UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from _______ to _________
Commission File Number: 0-12806
DYNATEC INTERNATIONAL, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
UTAH 87-0367267
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (IRS employer
or organization) identification no.)
3820 West Great Lakes Drive
Salt Lake City, Utah 84120
--------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(801) 973-9500
-------------
(Issuer's telephone number, including area code)
N/A
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. X Yes No
--- --
The Company had 6,095,640 shares of common stock outstanding at August 17, 2001.
The aggregate market value of voting stock held by non-affiliates of the Company
at August 17, 2001 was $346,349.
Transitional small business disclosure format. Yes X No
--- ---
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000..................3
Condensed Consolidated Statements of Operations for the three months ended
June 30, 2001 and 2000, respectively.............................................................5
Condensed Consolidated Statements of Operations for the six months ended
June 30, 2001 and 2000, respectively.............................................................6
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and 2000, respectively.............................................................7
Notes to Condensed Consolidated Financial Statements.............................................9
Item 2. Management's Discussion and Analysis or Plan of Operation.......................................14
PART II. OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings...............................................................................20
Item 2. Changes in Securities and Use of Proceeds.......................................................22
Item 6. Exhibits and Reports on Form 8-K................................................................23
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
--------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 16,982 $ 128,536
Trade accounts receivable, net of allowance for doubtful accounts of $13,739
and $56,800, at June 30, 2001 and December 31, 2000 respectively (note 2) 167,431 806,421
Accounts receivable-other 154,965 -
Inventories (note 2) 1,057,563 1,251,052
Prepaid expenses and other 90,164 101,096
Net assets of discontinued operations - 178,873
------------- -------------
Total current assets 1,487,105 2,465,978
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Building and improvements 2,865,000 2,865,000
Furniture, fixtures, and equipment 2,967,591 2,965,150
------------- -------------
5,832,591 5,830,150
Less accumulated depreciation and amortization 2,499,773 2,274,813
------------- -------------
Net property and equipment 3,332,818 3,555,337
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES, net (note 2) 129,173 150,128
DEFERRED LOAN COSTS, net of accumulated amortization of $66,646 and $56,001,
respectively - 10,645
OTHER ASSETS 32,518 91,987
------------- -------------
$ 4,981,614 $ 6,274,075
============= =============
See accompanying notes to condensed consolidated financial statements.
3
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' (DEFECIT) EQUITY
June 30, December 31,
2001 2000
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Short-term note payable $ 127,496 $ 485,250
Current portion of long-term debt - 81,175
Current portion of capital lease obligations 65,349 71,848
Accounts payable 1,414,322 1,369,958
Notes payable-related party 120,000 -
Accrued expenses 553,012 559,974
Accrued advertising 262,844 365,000
Accrued royalties payable 173,992 105,127
Net liabilities of discontinued operations 19,190 -
------------ -------------
Total current liabilities 2,736,205 3,038,332
DEFERRED GAIN ON SALE OF ASSET 225,882 232,043
CAPITAL LEASE OBLIGATIONS, net of current portion 2,857,131 2,887,526
------------ -------------
Total liabilities 5,819,218 6,157,901
------------ -------------
STOCKHOLDERS' (DEFECIT) EQUITY (note 3):
Common stock, $.01 par value; 100,000,000 shares authorized and 6,095,640 and
5,745,640 shares outstanding at June 30, 2001 and December 31, 2000,
respectively 60,956 57,456
Additional paid-in capital 10,341,949 10,320,949
Accumulated deficit (11,240,509) (10,262,231)
------------ -------------
Net stockholders' (deficit) equity (837,604) 116,174
------------ -------------
Total Liabilities and Stockholders (Deficit) Equity $ 4,981,614 $ 6,274,075
============ =============
See accompanying notes to condensed consolidated financial statements.
4
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Three months ended
June 30, 2001 June 30, 2000
---------------------- ----------------------
(Unaudited) (Unaudited)
PRODUCT SALES $ 1,255,830 $ 2,278,597
COST OF SALES (678,182) (1,414,563)
---------------- ----------------
Gross Margin 577,648 864,034
---------------- ----------------
OPERATING COSTS AND EXPENSES:
Selling expenses 496,444 780,849
General and administrative 478,358 622,822
Research and development - 57,353
---------------- ----------------
Total operating costs and expenses 974,802 1,461,024
---------------- ----------------
Operating loss from continuing operations (397,154) (596,990)
---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (125,311) (157,178)
Equity in loss of affiliate (note 5) (40,106) -
Other income (expense) (55,165) (168,733)
---------------- ----------------
Total other expense, net (220,582) (325,911)
---------------- ----------------
Loss from continuing operations before income tax benefit (617,736) (922,901)
---------------- ----------------
INCOME TAX BENEFIT - -
---------------- ----------------
Loss from continuing operations (617,736) (922,901)
---------------- ----------------
DISCONTINUED OPERATIONS:
Income from operations of discontinued home storage and
organization segment net of income tax - 110,223
---------------- ----------------
Net loss $ (617,736) $ (812,678)
================ ================
LOSS PER SHARE FROM CONTINUING OPERATIONS- BASIC AND DILUTED $ (.11) $ (.20)
================ ================
EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS- BASIC AND DILUTED $ - $ .03
================ ================
NET LOSS PER SHARE- BASIC AND DILUTED $ (.11) $ (.17)
================ ================
WEIGHTED AVERAGE SHARES-BASIC AND DILUTED 5,838,973 4,707,459
================ ================
See accompanying notes to condensed consolidated financial statements.
