories 156,710 745,159
Prepaid expenses 159,987 (36,313)
Other assets (26,336) 2
Accounts payable 360,482 (148,057)
Accounts payable - other - 77,563
Accounts payable - related party - (98,403)
Accrued expenses (11,241) (106,477)
Accrued advertising (149,597) (295,000)
Accrued royalties (4,393) 1,151
---------------- -----------------
Net cash provided by (used in) operating activities (254,052) 192,788
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of assets 2,600 15,441
Purchase of building and equipment (96,490) (69,441)
---------------- -----------------
Net cash used in investing activities (93,890) (54,000)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 226,554 210,325
Net payments on long-term debt (20,625) (85,620)
Net borrowings (payments) on capital lease obligations (14,373) 15,911
Payment to retire convertible debenture (note 4) (1,500,000) -
Proceeds from the issuance of common stock related to private
placement (note 3) 1,600,000 -
Payment of liquidated damages related to convertible debenture (note 4) - (135,000)
---------------- -----------------
Net cash provided by financing activities 291,556 5,616
---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (56,386) 144,404
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 244,755 2,268
---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 188,369 $ 146,672
================ =================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
6
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 2000 March 31, 1999
---------------------- ----------------------
(Unaudited) (Unaudited)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid for interest $ 144,492 $ 205,447
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases 2,220 -
Conversion of Convertible Debentures and accrued interest for
common stock 135,819 -
Issuance of 500,000 shares of restricted stock - 1,000,000
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
7
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Dynatec International, Inc., a Utah corporation ("Dynatec" or the
"Company"), is a manufacturer and distributor of consumer products comprising
the following major product lines: telecommunication headsets and amplifiers and
telephone accessories, home storage and organization, and flashlights. Dynatec
is located in Salt Lake City, Utah. The Company conducts most of its operations
through four wholly owned subsidiaries: Softalk, Inc., Nordic Technologies,
Inc., SofTalk Communications, Inc., and Arnco Marketing, Inc. Unless specified
to the contrary herein, references to Dynatec or to the Company refer to the
Company and its subsidiaries on a consolidated basis.
The Company's business follows seasonal trends. As a result the Company
experiences its highest revenues in the fourth quarter. Because the Company
sells its products primarily to major retailers, the Company's sales performance
is significantly dependent on the performance of those retailers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission for Form 10-QSB, and accordingly, do
not include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, these unaudited condensed
consolidated financial statements reflect all adjustments, which consist only of
normal recurring adjustments, which are necessary to present fairly the
Company's financial position, results of operations and cash flows as of March
31, 2000 and for the periods presented herein. These unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on form 10-KSB for the year ended December 31, 1999.
The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the remainder
of the year ending December 31, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories, consisting principally of telecommunication headsets and
amplifiers and telephone accessories, home storage and organization, and
flashlights as of March 31, 2000 and December 31, 1999, respectively, are
summarized as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31,
1999
--------------- ---------------
<S> <C> <C>
Raw materials............................ $ 745,280 $ 886,377
Work-in-Process.......................... 157,890 135,931
Finished Goods........................... 1,903,184 1,940,756
=============== ===============
$ 2,806,354 $ 2,963,064
=============== ===============
</TABLE>
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.
8
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basic and Diluted Net Income (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 three months ended March 31,
2000, and 1999, warrants and options to purchase 775,750 and 1,150,000 potential
common shares, respectively, are not included in the computation of diluted net
loss per common share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share.
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired from Transworld Products, Inc. (Transworld) on
July 15, 1999. The goodwill is being amortized using the straight-line basis
over two years. The balance as of March 31, 2000 and December 31, 1999 was as
follows:
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Goodwill $ 34,306 $ 34,306
Accumulated amortization 12,865 8,576
---------- -----------
$ 21,441 $ 25,730
========== ===========
</TABLE>
(3) STOCKHOLDERS' EQUITY
On February 4, 1999, the Company entered into a deposit payable
conversion agreement, whereby a $1,000,000 deposit received by the Company in
early 1998 and recorded as a liability was cancelled, and the Company issued
500,000 shares of restricted common stock under Regulation D to the depositor.
On February 23, 2000 the Company completed a private placement of its
restricted common stock to seven offshore investors. The private placement was
accomplished pursuant to a Stock Purchase Agreement (the "Stock Purchase
Agreement") between the Company and the investors dated as of February 11, 2000.
Under the Stock Purchase Agreement, the Company agreed to issue a total of
1,222,811 shares of restricted common stock. The consideration paid by the
investors was the greater of (i) $1.00 per share or (ii) 100% of the average of
the closing bid prices of the Company's common stock as quoted by the Nasdaq
Stock Market for the five trading days immediately preceding the date the
investors paid the purchase price or any portion thereof. The total proceeds to
the Company from the private placement were $1,600,000.
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT
On May 22, 1998, the Company executed a Convertible Debenture and
Private Equity Line of Credit Agreement (the "Credit Agreement") between the
Company and five separate investors. Under the Credit Agreement, the Company
issued convertible debentures (the "Convertible Debentures") in the aggregate
principal amount of $1,500,000 due May 22, 2001. The Convertible Debentures were
convertible into shares of the Company's common stock at the lesser of: (i) 75%
of the average of the three lowest closing bid prices of the Company's common
stock during the 22-trading-day period immediately preceding the conversion date
or (ii) $6.50.
In addition to the sale of the Convertible Debentures, under the Credit
Agreement, the Company also obtained the right to use a "put" mechanism to
periodically draw down up to $10,000,000 of additional equity capital (the
9
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
"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. Additionally,
upon the effectiveness of a registration statement covering the shares of common
stock issuable under the Credit Agreement (the "Registration Statement"), the
Company was obligated to issue an additional $500,000 principal amount of
Convertible Debentures, pro rata to the investors. Also in connection with the
Credit Agreement, the investors and placement agent were issued Series A and
Series B warrants as follows:
<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>
On June 25, 1999, the Company and the Convertible Debenture investors
entered into a Modification Agreement (the "Modification Agreement"), under
which the parties agreed to cancel the Equity Line and all of the parties'
respective obligations thereunder. The parties to the Modification Agreement
also agreed to cancel the investors' obligation to purchase and the Company's
obligation to sell the additional $500,000 principal amount of Convertible
Debentures upon the effectiveness of the Registration Statement. Additionally,
the Modification Agreement provided for the modification and temporary abatement
of the Company's obligation to pay cash liquidated damages of $45,000 per month
resulting from the Company's inability to have the Registration Statement
declared effective on or before August 28, 1998. Pursuant to the terms of the
Credit Agreement, the Company paid liquidated damages from September 23, 1998
through and including February 23, 1999 in the aggregate amount of $210,000.
