Related to the Canaccord litigation, a claim
for an additional 125,000 shares of the stock of the Company had been made by
"Katori Consultants, Ltd., a Philippines corporation. The answer and third party
complaint of Dynatec named Katori Consultants, Ltd. as a third party defendant
so that such additional claim could be addressed as part of the Canaccord legal
action. On October 21, 1998, Katori Consultants, Ltd. gave written notice to
Dynatec that it relinquished any claim to additional shares of common stock of
the Company."
On March 19, 1999, Alpha Tech Stock Transfer Company ("Alpha Tech")
filed a lawsuit against the Company in Utah state court in Salt Lake City, Utah.
Alpha Tech was the Company's stock transfer agent for a period of approximately
ten years until the Company terminated its relationship with Alpha Tech in
January 1999. Alpha Tech has transferred the Company's stock transfer records to
American Stock Transfer, New York, New York, which has assumed its serves as the
Company's present transfer agent. Alpha Tech's complaint alleges that the
Company breached its service contract with Alpha Tech by failing to pay $132,165
to Alpha Tech for transfer agent services rendered and reimbursement for legal
expenses incurred by Alpha Tech. Alpha Tech has not yet served the complaint;
the Company learned about the complaint through an unrelated third party. The
Company has demanded that Alpha Tech voluntarily dismiss the complaint. In any
event, the Company disputes the claims of Alpha Tech's complaint. If the
complaint is not voluntarily dismissed and process is served, the Company
intends to vigorously defend the suit.
On February 22, 1999, the Company received a demand letter from
counsel for Mag Instrument, Inc., a manufacturer and distributor of flashlights
Page 40
and one of the Company's competitors ("Mag"). In the letter, Mag accuses the
Company of infringing three of Mag's patents and committing false advertising
and unfair competition. Attached to the demand letter was a copy of a complaint
filed in the U.S. District Court for the Central District of California on
February 19, 1999. The complaint alleges that the Company has infringed three
patents owned by Mag, and seeks (i) an order enjoining the Company from
infringing Mag's patents, (ii) the delivery to the Court of all flashlights
which infringe Mag's patents, (iii) that the Company identify all entities who
have purchased, distributed or sold any infringing products, (iv) that the
Company deliver to the Court all documents reflecting or relating to the
purchase, sale or distribution of any flashlights which infringe Mag's patents,
(v) money damages sustained by Mag by reason of the alleged patent infringement,
including interest, costs, and attorney's fees. The demand letter specified that
the complaint was filed as a "precaution," and that Mag will refrain from
serving the complaint on the Company pending the receipt of certain assurances
from the Company. The Company has engaged patent litigation counsel and
commenced its preliminary assessment of the claims asserted in the complaint.
The Company is presently involved in further discussions with Mag. If process is
served by Mag, the Company intends to vigorously defend the lawsuit.
The Company is a party to pending litigation with a Canadian
brokerage firm captioned as Canaccord Capital Corporation ("Canaccord") vs.
Dynatec International, Inc., Civil No. 2:98-cv-420C, and filed in the United
States District Court for the District of Utah. Canaccord initially sued seeking
injunctive relief and money damages stemming from the Company's allegedly
wrongful cancellation of 125,000 shares of the Company's common stock in January
1998. Canaccord claimed that it suffered damage from a market shortage and
deficiency to various accounts which had previously been sold by Canaccord as a
result of the allegedly wrongful cancellation of shares. On July 17, 1998, the
District Court entered a preliminary injunction requiring the Company to reissue
125,000 shares in the name of CEDE & Company, as the market clearing house, to
replace the alleged market shortage. The court preserved Canaccord's remaining
claims for money damages and the return of an additional block of shares alleged
to have been wrongfully cancelled, which are still pending. The Company has
named various third party defendants to whom it believes the shares may have
been improperly issued and is seeking either recovery of the shares or the
recovery of damages. At present, the Company is engaged in negotiations with
representatives of various of the third parties and Canaccord, and believes that
a resolution of the outstanding claims, in whole or in part, will be reached
during the second quarter of 1999. Related to the Canaccord litigation, a claim
for an additional 125,000 shares of the stock of the Company had been made by
Katori Consultants, Ltd., a Philippines corporation. The answer and third party
complaint of Dynatec named Katori Consultants, Ltd. as a third party defendant
so that such additional claim could be addressed as part of the Canaccord legal
action. On October 21, 1998, Katori Consultants, Ltd. gave written notice to
Dynatec that it relinquished any claim to additional shares of common stock of
the Company.
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 later 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 April 30, 1999, the Company had received no response from
the Enforcement Division about whether the SEC plans to name the Company in any
administrative action.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a material adverse
effect on the Company's operations or financial condition.
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