5
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended Six months ended
June 30, 2001 June 30, 2000
------------------ ------------------
(Unaudited) (Unaudited)
PRODUCT SALES $ 3,198,462 $ 4,929,886
COST OF SALES (1,659,609) (2,859,072)
---------------- ----------------
Gross Margin 1,538,853 2,070,814
---------------- ----------------
OPERATING COSTS AND EXPENSES:
Selling expenses 1,096,235 1,695,953
General and administrative 1,054,847 1,420,374
Research and development - 152,320
---------------- ----------------
Total operating costs and expenses 2,151,082 3,268,647
---------------- ----------------
Operating loss from continuing operations (612,229) (1,197,833)
---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (251,362) (292,398)
Equity in loss of affiliate (note 5) (59,582) -
Other income (expense) (55,105) (167,156)
---------------- ----------------
Total other expense, net (366,049) (459,554)
---------------- ----------------
Loss from continuing operations before income tax benefit (978,278) (1,657,387)
INCOME TAX BENEFIT - -
---------------- ----------------
Loss from continuing operations (978,278) (1,657,387)
---------------- ----------------
DISCONTINUED OPERATIONS:
Income from operations of discontinued home storage and
organization segment net of income tax - 335,918
---------------- ----------------
Net loss $ (978,278) $ (1,321,469)
================ ================
LOSS PER SHARE FROM CONTINUING OPERATIONS- BASIC AND DILUTED $ (.17) $ (.35)
================ ================
EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS- BASIC AND DILUTED $ - $ .07
================ ================
NET LOSS PER SHARE- BASIC AND DILUTED $ (.17) $ (.28)
================ ================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 5,792,046 4,707,459
================ ================
See accompanying notes to condensed consolidated financial statements.
6
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended Six months ended
June 30, 2001 June 30, 2000
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net loss $ (978,278) $ (1,321,469)
Net income from discontinued operations - (335,918)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 246,705 300,777
Amortization of deferred loan costs 10,645 12,774
Amortization of deferred gain on sale of assets (6,161) (6,160)
Forgiveness of liquidated damages related to convertible debenture - (13,523)
Non-cash interest expense on re-issuance of common stock shares - 169,733
Gain on sale of assets (16,334) (1,577)
Provision for losses on accounts receivable (43,061) 8,073
Changes in operating assets and liabilities:
Trade accounts receivable 682,051 (533,870)
Accounts receivable-other (154,965) (60,000)
Inventories 193,489 (227,264)
Prepaid expenses 10,932 38,864
Other assets 59,469 (34,196)
Accounts payable 44,364 538,040
Accrued expenses 17,538 997
Accrued advertising (102,156) (246,431)
Accrued royalties 68,865 6,944
----------- ----------------
Net cash provided by (used in) continuing operating activities 33,103 (1,704,206)
Net cash provided by discontinued operating activities 198,063 671,836
----------- ----------------
Net cash provided by (used in) operating activities 231,166 (1,032,370)
----------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of assets 16,474 2,600
Purchase of property and equipment (3,371) (123,990)
----------- ----------------
Net cash provided by (used in) continuing investing activities 13,103 (121,390)
Net cash used in discontinued investing activities - -
----------- ----------------
Net cash provided by (used in) investing activities 13,103 (121,390)
----------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit (357,754) 49,034
Net payments on long-term debt (81,175) (41,250)
Net principal payments on capital lease obligations (36,894) (30,734)
Proceeds from related party note payable 150,000 -
Payments on related party note payable (30,000)
Payment to retire convertible debenture - (1,500,000)
Proceeds from the issuance of common stock related to private
placement - 1,600,000
Proceeds from common stock subscribed - 700,000
Proceeds from re-issuance of common stock - 200,714
----------- ----------------
Net cash provided by (used in) continuing financing activities (355,823) 977,764
Net cash provided by (used in) discontinued financing activities - -
----------- ----------------
Net cash provided by (used in) financing activities (355,823) 977,764
----------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (111,554) (175,996)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 128,536 244,755
----------- ----------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 16,982 $ 68,759
=========== ================
See accompanying notes to condensed consolidated financial statements.
7
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Six months ended Six months ended
June 30, 2001 June 30, 2000
----------------- ------------------
(Unaudited) (Unaudited)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest $ 246,530 $ 296,634
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock pursuant to settlement agreement 24,500 -
Building and equipment acquired under capital leases - 2,220
Conversion of Convertible Debentures and accrued interest for
common stock - 135,819
Common stock subscription receivable - 75,000
See accompanying notes to condensed consolidated financial statements.
8
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
------------------------------------------------
Dynatec International, Inc., a Utah corporation ("Dynatec" or the
"Company"), is a manufacturer and distributor of consumer products in the
following major product lines: telecommunication headsets and amplifiers and
telephone accessories, and flashlights. Dynatec is located in Salt Lake City,
Utah. The Company conducts most of its operations through its wholly owned
subsidiaries: Softalk, Inc., SofTalk Communications, Inc., Arnco Marketing,
Inc., and Nordic Technologies, Inc. Unless specified to the contrary herein,
references to Dynatec or to the Company refer to the Company and its
subsidiaries on a consolidated basis.
The Company's business follows seasonal trends. As a result the Company
experiences its highest revenues in the fourth quarter. Because the Company
sells its products primarily to major retailers, the Company's sales performance
is significantly dependent on the performance of those retailers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission for Form 10-QSB, and accordingly, do
not include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, these unaudited condensed
consolidated financial statements reflect all adjustments, which consist only of
normal recurring adjustments, which are necessary to present fairly the
Company's financial position, results of operations and cash flows as of June
30, 2001, 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, 2000.
The results of operations for the six months ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the remainder
of the year ending December 31, 2001.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Receivables sold with no recourse
The Company has sold portions of its trade accounts receivable to a
financing institution with no recourse. The buyer retains a portion of the
amounts for which the receivables were sold as reserves, which are released to
the Company as payments are made by the Company's customers less a discount rate
of 1% of the gross face amount of each account purchased if paid in the first
ten days and an additional .0556 of 1% per day until the account is paid in
full.
Inventories
Inventories, consisting principally of telecommunication headsets and
amplifiers and telephone accessories, flashlights, and other miscellaneous
products as of June 30, 2001 and December 31, 2000, respectively, are summarized
as follows:
June 30, December 31,
2001 2000
----------- ------------
Raw materials...................... $ 279,338 $ 423,667
Work-in-Process.................... 66,832 65,390
Finished Goods......................... 711,393 761,995
----------- ------------
$ 1,057,563 $ 1,251,052
=========== ============
9
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 for each
share of common stock outstanding during the reporting period and for each share
that would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period.
In calculating net loss per share for the six months ended June 30,
2001, and 2000, warrants and options to purchase 787,750 and 766,750 potential
common shares, respectively, are not included in the computation of diluted net
loss per common share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share.