Under the Modification Agreement, the Company was to accrue a total of $180,000
of liquidated damages for the period from February 24, 1999 through and
including June 23, 1999, which accrued amount was to have been payable at any
time after October 1, 1999, upon request for payment therefore by the investors,
in shares of the Company's common stock. Additionally, the Company's obligation
to pay liquidated damages under the Credit Agreement was abated from June 24,
1999 through September 23, 1999, provided that the Registration Statement was
declared effective on or before October 31, 1999. Additional liquidated damages
in the amount of $45,000 were to have accrued for the period between September
24, 1999 and October 23, 1999 if the Registration Statement was not declared
effective on or before October 31, 1999. If the Registration Statement was not
declared effective on or before October 31, 1999, the Modification Agreement's
provisions providing for the payment of liquidated damages in stock and the
abatement of liquidated damages from June 23, 1999 to September 23, 1999 and the
provisions allowing the Company to pay liquidated damages in common stock rather
than cash were subject to rescission at the option of the investors.
The Company also had issued, under the Credit Agreement, 80,000 shares
of its common stock as a fee to the placement agent. Of these shares, 20,000
were delivered to the placement agent 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. During the quarter ended March 31, 2000, the
certificates representing such 60,000 shares were cancelled.
On November 12, 1999, the Company and the investors amended the
Modification Agreement to substitute February 15, 2000 for the October 31, 1999
deadline originally in the Modification Agreement. Consequently, the accrual of
liquidated damages was to have been deferred from June 24, 1999 until February
15, 2000, provided that the
10
<PAGE>
(4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
Registration Statement became effective and shareholder approval of the
transaction was obtained on or before that date. Liquidated damages from
February 24, 1999 through June 23, 1999 were not accrued and continued to be
payable by the Company as specified in the Modification Agreement.
The Company and the holders of the Convertible Debentures executed a
Convertible Debenture Retirement Agreement dated as of February 1, 2000, and
which closed on February 23, 2000 (the "Retirement Agreement"). Under the
Retirement Agreement, and in exchange for payment to the holders of the
Convertible Debentures, pro rata, of $1,500,000 cash, the holders agreed to
surrender for cancellation all but a small portion of the then unconverted
Convertible Debentures, to surrender for cancellation all of the A and B
warrants that were issued under the Credit Agreement, and otherwise terminate
all of the obligations of either party under the Credit Agreement. At the
closing of the Retirement Agreement, the holders agreed to convert the remaining
portion of the principal amount of the Convertible Debentures into that number
of shares that would have been issuable had such portion been converted as of
January 24, 2000, or 94,450 shares. In light of the closing of the Retirement
Agreement, the Company has no ongoing obligations under the Credit Agreement,
and has submitted a request to the Securities and Exchange Commission to
withdraw the pending Registration Statement.
(5) BUSINESS SEGMENT INFORMATION
Information as to the operations of the Company in different business
segments is set forth below based on the nature of the products and services
offered. Management evaluates performance based on several factors, of which the
primary financial measure is business segment operating income before non-cash
amortization of intangible assets ("EBITDA"). The accounting policies of the
business segments are the same as those described in the summary of significant
accounting policies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
REVENUES: 2000 1999
- ----------------------------------------------------- --------------- ------------------
<S> <C> <C>
Telecommunication Headsets and
Amplifiers and Telephone Accessories.......... $ 1,866,000 $ 1,836,000
Home Storage and Organization.................... 1,386,000 990,000
Flashlights...................................... 588,000 210,000
Miscellaneous/Mass Market........................ - 608,000
--------------- ------------------
Total..................................... $ 3,840,000 $ 3,644,000
=============== ==================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
OPERATING INCOME (LOSS): 2000 1999
- ----------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 85,000 $ (20,000)
Home Storage and Organization.................... (130,000) (138,000)
Flashlights...................................... (330,000) (126,000)
Miscellaneous/Mass Market........................ - 32,000
---------------- ----------------
Total..................................... $ (375,000) $ (252,000)
================ ================
</TABLE>
11
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) BUSINESS SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
DEPRECIATION AND AMORTIZATION (1): 2000 1999
- ----------------------------------------------------- ---------------- ------------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 67,000 $ 72,000
Home Storage and Organization.................... 49,000 38,000
Flashlights...................................... 21,000 8,000
Miscellaneous/Mass Market........................ - -
---------------- ------------------
Total..................................... $ 137,000 $ 118,000
================ ==================
</TABLE>
(1) Amortization includes all amortization relating to goodwill, product license
rights, non-competes and purchased patents.
Information as to the assets and capital expenditures of Dynatec International,
Inc. is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, 1999
ASSETS (1): 2000
- ---------------------------------------------------- ------------------ --------------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 4,326,000 $ 4,827,000
Home Storage and Organization.................... 2,268,000 2,468,000
Flashlights...................................... 2,538,000 1,676,000
Miscellaneous/Mass Market........................ - -
------------------ --------------------
Total assets for reportable segments...... 9,132,000 8,971,000
Other assets..................................... 146,000 156,000
Deferred loan costs and other assets not
allocated to segments....... 474,000 661,000
================== ====================
Total..................................... $ 9,752,000 $ 9,788,000
================== ====================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
CAPITAL EXPENDITURES: 2000 1999
- ---------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 47,000 $ 42,000
Home Storage and Organization.................... 35,000 22,000
Flashlights...................................... 14,000 5,000
Miscellaneous/Mass Market........................
