UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
MAY 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-30608
DENTAL RESOURCES, INC.
(Name of Small Business Issuer in this charter)
MINNESOTA 41-1279182
(State of incorporation) (IRS Employer Identification No.)
530 RIVER STREET SOUTH, DELANO, MN, 55328
(Address of principal executive offices and Zip Code)
(Registrant's telephone number) (612) 972-3801
Securities registered pursuant to section 12(b) of the Exchange Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock, par
value $.01 per share
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the 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.
( ) YES (XX) NO
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained herein, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this FORM 10-KSB or any amendment to
the FORM 10-KSB (X)
Issuer's revenues for the fiscal year ended May 31, 2000 were $5,245,881.
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of August 25, 2000 was approximately
$782,443.
The Registrant had 1,901,697 shares of Common Stock outstanding as of August 25,
2000
Transitional Small Business Disclosure Format (check one) : YES ( ) NO ( X )
This Form 10-KSB contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"). These statements appear in a number of places in this Form
10-KSB and include statements regarding the intent, belief or current
expectations of Dental Resources, Inc. (the Company), with respect to (i) the
Company's financing plans, (ii) trends affecting the Company's financial
condition or results of operations, (iii) the impact of competition, and (iv)
the expansion of certain operations. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that the actual results may differ materially from
those in the forward-looking statements as a result of various factors. The
information contained in this Form 10-KSB, including, without limitation, the
information under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Business" identifies important
factors that could cause or contribute to such differences.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I................................................................................................................3
Item 1. Description of Business................................................................................3
Item 2. Description of Property................................................................................6
Item 3. Legal Proceedings......................................................................................6
Item 4. Submission of Matters to a Vote of Security Holders....................................................6
PART II...............................................................................................................6
Item 5. Market for Common Equity and Related Stockholder Matters...............................................6
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations.................8
Item 7. Financial Statements..................................................................................9
Item 8. Changes in and Disagreements with Accountants.........................................................9
PART III.............................................................................................................10
Item 9 . Directors and Executive Officers, Promoters and Control Persons.......................................10
Item 10. Executive Compensation................................................................................11
Item 11. Security Ownership of Certain Beneficial Owners and Management........................................13
Item 12. Certain Relationships and Related Transactions........................................................14
PART IV..............................................................................................................14
Item 13 Exhibits, Financial Statements, and Reports on Form 8K................................................14
Signatures...........................................................................................................16
List of Exhibits.....................................................................................................17
Auditor's Report and Financial Statements............................................................................18
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL BUSINESS DEVELOPMENT
Dental Resources, Inc. (the "Company" or "Dental Resources") was incorporated as
a "C" corporation in Minnesota in 1976. It has not been the subject of any
bankruptcy, receivership or similar proceedings; it has not experienced any
material reclassification, merger or consolidation; nor has it purchased or sold
a significant amount of assets that were not in the ordinary course of its
business.
BUSINESS
Products and Services:
Dental Resources is principally engaged in manufacturing and marketing five
associated groups of dental related products to dentists, dental clinics,
hospitals and dental laboratories. Some of the products in each group are
assembled from purchased components. Some are manufactured for Dental Resources
to its specifications using tooling or formulas supplied by Dental Resources.
Other products are simply purchased by it for resale. The Company's product line
consists of:
THE PRO-FORM LAMINATE SYSTEM
Products within the Pro-form laminate system include the vacuum forming unit
manufactured by the Company, thermoplastic sheets that are used for the
construction of removable dental prosthesis, and a variety of sundry items
useful for facilitating fabrication of the appliances, such as cutters,
adhesives, and lubricants. The Pro-form laminate system is a process that the
Company acquired full title to in February of 1981, including rights, title
and interest to the Pro-form trademark and all applicable US registered
patents. The US patents applicable to the Pro-form laminate system expired in
1994. Sales of products within this group currently comprise approximately 48
% of the Company's sales.
HYGIENIST AND HOME CARE PRODUCTS
Products within the Hygienist and Home Care Products group include certain
products and chemicals used in dental offices and additional products and
chemicals used in the home, which are all functionally related in that they
are used by the dental professional for the prevention or alleviation of
problems such as caries and gingivitis. Products in this group include
fluoride gels and trays, soaps, disposable prophy angles and ancillary
products. Sales of products within this group presently comprise
approximately 15 % of the Company's sales.