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired from Transworld Products, Inc. (Transworld) on
July 15, 1999. The goodwill is being amortized using the straight-line basis
over two years. The balance as of June 30, 2001 and December 31, 2000 was as
follows:
2001 2000
---------- -----------
Goodwill $ 34,306 $ 34,306
Accumulated amortization 34,306 25,729
---------- -----------
$ - $ 8,577
========== ===========
(3) STOCKHOLDERS' EQUITY
--------------------
On June 7, 2001 the Company entered into a settlement and release
agreement with Grandur, Inc. ("Grandur"). As consideration for Grandur's
execution and delivery of the agreement the Company issued and transferred to
Grandur 350,000 shares of the Company's restricted common stock.
(4) 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.
(Rounded) (Rounded)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
REVENUES: 2001 2000 2001 2000
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $1,130,000 $1,565,000 $2,844,000 $3,431,000
Flashlights...................................... 84,000 517,000 285,000 1,105,000
Hardware/houseware............................... 42,000 197,000 69,000 394,000
--------------- -------------- -------------- --------------
Total..................................... $1,256,000 $2,279,000 $3,198,000 $4,930,000
=============== ============== ============== ==============
10
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) BUSINESS SEGMENT INFORMATION (Continued)
---------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
OPERATING LOSS: 2001 2000 2001 2000
----------------------------------------------------- --------------- -------------- -------------- ---------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $(264,000) $(109,000) $(328,000) $ (246,000)
Flashlights...................................... (105,000) (369,000) (242,000) (781,000)
Hardware/houseware............................... (28,000) (119,000) (42,000) (171,000)
--------------- -------------- -------------- ---------------
Total..................................... $(397,000) $(597,000) $(612,000) $(1,198,000)
=============== ============== ============== ===============
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
DEPRECIATION AND AMORTIZATION (1): 2001 2000 2001 2000
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories....................... $106,000 $104,000 $219,000 $207,000
Flashlights...................................... 11,000 36,000 25,000 68,000
Hardware/houseware............................... 1,000 15,000 2,000 26,000
--------------- -------------- -------------- --------------
Total..................................... $118,000 $155,000 $246,000 $301,000
=============== ============== ============== ==============
(1) Amortization includes all amortization relating to product license rights,
non-compete agreements and purchased patents.
Information as to the assets and capital expenditures of Dynatec International,
Inc. is as follows:
JUNE 30, DECEMBER 31,
ASSETS: 2001 2000
---------------------------------------------------- --------------- -----------------
Telecommunication Headsets and Amplifiers and
Telephone Accessories......................... $ 3,379,000 $ 4,098,000
Flashlights...................................... 1,025,000 1,111,000
Hardware/Houseware............................... 283,000 554,000
Discontinued operations.......................... - 179,000
--------------- -----------------
Total assets for reportable segments...... 4,687,000 5,942,000
Other assets..................................... 33,000 92,000
Deferred loan costs and other assets not
allocated to segments......................... 262,000 240,000
--------------- -----------------
Consolidated total........................ $ 4,982,000 $ 6,274,000
=============== =================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
CAPITAL EXPENDITURES: 2001 2000 2001 2000
----------------------------------------------------- --------------- -------------- -------------- --------------
Telecommunication Headsets and
Amplifiers and Telephone Accessories.......... - $ 17,000 $ 3,000 $ 85,000
Flashlights...................................... - 7,000 - 28,000
Hardware/Houseware............................... - 6,000 - 11,000
-------------- ----------- ----------- ------------
Total..................................... $ - $ 30,000 $ 3,000 $ 124,000
============== =========== =========== ============
11
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) BUSINESS SEGMENT INFORMATION (Continued)
---------------------------------------
Information as to the Company's operations in different geographical
areas is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
REVENUES: 2001 2000 2001 2000
----------------------------------------------------- --------------- -------------- -------------- --------------
United States.................................... $1,235,000 $2,172,000 $3,169,000 $4,715,000
Other (1)........................................ 21,000 107,000 29,000 215,000
---------- ---------- ---------- ----------
Total..................................... $1,256,000 $2,279,000 $3,198,000 $4,930,000
========== ========== ========== ==========
(1) Includes Canada, Europe and other miscellaneous.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
OPERATING LOSS: 2001 2000 2001 2000
----------------------------------------------------- --------------- -------------- -------------- --------------
United States.................................... (397,000) (597,000) (612,000) (1,198,000)
=============== ============== ============== ==============
JUNE 30, 2001 DECEMBER 31,
ASSETS: 2000
------------------------------------------ ---------------- -------------
United States.......................... $ 4,724,000 $ 5,978,000
Asia................................... 257,000 296,000
---------------- -------------
Total........................... $ 4,981,000 $ 6,274,000
================ =============
(5) JOINT VENTURE
-------------
In January 2001, the Company's Nordic Technologies, Inc. subsidiary
("Nordic") formed a joint venture called Nordic ASI, L.L.C. that is owned 50% by
Nordic and 50% by Sarkat International, L.L.C., a Utah limited liability company
that is owned, in part, by Reed Newbold, who is a member of the Company's board
of directors. Nordic ASI was formed specifically to enable the Company to pursue
sales of its flashlight product line (and other flashlights and products not
then offered by the Company) in the advertising, specialty and promotional
market (the "ASI Market"). Prior to the formation of Nordic ASI, the Company was
not engaged directly in the ASI Market, although until the end of 2000, it was a
supplier of flashlight products to one or more companies that sell in the ASI
Market. As its capital contribution, the Company contributed rights to sell its
products in the ASI Market to Nordic ASI, and agreed to incur the administrative
expense associated with operating Nordic ASI and marketing its products for a
period of two years. For its capital contribution, Sarkat agreed to provide
$200,000 of debt financing to Nordic ASI to enable it to start up its
operations. Profits and losses of Nordic ASI will be allocated 70% to Nordic and
30% to Sarkat. Nordic ASI obtained the $200,000 of debt financing provided by
Sarkat and has commenced its business of selling to the ASI Market by ordering
LED flashlights provided by an unaffiliated third party. The Company believes
that, given its current financial condition, it could not have commenced any
sales effort in the ASI Market or supplemented its product line for that market
absent the formation of the joint venture with Sarkat.