- -
------------------ ------------------
Total..................................... $ 96,000 $ 69,000
================== ==================
</TABLE>
12
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) BUSINESS SEGMENT INFORMATION (Continued)
Information as to Dynatec International, Inc.'s operations in different
geographical areas is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
REVENUES: 2000 1999
- ------------------------------------------ ---------------- -----------------
<S> <C> <C>
United States.......................... $ 3,732,000 $ 3,588,000
Other (1).............................. 108,000 56,000
---------------- -----------------
Total........................... $ 3,840,000 $ 3,644,000
================ =================
</TABLE>
(1) Includes Canada, Europe, and other miscellaneous.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
OPERATING LOSS : 2000 1999
- ------------------------------------------ ---------------- -----------------
<S> <C> <C>
United States.......................... $ 375,000 $ 252,000
================ =================
</TABLE>
<TABLE>
<CAPTION>
MARCH DECEMBER 31,
ASSETS: 31, 1999 1999
- ------------------------------------------ ---------------- -----------------
<S> <C> <C>
United States.......................... $ 9,404,000 $ 9,418,000
Asia................................... 348,000 370,000
---------------- -----------------
Total........................... $ 9,752,000 $ 9,788,000
================ =================
</TABLE>
(6) STOCK OPTIONS
The Company has established three stock option programs under which it
has granted both non-qualified and incentive stock options to employees, board
members, and certain related entities. Under the Company's 1996-1997
non-qualified stock option program (the "Non-Qualified Plan"), the Company
granted options to acquire 1,640,000 shares of common stock. The 1996 Incentive
Option Plan ("1996 Plan") provides for grants of qualified stock options to
acquire a maximum of 300,000 shares of common stock, of which 200,000 options
have been granted to date. The exercise price of options granted to employees
under either option program equals the market price on the date of grant, and as
a result no compensation expense has been recognized in the accompanying
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. As of March 31, 2000, the
compensation committee of the Company's Board of Directors has granted stock
options under the 1999 Plan to purchase a total of 502,750 shares of common
stock to various executives, employees and directors of the Company. Such
options were granted as non-qualified options having terms of 10 years from the
date of grant. All such options have an exercise price of between $1.00 and
$1.75 per share, with a weighted average price of $1.462 per share. The exercise
price for the options was greater than or equal to the fair market value on the
grant date.
13
<PAGE>
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) STOCK OPTIONS (Continued)
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.
(7) SUBSEQUENT EVENTS
In February 2000, Merrill Lynch & Co., Inc. ("Merrill Lynch") notified
the Company that American Stock Transfer & Trust Co., New York, New York, the
Company's stock transfer agent ("AST"), had confiscated three separate
certificates purporting to represent a total of 208,000 shares of restricted
common stock issued in the name of an entity affiliated with Donald M. Wood, the
Company's former Chairman and Chief Executive Officer. AST confiscated such
certificates because they were not then shown as valid certificates representing
the Company's issued and outstanding common stock. Based on further
investigation by AST, the Company believes that its former stock transfer agent
had transferred the shares represented by such certificates to third parties,
but had not received the original certificates representing such shares at the
time of those transfers. Nor did the former transfer agent obtain documentation
indicating that such certificates had been lost, stolen or destroyed. Several
years after the shares represented by such certificates had been transferred,
Mr. Wood then tendered the original certificates to Merrill Lynch with
instruction to sell the shares represented by such certificates. Merrill Lynch
then sold such shares and tendered the certificates to AST for transfer, at
which time AST confiscated the certificates.
On March 28, 2000, the Company received a letter from counsel for
Merrill Lynch. In that letter, Merrill Lynch advised the Company of its
intention to enforce its clients' rights to compel the Company to recognize the
transfers of the shares represented by the certificates tendered by Mr. Wood
under Article 8 of the Uniform Commercial Code as adopted by the State of Utah.
The Company complied with Merrill Lynch's demand. The net effect of this action
was that the Company was required to recognize as having been previously issued
208,000 shares of common stock that were not then shown as being issued and
outstanding on the books and records of the Company.
On March 29, 2000, the Company filed a lawsuit in Utah state court
against Mr. Wood, WAC Research, Inc. ("WAC") and Muito Bem Ltd Partnership
("Muito Bem"), Alpha Tech Stock Transfer & Trust Company, the Company's former
stock transfer agent ("Alpha Tech"). Both WAC and Muito Bem are entities
affiliated with Wood. The case sought damages from all defendants, and
specifically asked the court to award to the Company the proceeds of the sales
by WAC and/or Muito Bem of the shares that the Company was compelled to
reinstate on the basis that those entities and their principals had been
unjustly enriched. In a settlement, dated April 12, 2000, among Wood, WAC, Muito
Bem, Merrill Lynch and the Company, the Company received cash in the amount of
$200,714, in exchange for which it released its claims for further damages
against Wood, WAC, Muito Bem and Merrill Lynch. The Company's claims against
Alpha Tech are still pending.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in dollars
(rounded) and percentage changes from period to period. Data in the table
reflects the consolidated results of the Company for the three months ended
March 31, 2000 and 1999, respectively. As supplemental information, the table
also segregates the Company's revenues by product line type.
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
% OF
CHG
FROM
MARCH 31, MARCH 31, 1999 TO
2000 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Unaudited Statement of Operations Data:
Product sales $ 3,840,000 $ 3,644,000 5.4%
Cost of sales 2,161,000 2,208,000 (2.1)
----------- -----------
Gross margin 1,679,000 1,436,000 16.9
----------- -----------
Operating Costs and Expenses:
Selling expenses 1,161,000 830,000 39.9
General and administrative 798,000 831,000 (4.0)
Research and development 95,000 26,000 265.4
----------- -----------
Total operating costs and
Expenses 2,054,000 1,687,000 21.8
----------- -----------
Other Income (Expense), net:
Interest expense (135,000) (273,000) (50.5)
Other income 2,000 2,000 -
Income taxes - (3,000) -
----------- -----------
Net loss $ (508,000) $ (525,000) 3.2%
=========== ===========
Unaudited Supplemental Information:
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories $ 1,866,000 $ 1,836,000 1.6%
Home storage and organization 1,386,000 990,000 40.0
Flashlights 588,000 210,000 180.0
Miscellaneous/mass market - 608,000 -
----------- -----------
Total product sales $ 3,840,000 $ 3,644,000 5.4%
=========== ===========
</TABLE>
The following are explanations of significant period to period changes for the
three months ended March 31, 2000 and 1999:
Revenues
Total Product Sales. Total product sales increased by $196,000, or 5.4%,
from $3,644,000 to $3,840,000 for the three months ended March 31, 2000 compared
to the three months ended March 31, 1999.