PACKAGING PRODUCTS
Products within the packaging group include injection molded plastic boxes
and packaging foams for use in the dental and medical industry. The Company
customizes its various products to the needs of the end user by stamping or
printing the dentist or laboratory name, logo, etc. onto the face of the
packaging. Sales of the products within this group currently comprise
approximately 31 % of the Company's sales.
PROCURE LIGHT CURED COMPOSITES
Products within the Procure product group include a high intensity
ultraviolet halogen-light oven manufactured by the Company and light cured
composites which are used for the fabrication of various dental prosthesis.
Sales of products within this group currently comprise only about 2 % of the
Company's sales.
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PRO-FLEX DENTURE SYSTEM
Products within the Pro-flex denture system include a line of various
materials used to fabricate flexible dentures. According to a survey
conducted by the American Dental Association in 1988, there were
approximately 24 million ill-fitting dentures in North America. As the
population ages, the Company believes this number will increase. The Pro-flex
denture system was conceived to address the problem of ill-fitting dentures
by providing a more natural flexible fit than conventional dentures. Although
this is a newly developed product, the Company believes that the Pro-flex
line has excellent potential as a product that alleviates the problem of
ill-fitting dentures. Sales of products within this product group currently
comprise about 4 % of the Company's sales.
Distribution Methods of Products or Services:
The Company's products are marketed through independent sales organizations and
established dealers throughout the world.
Status of Any Publicly Announced New Products or Services:
The Company introduced its Pro-flex product line of flexible dentures in 1999.
The sales performance of the Pro-flex product line is meeting expectations. The
Company conservatively forecasted that the Pro-flex line could capture a modest
share of the ill-fitting denture market of approximately 10%. As measured by
sales to dental laboratories that the Company estimates provide dentures, the
Pro-flex line has sold to approximately 20% of those laboratories. Minor
problems with some of the Pro-flex products in the field have caused the Company
to temporarily slow down its efforts to market the Pro-flex line. The Company
expects to resume marketing efforts of the line once the problems have been
resolved. It is expected that this will occur during the 2000/2001 fiscal year.
There have not been any other new products or services announced publicly in the
past three years.
Competitive Business Conditions and The Company's Competitive Position in the
Industry and Methods of Competition:
Competition with all of the Company's products occurs primarily on the basis of
price and product quality. There are numerous competitors providing the same or
similar products as the Company, none of whom dominate the market. However, many
of these competitors have significantly greater sales and capital resources than
that of the Company. Management believes that its technical competence, pricing
structure, and the packaging of its products into interrelated systems allows
the Company to compete effectively in the market. Recent certification to
ISO-9002, EN-46002, and ISO-13485 international quality assurance standards has
allowed the Company to remain competitive in a global environment.
Market Segment information:
The Company has one reportable segment, which is the manufacturing and marketing
of five associated groups of dental related products. The Company's five product
groups are: Pro-form thermo-forming equipment and supplies, Hygienist chemicals
and consumables, Packaging products, Procure ultraviolet light-cured ovens and
composites, and Pro-flex denture materials. These products are sold worldwide.
The Company does not currently own any assets outside the United States.
Gross revenues by product group are as follows:
<TABLE>
<CAPTION>
Year Ended May 31, 2000
--------------------------------------------------------
Total Domestic Foreign
-------------- -------------- --------------
<S> <C> <C> <C>
Pro-form $ 2,533,187 $ 1,646,571 $ 886,616
Hygienist 802,062 561,444 240,618
Packaging 1,639,578 1,229,683 409,895
Procure 74,570 52,945 21,625
Pro-flex 196,484 170,941 25,543
---------------- -------------- --------------
Totals $ 5,245,881 $ 3,661,584 $ 1,584,297
================ ============== ==============
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Year Ended May 31, 1999
--------------------------------------------------------
Total Domestic Foreign
-------------- -------------- --------------
Pro-form $ 1,977,550 $ 1,285,408 $ 692,142
Hygienist 734,876 514,413 220,463
Packaging 1,491,456 1,118,592 372,864
Procure 65,661 46,619 19,042
Pro-flex 213,657 192,292 21,365
--------------- -------------- --------------
Totals $ 4,483,200 $ 3,157,324 $ 1,325,876
=============== ============== ==============
</TABLE>
Sources and Availability of Raw Materials and Names of Principal Suppliers:
Raw materials are purchased from numerous sources. The Company does not rely on
any one source for any of its major products.