(6) GOING CONCERN
-------------
Based on current operations, the Company believes that its present
sources of liquidity will not be adequate to meet its projected requirements for
working capital, capital expenditures, scheduled debt service requirements and
other general corporate purposes for the remainder of the year 2001. The Company
is currently pursuing additional sources of liquidity in the form of traditional
commercial credit or additional sales of the Company's debt or equity securities
to finance its ongoing operations. Additionally, the Company has entered into
12
DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(6) GOING CONCERN-(continued)
------------------------
interim financing transactions, including $120,000 of revolving unsecured credit
provided by an entity affiliated with a member of the Company's board of
directors. The Company also is pursuing other types of commercial and private
financing which could involve sales of the Company's assets or sales of one or
more operating divisions. The Company's sales have been adversely affected by
the Company's reduced credit availability and lack of access to other financing
because of its reduced ability to purchase product to fill existing orders. On
August 14, 2001 due to cash flow constraints the Company reduced its workforce
by approximately 60%. This reduction in force will adversely affect the
Company's ability to fill existing orders. If additional financing is not
obtained in the near future, the Company will be required to more significantly
curtail its operations or seek protection under bankruptcy laws.
(7) SUBSEQUENT EVENTS
-----------------
On July 12, 2001 the Company executed a convertible debenture agreement
(the "Convertible Debenture"). Under the convertible debenture, the Company
issued a convertible debenture in the aggregate principal amount of $250,000
plus interest at a rate per annum equal to six percent, with interest being paid
quarterly as of January 1, April 1, July 1, and October 1 of each year. The
principal amount of the debenture is convertible at any time into common stock
in the Company at a price of $0.07 per share, which was the closing bid price of
the Company's common stock on July 12, 2001, as quoted on the OTC Electronic
Bulletin Board. If after three years the debenture has not been converted into
shares of the Company's common stock or redeemed or called for redemption by the
Company the debenture shall automatically convert into a two-year fully
amortizing term loan.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
The following table sets forth, for the periods indicated, certain
information relating to the operations of the Company expressed in dollars
(rounded) and percentage changes from period to period. Data in the table
reflects the consolidated results of the Company for the three and six-month
periods ended June 30, 2001 and 2000, respectively. As supplemental information,
the table also segregates the Company's revenues by product line type.
(Rounded) (Rounded)
For the Three Months Ended For the Six Months Ended
----------------------------------- ------------------------------------
% OF % OF
CHG CHG
FROM FROM
JUNE 30, JUNE 30, 2000 TO JUNE 30, JUNE 30, 2000 TO
2001 2000 2001 2001 2000 2001
-------- --------- ------- -------- -------- --------
Unaudited Statement of Operations
Data:
Product sales............. $1,256,000 $2,279,000 (44.9)% $3,198,000 $ 4,930,000 (35.1)%
Cost of sales............. 678,000 1,415,000 (52.1) 1,660,000 2,859,000 (41.9)
---------- ---------- ---------- -----------
Gross margin...... 578,000 864,000 (33.1) 1,538,000 2,071,000 (25.7)
---------- ---------- ---------- -----------
Operating Costs and Expenses:
Selling expenses.......... 497,000 781,000 (36.4) 1,096,000 1,696,000 (35.4)
General and administrative 478,000 623,000 (23.3) 1,055,000 1,421,000 (25.8)
Research and development.. - 57,000 (100.0) - 152,000 (100.0)
---------- ---------- ---------- -----------
Total operating costs and
Expenses................ 975,000 1,461,000 (33.3) 2,151,000 3,269,000 (34.2)
---------- ---------- ---------- -----------
Other Income (Expense), net:
Interest expense.......... (125,000) (157,000) (20.4) (251,000) (292,000) (14.0)
Equity in loss of affiliate (40,000) - - (59,000) - -
Other income (expense).... (56,000) (169,000) (66.9) (55,000) (167,000) (67.1)
---------- ---------- ---------- -----------
Total other income
(expense)................ (221,000) (326,000) (32.2) (365,000) (459,000) (20.5)
Loss from continuing
operations................ (618,000) (923,000) (33.0) (978,000) (1,657,000) (41.0)
Discontinued Operations:
Income from discontinued
operations - 110,000 (100.0) - 336,000 (100.0)
---------- ---------- ---------- -----------
Net loss.................. $ (618,000) $ (813,000) (24.0)% $ (978,000 $(1,321,000) (26.0)%
========== ========== ========== ===========
Unaudited Supplemental Information:
Revenue by product line type:
Telecommunication headsets and
amplifiers and telephone
accessories............. $1,130,000 $1,565,000 (27.8)% $2,844,000 $ 3,431,000 (17.1)%
Flashlights.................. 84,000 517,000 (83.8) 285,000 1,105,000 (74.2)
Hardware/houseware............ 42,000 197,000 (78.7) 69,000 394,000 (82.5)
---------- ---------- ---------- -----------
Total product sales..... $1,256,000 $2,279,000 (44.9)% $3,198,000 $ 4,930,000 (35.1)%
========== ========== ========== ===========
The following are explanations of significant period-to-period changes for the
three months ended June 30, 2001 and 2000:
Revenues
Total Product Sales. Total product sales decreased by $1,023,000, or
44.9%, from $2,279,000 to $1,256,000 for the three months ended June 30, 2001
compared to the three months ended June 30, 2000.
Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of telecommunication headsets and amplifiers and telephone accessories
decreased $435,000, or 27.8%, from $1,565,000 to $1,130,000 for the three months
ended June 30, 2001 compared to the three months ended June 30, 2000. This
decrease is primarily related to decreases in sales of the Company's telephone
headsets and amplifiers of $217,000, shoulder rest products of $71,000, and
$147,000 in other telephone accessory products. Overall gross margins for this
product line decreased to 52.7% from 53.2% for the three months ended June 30,
2001 compared to the three months ended June 30, 2000, as a result of the sales
mix.
Flashlights. Flashlight revenues decreased $433,000, or 83.8%, from
$517,000 to $84,000 for the three months ended June 30, 2001 compared to the
three months ended June 30, 2000. This decrease was primarily the result of the
Company's decision to move its flashlight manufacturing to a different Asian
supplier causing some short-term delays in the delivery of product and to the
Company's decreased credit availability and lack of alternate capital resources.
Overall gross margins for products in this category increased from 0.7% to 19.0%
for the three months ended June 30, 2001 when compared to June 30, 2000, as a
result of a decrease in material costs of the products due to a change in the
manufacturer.