Telecommunication Headsets and Amplifiers and Telephone Accessories.
Telecommunication headsets and amplifiers and telephone accessories sales
increased $30,000, or 1.6%, from $1,836,000 to $1,866,000 for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999. This
increase is primarily related to an increase in the Company's Softalk and
MiniSoftalk products of $79,000, the Cord Manager of $32,000 and telephone
headsets and amplifiers of $30,000, as well as an increase in sales of $52,000
of the new phonerest product acquired in the Transworld acquisition in August of
1999. The increase was offset in part by a decrease in the Softalk II and
Universal products of $109,000 and a decrease of $54,000 of the Company's
Twisstop product. Overall gross margins for this product line increased to 57.4%
from 56.3% for the three months ended March 31, 2000 compared to the three
months ended March 31, 1999, as a result of the sales mix and a more efficient
production process.
15
<PAGE>
Home Storage and Organization. Home storage and organization revenues
increased $396,000, or 40.0%, from $990,000 to $1,386,000 for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999. The
increase is primarily attributable to an increase of $250,000 in the
"Expand-A-Drawer" product line, $113,000 in the Company's "Expand-A-Shelf"
product line, and $60,000 in the doorstops product line. These increases are the
results of the Company's efforts to improve the retail packaging of its
houseware products. These increases were offset in part by a decrease of $18,000
in the baskets product line and $9,000 in the miscellaneous houseware products
line. Overall gross margins for products in this category increased from 34.0%
to 37.6% for the three months ended March 31, 2000 when compared to March 31,
1999, as a result of the sales mix.
Flashlights. Flashlight revenues increased $378,000, or 180.0%, from
$210,000 to $588,000 for the three months ended March 31, 2000 compared to the
three months ended March 31, 1999. This increase was primarily the result of the
addition of new major foreign and domestic customers as a result of a successful
increase in the Company's selling and marketing efforts in this product line.
Overall gross margins for products in this category decreased from 16.1% to
14.9% for the three months ended March 31, 2000 when compared to March 31, 1999,
as a result of an increase in costs related to upgrading the retail packaging of
this product line.
Miscellaneous and Mass Market. Miscellaneous and mass market revenues
decreased $608,000 from $608,000 to $0 for the three months ended March 31, 2000
compared to the three months ended March 31, 1999. This decrease was the result
of the Company's decision to discontinue its efforts in this product line and
the resulting December 24, 1998 agreement with Grandway China ("Grandway"). The
agreement provided for the transfer of inventory, distribution and sales rights
of products that the Company was then supplying to Dolgencorp. Upon execution,
Grandway agreed to purchase approximately $1,800,000 of inventory that had been
acquired by the Company and earmarked for sale to Dolgencorp. Management does
not presently anticipate future significant sales in this product line.
Operating Costs and Expenses
Selling Expenses. Selling expenses increased $331,000, or 39.9%, from
$830,000 to $1,161,000 for the three months ended March 31, 2000 compared to the
three months ended March 31, 1999. This increase is due in part to an increase
in salaries for sales personnel of $105,000 due to the addition of the Senior
Vice President of Sales and a national sales manager for the housewares product
line, as well as increases in advertising expense resulting from the placement
of additional pages in office product catalogues and an increase in consulting
fees of $50,000. Travel expenses increased by $41,000 due to increased travel to
foreign trade shows and freight expenses increased by $63,000 due to increased
sales and increased fuel prices.
Research and Development. Research and development expenses increased by
$69,000, or 265.4%, from $26,000 to $95,000 for the three months ended March 31,
2000 compared to the three months ended March 31, 1999. The increase was
primarily attributable to the Company's increased research and development
efforts associated with the Company's flashlight line to improve the function
and appearance of the products.
General and Administrative Expenses. General and administrative expenses
decreased $33,000, or 4.0%, from $831,000 to $798,000 for the three months ended
March 31, 2000 compared to the three months ended March 31, 1999. The decrease
in general and administrative expenses was primarily the result of a decrease in
severance pay in the amount of approximately $115,000 that was paid to the
Company's former Chairman and CEO, who resigned on January 14, 1999, and the
former President of the Company, who resigned effective March 17, 1999. This
decrease was offset in part by increases in consulting expense of $47,000, and
Directors and Officers and group health insurance premiums of $23,000.
Total Operating Costs and Expenses. Total operating costs and expenses
increased by $367,000, or 21.8%, from $1,687,000 to $2,054,000 for the three
months ended March 31, 2000 compared to the three months ended March 31, 1999,
for the reasons discussed above.
Interest Expense. Interest expense decreased $138,000, or 50.5%, from
$273,000 to $135,000 for the three months ended March 31, 2000 compared to the
three months ended March 31, 1999. This decrease was primarily associated with
the retirement of the Convertible Debentures as of February 14, 2000. The normal
non-cash interest that was recognized on the Convertible Debentures at 12% per
annum in the three months ended March 31, 1999 was $44,000 and liquidated
damages were assessed against the Company in the amount of $135,000 due to the
Company's failure to have effective a registration statement covering the shares
of common stock issuable upon conversion of the Convertible Debentures within
the time specified in a registration rights agreement executed in connection
with the sale of the Convertible Debentures. Theses decreases were offset in
part by an increase in interest expense related to the amortization of the
capital lease on the Company's office building and an increase in the borrowings
on the Company's line of credit.
16
<PAGE>
Net loss. The net loss decreased by $16,000, or 3.2%, from a loss of
$525,000 to a loss of $508,000 for the three months ended March 31, 2000
compared to the three months ended March 31, 1999 due to a combination of the
factors described above.