Dependence on One or Few Major Customers:
The Company derived 21% of its sales from one customer for each of the years
ended May 31, 2000 and 1999.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or
Labor Contracts:
Dental Resources has royalty contracts covering various products based on unit
sales to the following companies or individuals; ASD Corp., A&M Dental Lab, Mr.
Charles Coykendahl, Mr. Jerry Webb, Scott All Sports, and Mr. Tom Mayclin. Total
royalties paid during the fiscal year ended May 31, 2000 aggregated $15,442.
Need for any Government Approval of Principal Products or Services:
Pro-flex products marketed by Dental Resources are registered with the Federal
Food & Drug Administration. Iodophor sanitizers marketed by the Company have
been registered with the Environmental Protection Agency.
Effect of Existing or Probable Governmental Regulations on the Business:
The Company is not aware of any existing or probable government regulations that
have or will have any material effects on the Company's business.
Research and Development:
Research and development costs are expensed as incurred. Research and
development expense was $6,094 and $6,984 for the years ended May 31, 2000 and
1999.
Environmental Compliance:
There have been no significant costs borne by the Company in an effort to comply
with environmental laws.
Employees:
Dental Resources employs 28 full-time and 9 part-time employees, including
management. The Company also engages the in house services of an additional 15
workers that are subcontracted through Functional Industries, a business that
employs individuals with physical or mental handicaps.
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Reports to Security Holders:
Prior to the filing of Form 10-SB in 2000, the Company had not filed any other
reports with the Securities and Exchange Commission. The Company had only been
required to file annual reports to the State of Minnesota's Securities and Real
Estate Division pursuant to Minn. Stat. Section 80A.12, Subdivision 10. However,
the Company historically sends an annual report along with audited financial
statements to security holders annually. Form 10-QSB was filed earlier this year
for the quarter ended February 29, 2000. This report and any other information
that the Company has filed with the Securities Exchange Commission may be read
or copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20529. The public may obtain information on the operation of the
Public Reference Room by calling 1-800-SEC-0330. The Commission maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the Commission. The
Internet address of the Commission's site is (http://www.sec.gov).
The Company also maintains an Internet website at www.dentalresourcesinc.com.
ITEM 2. DESCRIPTION OF PROPERTY.
Location and Condition of the Principal Plants of Operation:
The Company does not own any real property. The Company leases a 13,000 square
foot facility at 530 River Street S. in Delano Minnesota from a partnership
consisting of some of its officers and directors ("see certain relationships and
related transactions" below). This facility holds all administrative and a
portion of the warehousing and manufacturing operations of the Company. The
lease term extends through September 2003 at an average annual lease rate per
square foot of $5.08. The Company also leases a 10,000 square foot facility at
410 Congress Street in Maple Lake Minnesota. This facility houses all remaining
manufacturing operations. The lease term for this facility extends through
September 2003 at an average annual lease rate per square foot of $5.50. Both
facilities are new (less than 10 years) and are in excellent condition.
Management believes that the lease rate per square foot and other terms and
conditions are not materially different than prevailing market rates and
conditions. Leases for both facilities provide for an option to renew leases for
an additional five years beyond the expiration of the current lease term. Lease
rates will increase 10% if renewed for the additional five year term.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to in any existing or pending legal proceedings nor
has its property been the subject of any such proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information:
The Company's common stock currently trades in the "pink sheets" under the
trading symbol: DNLR. The Company's common stock was quoted for trading on the
over-the-counter bulletin board (OTC:BB) on August 17, 1998, but became
ineligible to continue trading on November 3, 1999 because its Form 10-SB was
not effective as of such date. The Company intends to apply for eligibility to
be quoted on the OTC: BB once its previously-filed Form 10-SB is approved by the
SEC.