Hardware/houseware. Hardware/houseware revenues decreased $155,000, or
78.7%, from $197,000 to $42,000 for the three months ended June 30, 2001
compared to the three months ended June 30, 2000. The decrease is primarily
attributable to the loss of the Company's main customer in the doorstops product
14
line as a result of an increase in the Company's pricing. Overall gross margins
for products in this category increased from 33.7% to 43.8% for the three months
ended June 30, 2001 compared to June 30, 2000, as a result of the increase in
pricing.
Operating Costs and Expenses
Selling Expenses. Selling expenses decreased $284,000, or 36.4%, from
$781,000 to $497,000 for the three months ended June 30, 2001 compared to the
three months ended June 30, 2000. This decrease is due in part to a decrease in
salaries for sales personnel of $107,000 due to a reduction in force of the
sales staff, as well as decreases in commissions paid to outside sales
representatives of $63,000, freight expenses of $57,000, travel related expenses
of $17,000, consulting fees of $16,000 and royalties of $12,000.
General and Administrative Expenses. General and administrative
expenses decreased $145,000, or 23.3%, from $623,000 to $478,000 for the three
months ended June 30, 2001 compared to the three months ended June 30, 2000. The
decrease in general and administrative expenses was primarily the result of a
decrease in legal and accounting fees of $75,000, as well as a decrease of
$30,000 in salaries paid as a result of the Company's reductions in force, a
decrease in office and computer supplies of $24,000, consulting fees of $18,000,
employee recruitment and education expenses of $7,000 and a decrease of $16,000
in travel related expenses. These decreases were offset in part by an increase
in bank charges of $13,000 and bad debt expense of $12,000.
Research and Development. Research and development decreased by
$57,000, or 100.0%, from $57,000 to $-0- for the three months ended June 30,
2001 compared to the three months ended June 30, 2000. The decrease was
primarily attributable to the completion in 2000 of the Company's research and
development efforts associated with the Company's flashlight line to improve the
function and appearance of the products.
Total Operating Costs and Expenses. Total operating costs and expenses
decreased by $486,000, or 33.3%, from $1,461,000 to $975,000 for the three
months ended June 30, 2001 compared to the three months ended June 30, 2000, for
the reasons discussed above.
Interest Expense. Interest expense decreased $32,000, or 20.4%, from
$157,000 to $125,000 for the three months ended June 30, 2001 compared to the
three months ended June 30, 2000. This decrease is primarily the result of the
Company's reduction in interest expenses related to its revolving credit
facility. These decreases were offset in part by an increase in interest expense
related to the Company's joint venture and financing arrangement with Sarkat
International, LLC (see note 5 to the accompanying condensed consolidated
financial statements).
Equity in loss of affiliate. Equity in loss of affiliate increased by
$40,000 from -0- to $(40,000) for the three months ended June 30, 2001 compared
to the three months ended June 30, 2000. This decrease is attributable to the
Company's joint venture with Sarkat International, LLC (see note 5 to the
accompanying condensed consolidated financial statements).
Other income (expense). Other income (expense) decreased by $113,000
from $(169,000) to $(56,000) for the three months ended June 30, 2001 compared
to the three months ended June 30, 2000. The increase is due to the one time
non-cash expense of $169,000 related to the April 4, 2000 recognition as having
been previously issued of 208,000 shares of the Company's common stock as well
as an increase in the gain on sale of assets of $16,000. These increases were
offset in part by $70,000 of accrued severance expenses related to the
termination of the Company's former Sr. Vice President of Sales.
Discontinued operations. Income from discontinued operations decreased
$110,000 from $110,000 to -0- for the three months ended June 30, 2001 compared
to the three months ended June 30, 2000. This decrease is attributable to the
sale of the assets of the Company's Neat Things! (TM) home organization and
storage product line in November 2000.
Net Loss. The net loss decreased by $195,000, or 24.0%, from $813,000
to $618,000 for the three months ended June 30, 2001 compared to the three
months ended June 30, 2000 due to the factors described above.
The following are explanations of significant period-to-period changes for the
six months ended June 30, 2001 and 2000:
15
Revenues
Total Product Sales. Total product sales decreased by $1,732,000 or
35.1% from $4,930,000 to $3,198,000 for the six months ended June 30, 2001
compared to the six months ended June 30, 2000.
Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of telecommunication headsets and amplifiers and telephone accessories
decreased $587,000, or 17.1%, from $3,431,000 to $2,844,000 for the six months
ended June 30, 2001 compared to the six months ended June 30, 2000. This
decrease is primarily related to decreases in sales of the Company's shoulder
rest products of $311,000, and telephone headsets and amplifiers of $379,000.
These sales decreases were partially attributable to the Company's inability to
acquire product to fill existing orders because of decreased credit availability
and a lack of alternate capital resources. The decrease was offset in part by an
increase of $103,000 in the Company's Twisstop and other telephone accessory
products. Overall gross margins for this product line decreased to 53.3% from
55.5% for the six months ended June 30, 2001 compared to the three months ended
June 30, 2000, as a result of the sales mix.
Flashlights. Flashlight revenues decreased $820,000, or 74.2%, from
$1,105,000 to $285,000 for the six months ended June 30, 2001 compared to the
six months ended June 30, 2000. This decrease was primarily the result of the
Company's decision to move its flashlight manufacturing to a different Asian
supplier causing some short-term delays in the delivery of product and to the
Company's decreased credit availability and lack of alternate capital resources.
Overall gross margins for products in this category decreased from 8.2% to 7.5%
for the six months ended June 30, 2001 when compared to June 30, 2000, as a
result of an increase in overseas freight charges to expedite delivery of
product from the Company's foreign supplier.
Hardware/houseware. Hardware/houseware revenues decreased $325,000, or
82.5%, from $394,000 to $69,000 for the six months ended June 30, 2001 compared
to the six months ended June 30, 2000. The decrease is primarily attributable to
the loss of the Company's main customer in the doorstops product line as a
result of an increase in the Company's pricing. Overall gross margins for
products in this category increased from 19.5% to 44.7% for the six months ended
June 30, 2001 when compared to June 30, 2000, as a result of the increase in
pricing.