Liquidity and Capital Resources
General
The Company's principal sources of liquidity are cash flows from
operations, cash on hand and borrowing under the Company's existing secured
revolving credit facility. On May 27, 1998, the Company obtained its secured
revolving credit facility from a regional financing institution for up to
$5,000,000, bearing interest at a rate of prime plus one percent, with interest
payable monthly. The credit facility is secured by the Company's accounts
receivable and 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 March 23, 2000 the Company and its lending
institution entered into a Seventh Amendment to the Credit Agreement (the
"Seventh Amendment"). Pursuant to this amendment certain definitions have been
modified as follows: (i) the maximum line decreased from $3,000,000 to
$2,500,000; and (ii) the inventory advance rate increased from 40% to 48% of
eligible inventory. Also, the Seventh Amendment changed the terms of certain of
the financial covenants and ratios for the remainder of year 2000 and for 2001.
The interest rate presently applicable to the revolving credit line is prime
plus three percent, with interest payable monthly. At March 31, 2000, the
Company had $441,824 of unused borrowings under its credit facility, which
amount is limited by the levels of inventory and receivables.
On May 22, 1998, the Company closed a transaction that provided net capital
proceeds of $1,335,000. The transaction was accomplished pursuant to a
Convertible Debenture and Private Equity Line of Credit Agreement (the "Credit
Agreement") between the Company and a group of five unaffiliated investors.
These funds were raised pursuant to the sale by the Company of Convertible
Debentures in the aggregate principal amount of $1,500,000. The Convertible
Debentures were convertible into the Company's common stock at the lesser of:
(i) 75% of the average of the three lowest closing bid prices of the common
stock as quoted on the Nasdaq SmallCap Market during the 22 trading-day period
immediately preceding the conversion date or (ii) $6.50. In addition to the sale
of the Convertible Debentures, the Company also obtained the right to use a
"put" mechanism to periodically draw down up to $10,000,000 of additional equity
capital the ("Equity Line"). Under the terms of the Credit Agreement, the
Company was obligated to draw down a minimum of $1,000,000 under the Equity
Line, and all amounts were to have been drawn in increments of not less than
$50,000. In return for the payment of additional capital under the Equity Line,
the Company would have been required to issue shares of its common stock at a
per share purchase price equal to 80% of the average of the three lowest closing
bid prices of the common stock during a six day valuation period commencing
three days before the draw date and ending two days after the draw date. The
Equity Line could not have been utilized, and the Company had no obligation to
exercise any portion of the put mechanism, until after the effective date of the
registration statement (the "Registration Statement") for the underlying stock
of the Credit Agreement. Additionally, upon registration of the underlying
shares, which were issuable upon conversion of the Convertible Debentures, the
Company was obligated to issue an additional $500,000 of Convertible Debentures.
The Company filed the Registration Statement on Form SB-2 as required by the
Credit Agreement but it had not become effective by June 1999.
On June 25, 1999, the Company and the Convertible Debenture holders entered
into a Modification Agreement ("Modification Agreement"), under which the
parties agreed to cancel the Equity Line and all of the parties' respective
obligations there under. The parties to the Modification Agreement also agreed
to cancel the investors' obligation to purchase and the Company's obligation to
sell the additional $500,000 principal amount of Convertible Debentures upon the
effectiveness of the Registration Statement. Additionally, the Modification
Agreement provided for the modification and temporary abatement of the Company's
obligation to pay cash liquidated damages of $45,000 per month resulting from
the Company's obligation to have the Registration Statement declared effective
on or before August 28, 1998. Pursuant to the terms of the Credit Agreement, the
Company paid liquidated damages from September 23, 1998 through and including
February 23, 1999 in the aggregate amount of $210,000, of which $135,000 was
paid in the three-month period ended March 31, 1999. Under the Modification
Agreement, the Company was to accrue a total of $180,000 of liquidated damages
for the period from February 24, 1999 through and including June 23, 1999, which
accrued amount was payable at any time after October 1, 1999, upon request for
payment therefore by the Investors, in shares of the Company's common stock. The
number of shares of common stock issuable upon such payment was to have been
determined by dividing the total amount of damages accrued by 100% of the
average of the closing bid prices of the Company's common stock during the five
trading day period immediately preceding the date of such payment. Additionally,
under the Modification Agreement, the Company's obligation to pay liquidated
damages under the Credit Agreement was abated from June 24, 1999 through
September 23, 1999, provided that the Registration Statement was declared
17
<PAGE>
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
surrender for cancellation all but a small portion of the then unconverted
Convertible Debentures, to surrender for cancellation all of the A and B
warrants that were issued under the Credit Agreement, and otherwise terminate
all of the obligations of either party under the Credit Agreement. At the
closing of the Retirement Agreement, the holders agreed to convert the remaining
portion of the principal amount of the Convertible Debentures into that number
of shares that would have been issuable had such portion been converted as of
January 24, 2000, or 94,450 shares. In light of the closing of the Retirement
Agreement, the Company has no ongoing obligations under the Credit Agreement,
and has submitted a request to the Securities and Exchange Commission to
withdraw the pending Registration Statement.
To allow the Company to consummate the transactions contemplated by the
Retirement Agreement, the Company completed a private placement of its
restricted common stock to seven offshore investors. The private placement was
accomplished pursuant to a Stock Purchase Agreement (the "Stock Purchase
Agreement") between the Company and the investors dated as of February 11, 2000,
which closed on February 23, 2000. Under the Stock Purchase Agreement, the
Company agreed to issue a total of 1,222,811 shares of restricted common stock.
The consideration paid by the investors was the greater of (i) $1.00 per share
or (ii) 100% of the average of the closing bid prices of the Company's common
stock as quoted by the Nasdaq Stock Market for the five trading days immediately
preceding the date the investors paid the purchase price or any portion thereof.
The total proceeds to the Company from the private placement were $1,600,000, of
which $1,500,000 was used to close the Retirement Agreement, and $100,000 was
used for general corporate purposes.