The following table sets forth the highest and lowest bid prices for the common
stock for each FISCAL QUARTER and subsequent interim period since the common
stock commenced actual trading, as reported by the
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National Quotation Bureau, and represent interdealer quotations, without retail
markup, markdown or commission and may not be reflective of actual transactions:
Fiscal 1999 HIGH BID LOW BID
----------- -------------- -------------
FIRST QUARTER 1 .75
SECOND QUARTER .75 .50
THIRD QUARTER .875 .75
FOURTH QUARTER .75 .50
Fiscal 2000
-----------
FIRST QUARTER .6875 .4375
SECOND QUARTER .4375 .125
THIRD QUARTER .3 .1875
FOURTH QUARTER 1.70 .30
There can be no assurance that an active public market for the common stock will
continue or be sustained. In addition, the shares of common stock are subject to
various governmental or regulatory body rules which affect the liquidity of the
shares.
Holders:
There were approximately 400 holders of record of the Company's common stock as
of May 31, 2000.
Dividends:
The Company has never paid cash dividends on its common stock and does not
intend to do so in the foreseeable future. There are no external restrictions on
the Company's ability to pay dividends. The Company currently intends to retain
its earnings for the operation and expansion of its business. The Company's
continued need to retain earnings for operations and expansion are likely to
limit the Company's ability to pay dividends in the future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations For the Fiscal Years Ended May 31, 2000 and 1999.
For the year ended May 31, 2000, the Company recorded revenues from operations
of $5,246,000, an increase of approximately 17% compared to $4,483,000 for the
same period in 1999. This increase is attributable to increases in sales in most
of the Company's product lines, although the majority of the increases were
within the Company's two largest groups Pro-form and Packaging. Gross profits
rose to $1,430,000 for the year ended May 31, 2000 from $1,249,000 in 1999. The
increase in gross profits was due to the increase in revenues. Gross profit as a
percent of sales fell slightly from 27.9% in the year ending May 31, 1999 to
27.3% in 2000. The slight decrease was due to a shift in overall product mix.
Marketing expenses for the year ending May 31, 2000 increased to $698,000 from
$642,000 in 1999, an increase of 9%. Additional personnel in customer service
along with increased advertising expenses were the primary factors causing the
increase in marketing expenses. General and administrative expenses increased to
$539,000 for the year ended May 31, 2000 from $498,000 in 1999, an increase of
9%. Increases in administrative personnel from the addition sales volumes, and
legal and accounting expenses relating to public securities filings were the
primary reason for the increase in general and administrative expenses.
Interest expense increased to $30,000 for the year ended May 31, 2000 from
$25,000 in 1999. The increase in interest is a combination of increased
borrowing of term notes coupled with overall increases in interest rates. Income
taxes increased to $41,000 for the year ended May 31, 2000 from $6,000 in 1999.
The increase was due to an increase in net profits from operations along with
the fact that the company reversed the valuation allowance on deferred tax
assets related to operating loss carryforwards in the year ended May 31, 1999.
Net Income for the year ended May 31, 2000 rose to $126,000 from $90,000 in
1999.
On May 31, 2000 the Company's total assets were $2,073,000, compared to
$1,815,000 at May 31, 1999. The increase was due primarily to increases in
inventories and investments in property and equipment used for production. Total
liabilities increased from $687,000 at May 31, 1999 to $815,000 at May 31, 2000.
The primarily increase was in long-term debt as the Company continues to expand
it's manufacturing capacity. As of May 31, 2000, stockholder's equity increased
by $131,000 to $1,259,000 from $1,128,000 as of May 31, 1999.
Liquidity and Capital Resources.
During the twelve month period ending May 31, 2000, operations of the Company
produced a positive cash flow of $193,000. The prior year produced positive cash
flows of $184,000 in comparison. The increase in operating cash flows is
primarily due to increased profits from the current year operations.
The Company has typically relied on cash flows from operations to finance its
working capital needs. The Company has a working capital loan with Oakley
National Bank of Buffalo, Minnesota in the amount of $350,000 secured by the
Company's inventories and accounts receivable to fund temporary or seasonal
variations in cash flows. As of May 31, 2000, the Company had used $257,000 of
the credit line leaving a balance of $93,000 available. The Company has
traditionally borrowed capital from time to time on term basis to finance
necessary purchases of specific capital equipment. As of May 31, 2000, the
balance due on all outstanding term loans used for capital equipment purchases
was $119,000. Management is confident that these combined sources of capital
will be sufficient to finance the current operations of the Company. The
Company's future capital requirements will depend on many factors, including
growth of the Company's customer base, economic conditions and other factors
including the results of future operations.