Operating Costs and Expenses
Selling Expenses. Selling expenses decreased $600,000, or 35.4%, from
$1,696,000 to $1,096,000 for the six months ended June 30, 2001 compared to the
six months ended June 30, 2000. This decrease is due in part to a decrease in
salaries for sales personnel of $118,000 due to a reduction in force of the
sales staff, as well as decreases in commissions paid to outside sales
representatives of $128,000, freight expenses of $103,000, travel related
expenses of $67,000, consulting fees of $66,000, product samples and sales
literature of $64,000, royalties of $32,000, and trade show expenses of $22,000.
General and Administrative Expenses. General and administrative
expenses decreased $366,000, or 25.8%, from $1,421,000 to $1,055,000 for the six
months ended June 30, 2001 compared to the six months ended June 30, 2000. The
decrease in general and administrative expenses was primarily the result of a
decrease in legal and accounting fees of $129,000, as well as a decrease of
$88,000 in salaries paid as a result of the Company's reductions in force, a
decrease in office and computer supplies of $71,000, consulting fees of $59,000,
employee recruitment and education expenses of $28,000 and a decrease of $35,000
in travel related expenses. These decreases were offset in part by an increase
in bank charges of $27,000 and bad debt expense of $17,000.
Research and Development. Research and development decreased by
$152,000, or 100.0%, from $152,000 to $-0- for the six months ended June 30,
2001 compared to the six months ended June 30, 2000. The decrease was primarily
attributable to the completion in 2000 of the Company's research and development
efforts associated with the Company's flashlight line to improve the function
and appearance of the products.
Total Operating Costs and Expenses. Total operating costs and expenses
decreased by $1,118,000, or 34.2%, from $3,269,000 to $2,151,000 for the six
months ended June 30, 2001 compared to the six months ended June 30, 2000, for
the reasons discussed above.
Interest Expense. Interest expense decreased $41,000, or 14.0%, from
$292,000 to $251,000 for the six months ended June 30, 2001 compared to the six
months ended June 30, 2000. This decrease is primarily the result of the
Company's reduction in interest expenses related to its revolving credit
facility. These decreases were offset in part by an increase in interest expense
related to the Company's joint venture and financing arrangement with Sarkat
International, LLC (see note 5 to the accompanying condensed consolidated
financial statements).
16
Equity in loss of affiliate. Equity in loss of affiliate increased by
$59,000 from -0- to $(59,000) for the six months ended June 30, 2001 compared to
the six months ended June 30, 2000. This decrease is attributable to the
Company's joint venture with Sarkat International, LLC (see note 5 to the
accompanying condensed consolidated financial statements).
Other income (expense). Other income (expense) decreased $112,000, from
$(167,000) to $(55,000) for the six months ended June 30, 2001 compared to the
six months ended June 30, 2000. The decrease is due to the one time non-cash
expense of $169,000 related to the April 4, 2000 recognition as having been
previously issued of 208,000 shares of the Company's common stock. As well as an
increase in the gain on sale of assets of $16,000. These decreases were offset
in part by $70,000 of accrued severance expenses related to the termination of
the Company's former Sr. Vice President of Sales.
Net Loss. The net loss decreased by $343,000, or 26.0%, from $1,321,000
to $978,000 for the six months ended June 30, 2001 compared to the six months
ended June 30, 2000 due to a combination of the factors described above.
Liquidity and Capital Resources
General
The Company's principal sources of liquidity historically have been
cash flows from operations, cash on hand and borrowing under a secured revolving
credit facility. On June 5, 2001 the Company entered into an Account Purchase
Agreement with a national financial institution to sell and assign its trade
accounts receivable. (see note 2 to the accompanying condensed consolidated
financial statements). The proceeds of these sales were used primarily to pay
off the Company's secured revolving credit facility.
In February 2001, and due to decreases in the Company's operating
capital and borrowing availability, the Company entered into a relationship with
Sarkat International, LLC ("Sarkat"), a limited liability company that is owned
in part by Reed Newbold, who currently is a member of the Company's board of
directors. In connection with this arrangement, Sarkat agreed to provide
unsecured, revolving debt financing to Softalk, Inc. or Softalk Communications,
Inc., each a subsidiary of the Company, in the aggregate amount of $150,000. In
exchange for each advance of funds by Sarkat, the Company (or its subsidiary
directly receiving such funds) is obligated to repay the principal amount
advanced, plus interest calculated on a daily basis at the annual rate of the
greater of eight and one-half percent or the actual rate of interest paid by
Sarkat to obtain such funds, plus a "lender's premium" of 12.5% of the principal
amount advanced. Such borrowed funds are disbursed by direct payment by Sarkat
to the Company's supplier, who then ships product to the Company, which allows
the Company to service pending orders from its customers. As of August 2, 2001,
the Company owes Sarkat $120,000 in principal and $5,093 in interest. Sarkat has
been paid $40,564 in lender's premiums. The principal and interest are due 180
days from the date of the advance. Debt financing on similar or terms more
preferential to the Company was not available to the Company at the time.
June 30, 2001 Compared to December 31, 2000
As of June 30, 2001 the Company had liquid assets (cash and cash
equivalents and trade accounts receivable) of $184,000, a decrease of 80.3%, or
$751,000, from December 31, 2000 when liquid assets were $935,000. Cash
decreased $112,000, or 87.5%, to $16,000 at June 30, 2001 from $128,000 at
December 31, 2000. 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
decreased $639,000, or 79.3%, to $167,000 at June 30, 2001 from $806,000 at
December 31, 2000. This decrease is primarily the result of the Company's sale
of its trade accounts receivable to a financial institution (see note 2 to the
accompanying condensed consolidated financial statements).
Current assets decreased by $979,000, or 39.7%, to $1,487,000 at June
30, 2001 from $2,466,000 at December 31, 2000. This decrease was primarily the
result of a decrease in cash of $112,000, discussed above, a decrease in
inventory by $193,000 primarily due to the Company's efforts to reduce inventory
levels to a one month's supply, and a decrease in net assets of discontinued
operations of $179,000 due to the sale of the assets of the Company's Neat
Things! (TM) home organization and storage product line. The decrease in current
assets was offset in part by an increase in accounts receivable-other of
$155,000 as a result of reserves held by the financial institution for monies
not yet collected against trade accounts receivable purchased by the financial
institution.