In February 2000, Merrill Lynch & Co., Inc. ("Merrill Lynch") notified the
Company that American Stock Transfer & Trust Co., New York, New York, the
Company's stock transfer agent ("AST"), had confiscated three separate
certificates purporting to represent a total of 208,000 shares of restricted
common stock issued in the name of an entity affiliated with Donald M. Wood, the
Company's former Chairman and Chief Executive Officer. AST confiscated such
certificates because they were not then shown as valid certificates representing
the Company's issued and outstanding common stock. Based on further
investigation by AST, the Company believes that its former stock transfer agent
had transferred the shares represented by such certificates to third parties,
but had not received the original certificates representing such shares at the
time of those transfers. Nor did the former transfer agent obtain documentation
indicating that such certificates had been lost, stolen or destroyed. Several
years after the shares represented by such certificates had been transferred,
Mr. Wood then tendered the original certificates to Merrill Lynch with
instruction to sell the shares represented by such certificates. Merrill Lynch
then sold such shares and tendered the certificates to AST for transfer, at
which time AST confiscated the certificates.
On March 28, 2000, the Company received a letter from counsel for Merrill
Lynch. In that letter, Merrill Lynch advised the Company of its intention to
enforce its clients' rights to compel the Company to recognize the transfers of
the shares represented by the certificates tendered by Mr. Wood under Article 8
of the Uniform Commercial Code as adopted by the State of Utah. The Company
complied with Merrill Lynch's demand. The net effect of this action was that the
Company was required to recognize as having been previously issued 208,000
shares of common stock that were not then shown as being issued and outstanding
on the books and records of the Company.
On March 29, 2000, the Company filed a lawsuit in Utah state court against
Mr. Wood, WAC Research, Inc. ("WAC") and Muito Bem Ltd Partnership ("Muito
Bem"), Alpha Tech Stock Transfer & Trust Company, the Company's former stock
transfer agent ("Alpha Tech"). Both WAC and Muito Bem are entities affiliated
with Wood. The case sought damages from all defendants, and specifically asked
18
<PAGE>
the court to award to the Company the proceeds of the sales by WAC and/or Muito
Bem of the shares that the Company was compelled by Merrill Lynch to reinstate
on the basis that those entities and their principals had been unjustly
enriched. In a settlement among Wood, WAC, Muito Bem, Merrill Lynch and the
Company, the Company received cash in the amount of $200,714, in exchange for
which it released its claims for further damages against Wood, WAC, Muito Bem
and Merrill Lynch.
March 31, 2000 Compared to December 31, 1999
As of March 31, 2000, the Company had liquid assets (cash and cash
equivalents and trade accounts receivable) of $2,240,000, an increase of 15.4%,
or $299,000, from December 31, 1999 when liquid assets were $1,941,000. Cash
decreased $57,000, or 23.3%, to $188,000 at March 31, 2000 from $245,000 at
December 31, 1998. The decrease in cash was primarily the result of the Company
utilizing its revolving credit facility, under which "draws" are made by the
Company to fund capital expenditures, purchase inventory and for general-purpose
use. After a draw is made a corresponding payable is setup, when collections of
outstanding accounts receivable are made the monies collected, are swept, the
next day, and re-applied against outstanding draws. Trade accounts receivable
increased $356,000, or 21.0%, to $2,052,000 at March 31, 2000 from $1,696,000 at
December 31, 1999. This increase is primarily the result of increased sales in
March 2000 compared to December 1999.
Current assets decreased by $17,000, or 0.3%, to $5,303,000 at March 31,
2000 from $5,320,000 at December 31, 1999. This decrease was primarily the
result of a decrease in cash of $57,000, discussed above, inventory levels
decreased by $157,000 primarily due to the Company's efforts to reduce inventory
levels to a three months supply, and a decrease in prepaid expenses and other of
$160,000. The decrease in current assets was offset in part by an increase in
trade accounts receivable, as discussed above.
Long-term assets decreased $19,000, or 0.4%, to $4,449,000 at March 31,
2000 from $4,468,000 at December 31, 1999. This decrease was primarily the
result of recurring depreciation expense on building and equipment, and
amortization of deferred loan costs, and other intangibles.
Current liabilities decreased by $1,224,000, or 20.0%, to $4,887,000 at
March 31, 2000 from $6,111,000 at December 31, 1999. This decrease was primarily
due to a decrease of $1,649,000 in convertible debentures as a result of the
Company's February 1, 2000 agreement to retire the convertible debentures, as
well as a decrease in accrued advertising of $150,000. These decreases were
off-set in part by an increase of $361,000 in trade accounts payable as a result
of the Company negotiating extended terms with some of its major suppliers, and
$226,000 in short-term notes payable as a result of additional borrowings under
the Company's revolving line of credit.
The Company's working capital increased by $1,207,000, or 152.6%, to
$416,000 at March 31, 2000 from ($791,000) at December 31, 1999, for the reasons
described above.
The Company used net cash of $254,000 in operating activities during the
three months ended March 31, 2000, primarily from the net loss incurred during
the period, an increase in trade accounts receivable and a decrease in accrued
advertising, offset in part by decreased inventory levels and prepaid expenses
as well as an increase in accounts payable.
The Company used net cash of $94,000 in investing activities during the
three months ended March 31, 2000, primarily for capital expenditures for
machinery and equipment.
The Company provided net cash of $292,000 from financing activities during
the three months ended March 31, 2000. The increase was primarily due to
proceeds from the issuance of common stock related to a private placement (note
3) and borrowings under the Company's revolving line-of-credit, off-set in part
by payments made on the retirement of the convertible debentures and payments
made on long-term debt during the period.
19
<PAGE>
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 for the remainder of 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.
Inflation
Most of the Company's products are purchased in finished form and packaged
by the supplier or at the Company's headquarters. The Company uses a premixed
plastisol (a petroleum based raw material) to manufacture certain of its
telephone accessory products at its headquarters. The Company anticipates usual
inflationary increases in the price of its plastic products and does not intend
to pass these increases along to its customers, primarily as a result of other
operating efficiencies gained through changing the sourcing of certain of its
flashlight manufacturing from the United States to Asia. Significant increases
in the cost of plastisol in the future could materially affect the Company's
profitability if these costs cannot be passed on to customers. In general, the
Company does not believe that inflation has had a material effect on its results
of operations in recent years. However, there can be no assurance that the
Company's business will not be affected by inflation in the future.