The Company intends to continue developing its existing product lines and
expanding it's manufacturing capacity. It is estimated that the Company may need
to borrow up to $150,000 during the next twelve months to finance the
acquisition of capital equipment necessary to support such expansion. In
particular, the Company intends to continue the development of its extrusion and
thermo-forming lines. Aside from
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equipment purchased in the spring of 2000, the Company has not made any
commitments for any capital expenditures at this time. At this time there are no
plans to sell any significant capital equipment. The Company is evaluating the
possibility of further expanding its plastic extrusion and die cutting
operations. By expanding operations, the Company expects that the number of full
time employees it employs will increase approximately ten percent over the next
two years.
There are no known trends, events, or uncertainties known to management at this
time that have had or are reasonably expected to have a material impact on the
net sales or revenues or income from continuing operations. Historically, the
first quarter of operations has always been the strongest for the Company due to
increased sales of its Pro-form mouthguard line to athletes returning to school
in the fall. As the Company continues to expand the other product lines that it
markets, the effect of this seasonal business is expected to continue to decline
as a material aspect of its operations.
ITEM 7. FINANCIAL STATEMENTS.
The Company's Financial Statements, and the report of Olsen Thielen & Co., LTD,
independent auditors, and Froehling, Anderson, Plowman and Wasmuth, LTD,
independent auditors, with respect thereto, referred to in the Index to
Financial Statements, appear elsewhere in this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On May 15, 2000, the Registrant was notified by Froehling, Anderson, Plowman &
Wasworth, Ltd. that the firm declined to stand for re-election as the
Registrant's certifying accountants effective May 15, 2000. During the
Registrant's two most recent fiscal years and through May 15, 2000, there were
no disagreements with Froehling, Anderson, Plowman & Wasmuth, Ltd. on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Froehling, Anderson, Plowman & Wasmuth, Ltd., would have caused
that firm to make reference to the subject matter of the disagreement in
connection with its report. Froehling, Anderson, Plowman & Wasmuth, Ltd.'s
report on the Registrant's financial statements for the past two years contained
no adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope, or accounting principles. During the Registrant's
two most recent fiscal years and through May 15, 2000, there were no reportable
events (as defined in Regulation S-K ITEM 304(a)(1)(v)). The Registrant has
provided Froehling, Anderson, Plowman & Wasmuth, Ltd. with a copy of the
disclosures contained in its form 8-K and has requested that Froehling,
Anderson, Plowman & Wasmuth, Ltd. furnish it with a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the statements
made by the Registrant herein and, if not, stating the respects in which it does
not agree. A copy of the Froehling, Anderson, Plowman & Wasmuth, Ltd. letter
dated May 19, 2000 was filed as Exhibit 16 to Form 8-K on May 19, 2000.
Effective May 15, 2000 the Board of Directors of the Registrant approved
engaging Olsen Thielen & Co., Ltd as its certifying accountant for the year
ended May 31, 2000.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
Douglas Murphy 51 President, Chief Executive Officer and Director
Bryan Nichols 40 Vice President, Chief Financial Officer and Director
William Murphy 49 Vice President of Sales
Dr. Earl Johnson 65 Director
Russel Felten 51 Director
</TABLE>
Douglas Murphy has been President and CEO of the Company since January of
1986. He has served as director and as an officer of the Company since 1981.
Mr. Murphy holds a Ph.D. degree in Biological Sciences. In his present
capacity within the Company, Mr. Murphy is principally concerned with
marketing, distribution and introduction of new products.
Bryan Nichols has been the Vice President of Operations and CFO of the
Company since January of 1986. He has served as secretary to the board since
1986 and as a director since 1995. Mr. Nichols holds a Bachelors degree in
Business Administration along with a (mini) MBA certificate from the
University of St. Thomas. Mr. Nichols has also completed certification
training in ISO-9000 and FDA QSR Regulatory training. In his present capacity
with the Company Mr. Nichols is primarily concerned with operations,
production and financing.
William Murphy was one of the original founders of the Company in 1976. He is
the brother of Douglas Murphy. Mr. Murphy has held positions as both director
and President of the Company. He resigned his position with the Company in
1986 to direct another public company, Medical Packaging Corp. But he
returned to the Company in 1988 where he has served in various management
positions since that time. Mr. Murphy holds a Bachelors degree in Business
from St. Cloud State. Mr. Murphy is principally concerned with products
within the Laboratory division of the Company including research and
development and introduction of products within that division.