17
Long-term assets decreased $313,000, or 8.2%, to $3,495,000 at June 30,
2001 from $3,808,000 at December 31, 2000. This decrease was primarily the
result of recurring depreciation expense on property and equipment, and
amortization of deferred loan costs, and other intangibles.
Current liabilities decreased by $302,000, or 9.9%, to $2,736,000 at
June 30, 2001 from $3,038,000 at December 31, 2000. This decrease was primarily
due to a decrease of $358,000 in notes payable-short term and $81,000 in current
portion of long-term debt as a result of the pay-off of the Company's secured
revolving credit facility, as well as a decrease in accrued advertising of
$102,000. These decreases were offset in part by an increase in notes
payable-related party of $120,000 as a result of the Company's February 2001
agreement with Sarkat, an increase in accrued royalties of $68,000, and trade
accounts payable of $44,000.
The Company's working capital deficit increased by $677,000, or 118.4%,
to ($1,249,000) at June 30, 2001 from ($572,000) at December 31, 2000, for the
reasons described above.
The Company provided net cash of $33,000 from continuing operating
activities during the six months ended June 30, 2001, primarily from the
decrease in accounts receivable-trade and the decrease in inventory levels,
offset in part by the net loss incurred during the period and a decrease in
accrued advertising.
The Company provided net cash of $13,000 in investing activities during
the six months ended June 30, 2000, primarily from the net proceeds from the
sale of assets, offset in part by capital expenditures for property and
equipment.
The Company used net cash of $356,000 from financing activities during
the six months ended June 30, 2001 primarily as a result of the net payments
made on the Company's line of credit, long-term debt and capital lease
obligations during the period, offset in part by proceeds from the related party
note payable.
Based on current operations, the Company believes that its present
sources of liquidity will not be adequate to meet its projected requirements for
working capital, capital expenditures, scheduled debt service requirements and
other general corporate purposes for the remainder of the year 2001. The Company
is currently pursuing additional sources of liquidity in the form of traditional
commercial credit, asset based lending or additional sales of the Company's debt
or equity securities to finance its ongoing operations. Additionally, the
Company has entered into interim financing transactions, including $120,000 of
revolving unsecured credit provided by an entity affiliated with a member of the
Company's board of directors. The Company also is pursuing other types of
commercial and private financing which could involve sales of the Company's
assets or sales of one or more operating divisions. The Company's sales and
financial condition have been adversely affected by the Company's reduced credit
availability and lack of access to alternate financing because of its reduced
ability to purchase product to fill existing orders. On August 14, 2001 due to
cash flow constraints the Company reduced its workforce by approximately 60%.
This reduction in force will adversely affect the Company's ability to fill
existing orders. If additional financing is not obtained in the near future, the
Company will be required to more significantly curtail its operations or seek
protection under bankruptcy laws.
Seasonality
The Company's business is seasonal. The Company typically experiences
its highest sales volume in the fourth quarter of each year as a result of the
retail environment in which most of its customers conduct business. Because the
Company sells its products primarily to major retailers, the Company's sales
performance is significantly dependent on the performance of those retailers.
Accordingly, the fourth quarter is a key determinate to overall profitability
for the year.
Forward Looking Statements
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements will
prove to be accurate. Factors that could cause actual results to differ from
results discussed in forward-looking statements include, but are not limited to,
potential increases in inventory costs, competition, the Company's ability to
18
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, 2000.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
In July 2001, Lloyd M. Taggart filed suit against the Company in Utah
state court for alleged breach of an employment agreement between the Company
and Mr. Taggart. Mr. Taggart seeks money damages from the Company in excess of
$380,000 and other unspecified damages and remedies. Mr. Taggart alleges that
his employment was terminated by the Company without cause, as defined in his
employment agreement. The Company has answered the Complaint and intends to
vigorously defend the lawsuit.
On February 8, 2001, the Company waived service of a summons with
respect to a complaint filed in the U.S. District court in the District of Utah
by K&S Flashlight, Inc. ("K&S"), a Taiwan company that was the Company's
flashlight supplier from 1998 through 2000. The lawsuit names as defendants both
Dynatec and its subsidiary, Nordic Technologies, Inc. The lawsuit alleges that
the Company owes K&S in excess of $100,000 for the Company's alleged failure to
pay amounts due to K&S for flashlight products shipped during 2000, and seeks
damages in an unspecified amount. The Company has filed its answer and intends
to vigorously defend the lawsuit.
On August 4, 2000, the Company filed suit against WAC Research, Inc., a
Utah corporation ("WAC"), in Utah state court in Salt Lake City, Utah. WAC is a
corporation at least fifty percent of which is owned by Donald M. Wood ("Wood"),
the Company's former Chairman and Chief Executive Officer. The dispute with WAC
arose out of a series of royalty agreements between the Company and WAC dated in
1990 and 1998 that purported to obligate the Company to pay perpetual royalties
to WAC on sales of products in the Company's telephone accessories product line.
In return for this perpetual royalty (which the Company paid for approximately
10 years) WAC purported to assign and grant to the Company the intellectual
property rights underlying certain of the Company's Softalk products. At the
times the WAC agreements were negotiated, Wood controlled both WAC and the
Company. The Company amended its complaint in the WAC Action on August 29, 2000
and on October 19, 2000. The Company's complaint, as amended to date, seeks the
court's declaration that no further royalties are owed by the Company to WAC
because, among other reasons, (i) WAC never had any interest in or to any of the
intellectual property rights underlying the Company's Softalk products, (ii) WAC
breached its representations and warranties of ownership as to such intellectual
property rights as set forth in the WAC agreements, (iii) patents covering
certain of the key products in the Company's Softalk product line have expired,
and such products are not otherwise covered by enforceable copyrights or other
intellectual property rights, (iv) the Company owns all trademark rights with
respect to its Softalk products, (v) WAC has no right to continue forcing the
Company to pay royalties under expired patents, (vi) WAC's ongoing attempts to
enforce the WAC royalty agreements constitute patent misuse, and (vii) as a
consequence of WAC's patent misuse, WAC is liable to the Company for royalties
paid under a 1998 agreement between WAC and the Company. The complaint also
includes claims for damages stemming from WAC's alleged patent misuse, failure
of consideration, unjust enrichment and additional declaratory relief. On March
27, 2001, WAC filed a counterclaim against the Company. The WAC Action is still
pending, and the Company intends to vigorously prosecute it.