Seasonality
The Company's business is seasonal. The Company typically experiences its
highest sales volume in the fourth quarter of each year as a result of the
retail environment in which most of its customers conduct business. Because the
Company sells its products primarily to major retailers, the Company's sales
performance is significantly dependent on the performance of those retailers.
Accordingly, the fourth quarter is a key determinate to overall profitability
for the year.
Forward Looking Statements
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements will prove to be accurate.
Factors that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to, potential increases
in inventory costs, competition, the Company's ability to obtain additional
working capital to fund future growth and any of the risks described in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
20
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 4, 2000, Grandur, Inc., a Taiwan corporation ("Grandur"), sued
the Company in the United States District Court for the District of New Jersey.
The summons and complaint were served on the Company in Salt Lake City, Utah on
May 12, 2000. The complaint alleges that the Company has breached a
manufacturing agreement between the Company and Grandur pursuant to which the
Company is alleged to have a minimum annual purchase requirement and an
exclusive manufacturing arrangement with Grandur for the Company's Twisstop
product. The Complaint further alleges that Grandur is entitled to recover, in
addition to such damages as may be proved at trial, liquidated damages per the
terms of the contract in the amount of $500,000. The Company intends to
vigorously defend the lawsuit.
In February 2000, Merrill Lynch & Co., Inc. ("Merrill Lynch") notified
the Company that American Stock Transfer & Trust Co., New York, New York, the
Company's stock transfer agent ("AST"), had confiscated three separate
certificates purporting to represent a total of 208,000 shares of restricted
common stock issued in the name of an entity affiliated with Donald M. Wood, the
Company's former Chairman and Chief Executive Officer. AST confiscated such
certificates because they were not then shown as valid certificates representing
the Company's issued and outstanding common stock. Based on further
investigation by AST, the Company believes that its former stock transfer agent
had transferred the shares represented by such certificates to third parties,
but had not received the original certificates representing such shares at the
time of those transfers. Nor did the former transfer agent obtain documentation
indicating that such certificates had been lost, stolen or destroyed. In January
2000, several years after the shares represented by such certificates
purportedly had been transferred, the original certificates were tendered to
Merrill Lynch with instruction to sell the shares represented by such
certificates. Merrill Lynch then sold such shares and tendered the certificates
to AST for transfer, at which time AST confiscated the certificates. On March
28, 2000, the Company received a letter from counsel for Merrill Lynch. In that
letter, Merrill Lynch advised the Company of its intention to enforce its
clients' rights to compel the Company to recognize the transfers of the shares
represented by the certificates tendered to it in January 2000 under the Uniform
Commercial Code as adopted by the State of Utah. The Company complied with
Merrill Lynch's demand. The net effect of this action was that the Company was
required to recognize as having been previously issued 208,000 shares of common
stock that were not then shown as being issued and outstanding on the books and
records of the Company. On March 29, 2000, the Company filed a lawsuit in Utah
state court against Mr. Wood, WAC Research, Inc. ("WAC") and Muito Bem Ltd
Partnership ("Muito Bem"), Alpha Tech Stock Transfer & Trust Company, the
Company's former stock transfer agent ("Alpha Tech"). Both WAC and Muito Bem are
entities affiliated with Wood. The case sought damages from all defendants, and
specifically asked the court to award to the Company the proceeds of the sales
by WAC and/or Muito Bem of the shares that the Company was compelled to
reinstate on the basis that those entities and their principals had been
unjustly enriched. In a settlement, dated April 12, 2000, among Wood, WAC, Muito
Bem, Merrill Lynch and the Company, the Company received cash in the amount of
$200,714, in exchange for which it released its claims for further damages
against Wood, WAC, Muito Bem and Merrill Lynch. The Company's claims against
Alpha Tech are still pending.
On December 7, 1999, Donald M. Wood, the former Chairman and Chief
Executive Officer of the Company, and the Stith Law Office (Wood's personal
legal counsel) filed a lawsuit in the District Court of Salt Lake County, State
of Utah (Case No. 990912153). In that lawsuit, Wood and Stith asserted that the
Company has breached a Settlement Agreement executed by the Company and Wood
upon Wood's resignation as the Company's Chairman and Chief Executive Officer,
effective as of January 14, 1999. The lawsuit includes claims for breach of
contract, fraud and intentional infliction of emotional distress, and seeks
money damages and punitive damages in the aggregate amount of $1,162,246. On
February 7, 2000, the Company filed its answer to the Wood litigation, in which
the Company asserted that its payment obligations under the Settlement Agreement
were excused by repeated breaches by Wood of various covenants of the Settlement
Agreement. Simultaneously, the Company filed a counterclaim against Wood for
money damages incurred by the Company as a result of Wood's various breaches of
the Settlement Agreement. The Company also simultaneously filed motions to
dismiss the fraud and intentional infliction of emotional distress claims. The
Company's management believes the Wood litigation is without merit and intends
to vigorously defend.
On March 19, 1999, Alpha Tech Stock Transfer Company ("Alpha Tech")
filed a lawsuit against the Company in Utah state court in Salt Lake City, Utah.
Alpha Tech was the Company's stock transfer agent for a period of approximately
ten years until the Company terminated its relationship with Alpha Tech in
January 1999 and instructed Alpha Tech to transfer the Company's stock transfer
records to American Stock Transfer, New York, New York. The complaint alleges
that the Company breached its service contract with Alpha Tech by failing to pay
$132,165 to Alpha Tech for transfer agent services rendered and reimbursement
for legal expenses incurred by Alpha Tech. Alpha Tech never served the
complaint; the Company learned about the complaint through an unrelated third
party. In March 2000, Alpha Tech refiled essentially the same complaint, thereby
commencing another lawsuit against the Company. The March 2000 complaint is
virtually identical to the March 1999 complaint. In April 2000, the Company
accepted service of process, and has filed a motion to dismiss the March 2000
complaint. The Company disputes the claims of Alpha Tech's complaint and intends
to vigorously defend this action.
On February 22, 1999, the Company received a demand letter from counsel
for Mag Instrument, Inc., a manufacturer and distributor of flashlights and one
of the Company's competitors ("Mag"). In the letter, Mag accused the Company of
infringing certain of Mag's patents and committing false advertising and unfair
competition. Attached to the demand letter was a copy of a complaint filed in
21
<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 March 31, 2000, the Company had received no response from
the Enforcement Division about whether the SEC plans to name the Company in any
administrative action.
In addition, the Company has previously disclosed that it has been
informed of an investigation by the Enforcement Division of the Securities and
Exchange Commission. The Company believes this investigation concerns certain
trading activity in the Company's common stock and other transactions involving
the Company's securities, however, the Company has not been informed of the
specifics of such investigation. The Company is cooperating fully with these
administrative proceedings. Any finding or order of the Commission adverse to
the Company or any judgment against the Company in any of the pending litigation
matters, would have an adverse effect on the business, financial condition or
results of operations of the Company, or the market for its common stock.
On February 12, 1998, Fuji Corporation filed a claim with the
International Trade Commission seeking a cease and desist order against
approximately 30 entities. Fuji sought to enlist the aid of the U.S. Customs
Department in preventing the importation of single-use cameras which are
manufactured by any of the defendant entities and which infringe the patents of
Fuji. The Company does not manufacture single-use cameras, but previously has
distributed single-use cameras which have been refurbished and reloaded in
mainland China. The Company was therefore involved in the Fuji proceeding. The
Company engaged intellectual property counsel and vigorously defended its
position until December 1998, when the Company sold its remaining inventory of
single-use cameras to another entity. In connection with that sale, any
liability of the Company in connection with the Fuji proceeding, including the
costs of further defending the action, were assumed by the purchaser of the
Company's single-use camera inventory, although the Company nominally remains
part of that litigation.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a material adverse
effect on the Company's operations or financial condition.
Item 2(c). Recent Sales of Unregistered Securities
In January and February 2000, the Company conducted a private placement
of its restricted common stock to seven investors. The closing of that private
placement occurred on February 23, 2000, although funds were received by the
Company in connection with that placement on various dates ranging from January
20, 2000 to February 11, 2000. Pursuant to the private placement the Company
received proceeds of $1,600,000, $1,500,000 of which was used to retire the
Company's convertible debentures and discharge other liabilities of the Company
to the holders of the convertible debentures. The remaining $100,000 of those
proceeds was used as working capital. The purchase price of such securities was
100% of the average of the closing bid price of the Company's common stock, as
quoted by The Nasdaq Stock Market, for the five trading days immediately
preceding the date funds were received by the Company. In connection with the
private placement, the Company issued a total of 1,222,811 shares of its
restricted common stock. The Company issued such shares without registration
under the Securities Act of 1933 (the "Securities Act") in reliance on Section
4(2) of the Securities Act and Rule 506 of Regulation D under the Securities
22
<PAGE>
Act. Such shares of common stock were issued as restricted securities, and the
certificates representing such shares was stamped with a standard legend to
prevent any resale without registration under the Securities Act or pursuant to
an exemption.
In connection with the retirement of the Company's convertible
debentures, the holders of the convertible debentures agreed in January 2000 to
convert approximately $58,000 principal amount of the debentures, together with
interest accrued thereon, into 94,450 shares of restricted common stock.
Although the Convertible Debenture Retirement Agreement executed by the Company
and the convertible debenture holders was dated as of February 1, 2000, and the
transactions contemplated thereby did not close until February 23, 2000, the
Company agreed that it would honor the conversions described above as of January
24, 2000, the date the Company's Board of Directors approved the transaction.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
10.1 Convertible Debenture and Equity Line of Credit Agreement
between the Company and five investors dated as of May 28,
1998. (Incorporated by reference from Current Report on Form
8-K filed by the Company with the SEC on June 8, 1998).
10.2 Form of Convertible Debentures issued in May 1998.
(Incorporated by reference from Current Report on Form 8-K
filed by the Company with the SEC on June 8, 1998).
10.3 Form of A Warrants issued in conjunction with Convertible
Debentures. (Incorporated by reference from Current Report on
Form 8-K filed by the Company with the SEC on June 8, 1998).
10.4 Form of B Warrants issued in conjunction with Convertible
Debentures. (Incorporated by reference from Current Report on
Form 8-K filed by the Company with the SEC on June 8, 1998).
10.5 Registration Rights Agreement entered into with the holders of
Convertible Debentures. (Incorporated by reference from
Current Report on Form 8-K filed by the Company with the SEC
on June 8, 1998).
10.6 Modification Agreement between the Company and the holders of
Convertible Debentures, dated as of June 25, 1999.
(Incorporated by reference from Quarterly Report on Form
10-QSB for the period ended June 30, 1999).
10.7 Amendment to Modification Agreement between the Company and
the holders of Convertible Debentures, dated as of November
12, 1999. (Incorporated by reference from Quarterly Report on
Form 10-QSB for the period ended September 30, 1999.)
10.8 Convertible Debenture Retirement Agreement between the Company
and the holders of the Convertible Debentures, dated as of
February 1, 2000. (Incorporated by reference from Annual
Report on Form 10-KSB for the year ended December 31, 1999.)
10.9 Stock Purchase Agreement between the Company and seven
investors, dated as of February 11, 2000. (Incorporated by
reference from Annual Report on Form 10-KSB for the year ended
December 31, 1999.)
10.10 Employment Agreement between the Company and Frederick W.
Volcansek, dated as of February 5, 1999. (Incorporated by
reference from Annual Report on Form 10-KSB for the year ended
December 31, 1998).
23
<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.)
27 Financial Data Schedule.
(b) Forms 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATEC INTERNATIONAL, INC.
/s/ Frederick W. Volcansek, Sr. May 15, 2000
- ------------------------------------ -------------------
Frederick W. Volcansek, Sr. Date
Chairman & CEO
/s/ Michael L. Whaley May 15, 2000
- ------------------------------------ -------------------
Michael L. Whaley Date
Senior Vice President & CFO
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