In February 1999, Mag Instrument, Inc., a manufacturer and distributor
of flashlights and one of the Company's competitors ("Mag"), filed a lawsuit
against the Company's subsidiary, Nordic Technologies, Inc. ("Nordic") alleging
that Nordic is infringing certain of Mag's patents and committing false
advertising and unfair competition. The lawsuit was filed in the U.S. District
Court for the Central District of California. The Company and Mag attempted to
settle that lawsuit, and entered into an agreement whereby the lawsuit was
dismissed without prejudice, with Mag having the express right to refile the
complaint in the same court and venue. No settlement was ever reached. On
October 30, 2000, Mag filed a new complaint in the same federal district court
that it subsequently served on the Company. The new Mag complaint alleges that
Nordic has infringed two patents and related trademarks owned by Mag, and also
has engaged in unfair competition arising out of Nordic's alleged use of a
flashlight design that is confusingly similar to the shape, style and overall
appearance of Mag's miniature "AA" light, all in violation of various provisions
of federal and California state law. Mag seeks unspecified money damages,
punitive damages and injunctive relief. The Company does not believe that any of
Nordic's flashlight products have infringed any patents or trademarks of Mag,
and intends to vigorously defend the suit.
On May 4, 2000, Grandur, Inc., a Taiwan corporation ("Grandur"), sued
the Company in the United States District Court for the District of New Jersey.
The summons and complaint were served on the Company in Salt Lake City, Utah on
May 12, 2000. The complaint alleges that the Company has breached a
20
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. During the period ended June
30, 2001, Grandur and the Company settled this litigation, which has been
dismissed by the court.
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. During the period ended June 30,
2001, the Company entered into a settlement agreement with Alpha Tech pursuant
to which the Alpha Tech litigation will be dismissed.
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.
During the period ended June 30, 2001, the Company entered into a settlement
agreement with Mr. Wood pursuant to which his lawsuit will be dismissed.
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. During the period ended June 30, 2001, the
Company entered into a settlement agreement with Alpha Tech pursuant to which
the Alpha Tech litigation will be dismissed.
21
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, 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, in the first
quarter of 1999, it was 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 has
cooperated fully with these administrative proceedings. The Company had no
contract from the Enforcement Division regarding this investigation during the
entirety of 2000.
On February 12, 1998, Fuji Corporation filed a claim with the
International Trade Commission seeking a cease and desist order against
approximately 30 entities. Fuji sought to enlist the aid of the U.S. Customs
Department in preventing the importation of single-use cameras which are
manufactured by any of the defendant entities and which infringe the patents of
Fuji. The Company does not manufacture single-use cameras, but previously has
distributed single-use cameras, which have been refurbished and reloaded in
Mainland China. The Company was therefore involved in the Fuji proceeding. The
Company engaged intellectual property counsel and vigorously defended its
position until December 1998, when the Company sold its remaining inventory of
single-use cameras to another entity. In connection with that sale, any
liability of the Company in connection with the Fuji proceeding, including the
costs of further defending the action, were assumed by the purchaser of the
Company's single-use camera inventory, although the Company nominally remains
part of that litigation.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a material adverse
effect on the Company's operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds
-------------------------------------------------
Item 2(c). Recent Sales of Unregistered Securities
On May 29, 2001 the Company issued a warrant to purchase 200,000 shares
of its restricted common stock at an exercise price of $.07 as part of a
settlement of a lawsuit brought by its former Chairman and Chief Executive
Officer. The warrant, and any shares of common stock issued upon its exercise
were issued without registration under the Securities Act of 1933, as amended,
in reliance on an exemption from the registration requirement under section 4(2)
of the Securities Act. The warrant and any shares of common stock issued upon
its exercise bear and will bear a legend restricting transfers of such
securities except upon compliance with the registration requirements of the
Securities Act or an exemption there from.
On June 7, 2001 the Company issued 350,000 shares of its restricted
common stock as part of a settlement of a lawsuit brought by a product supplier.
The warrant shares of common stock were issued without registration under the
Securities Act of 1933, as amended, in reliance on an exemption from the
registration requirement under section 4(2) of the Securities Act . The
certificates representing such common stock bear a legend restricting transfers
of such securities except upon compliance with the registration requirements of
the Securities Act or an exemption there from. Item 6. Exhibits and Reports on
Form 8-K
22
(a) Exhibits
No. Description
--------------------
10.1 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.)
10.2 Employment Agreement between the Company and Frederick W.
Volcansek, dated as of February 5, 1999. (Incorporated by
reference from Annual Report on Form 10-KSB for the year ended
December 31, 1998).
10.3 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.)
10.4 Commercial Lease between the Company and FRE III 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.)
10.5 Commercial Real Estate Purchase Contract between the Company
and Darwin Datwyler dated as of July 16, 1999, as amended
through November 4, 1999. (Incorporated by reference from
Quarterly Report on Form 10-QSB for the period ended September
30, 1999.)
10.6 Stock Purchase Agreement between the Company and three
investors, dated as of May 18, 2000. (Incorporated by
reference from Quarterly Report on Form 10-QSB for the period
ended June 30, 2000).
10.7 Asset Purchase Agreement dated November 22, 2000, by and among
Dynatec International, Inc., and Expandable Home Organizers,
Inc., a California corporation (Incorporated by reference from
Current Report on Form 8-K dated as of November 22, 2000).
10.8 Form of Promissory Note in favor of Sarkat International,
L.L.C. (Incorporated by reference from Annual Report on Form
10-KSB for the year ended December 31, 2000).
10.9 Articles of Organization of Nordic ASI, L.L.C. (Incorporated
by reference from Annual Report on Form 10-KSB for the year
ended December 31, 2000)
10.10 Operating Agreement of Nordic ASI, L.L.C. (Incorporated by
reference from Annual Report on Form 10-KSB for the year ended
December 31, 2000)
(b) Forms 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATEC INTERNATIONAL, INC.
/s/ Frederick W. Volcansek, Sr. August 20, 2001
--------------------------------- ---------------
Frederick W. Volcansek, Sr. Date
Chairman & CEO
/s/ Mark W. Sperry August 20, 2001
-------------------- ---------------
Mark W. Sperry Date
Vice President & Chief Accounting Officer
24