Dr. Earl Johnson was elected to the board of directors in January 1988. He
has served in that capacity with the Company since that time. Dr. Johnson
retired after running a successful practice in Hibbing, MN for 35 years. Dr.
Johnson is a graduate of the University of Minnesota School of Dentistry. In
addition to serving as a board member, Dr. Johnson assists with research and
development of various products that the Company has introduced.
Russel Felten was elected to the board of directors in 1994 and has served in
that capacity since that time. Mr. Felten is President of Agricultural
Financial Services, a Company focused on leasing to the farming industry. At
the same time Mr. Felten continues to manage assets for individuals as he has
done for the past twelve years. Form 1973 to 1988 Mr. Felten was employed by
Waycrosse, Inc. where he performed duties ranging form tax and estate
planning work to the management of all types of investments. Mr. Felten is
also a director of Minn. American Inc., OTCFMB.MN.A:C, as well as a director
of various privately held companies. Mr. Felten holds a BS in Business
Administration from Valparaiso University and received the Certified
Financial Planner designation in 1988.
The Company's directors are elected at the annual meeting of stockholders and
hold office until their successors are elected and qualified. The Company's
officers are appointed by the Board of Directors and serve at the pleasure of
the Board and subject to employment agreements, if any, approved and ratified
by the Board.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10% percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. To the best of the Company's knowledge, no Form 3's or Form 5's
required to be filed under Section 16(a) of the Securities Exchange Act of
1934 were filed by any of the officers, directors, or greater than 10%
percent shareholders of the Company since the date of effectiveness of the
Company's Form 10-SB, May 7, 2000. In addition, to the best of the Company's
knowledge, Russel Felten, a director of the Company, failed to timely file a
Form 4 upon his exercise of an option to purchase 1,853 shares of common
stock in July, 2000.
ITEM 10. EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long Term
Compensation Compensation
----------------------- Securities All
Fiscal Underlying Other
Name and Principal Position Year Salary Bonus Options (1) Compensation (2)
------------------------------------ ---------- ---------- ----------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Douglas Murphy 1998 $ 88,200 $ 7,825 0 $ 9,780
Chief Executive Officer 1999 $ 90,846 $ 5,700 0 $ 9,780
2000 $ 96,434 $ 12,091 0 $ 2,580
William Murphy 1998 --------- --------- --------- -------
Vice President Sales 1999 --------- --------- --------- -------
2000 $ 96,434 $ 12,230 0 $ 2,580
Bryan Nichols 1998 --------- --------- --------- -------
Chief Financial Officer 1999 --------- --------- --------- -------
2000 $ 96,434 $ 12,990 0 $ 2,580
</TABLE>
(1) Doug Murphy, William Murphy, and Bryan Nichols received incentive stock
options to purchase 40,000 shares of common stock granted September 1,
1999, at $.44 per share, the final bid price as of the option date. They
also received warrants to purchase 37,500 shares of common stock granted
March 1, 2000 at $.20 per share the final bid price as of the warrants
date.
(2) Includes net automobile allowance and entertainment and expense allowance,
health insurance premiums and life insurance premiums not available to
employees generally.
There were no other executives that earned in excess of $100,000 during the most
recent fiscal year.
EMPLOYMENT CONTRACTS
The Company has entered into five-year employment agreements with Douglas
Murphy, William Murphy, and Bryan Nichols. Each agreement provides for a bonus
based on net income of the Company and for severance payments of three years'
annual salary. The agreements expire in May 2002. Copies of these employment
agreements were filed previously with the Company's Amendment Number Two to Form
10-SB filed July 14, 2000.
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STOCK OPTIONS AND WARRANTS
The following table sets forth all options and warrants that have been granted
to officers or directors as of the end of the Company's last fiscal year.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
NUMBER
DATE DATE OF OPTION
OPTIONEE CAPACITY GRANTED EXPIRES SHARES PRICE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Russel Felten (1) Director 07/06/95 07/05/00 800 0.25
---------------------------------------------------------------------------------------------------------------------
Earl Johnson (2) Director 07/06/95 07/05/00 800 0.25
---------------------------------------------------------------------------------------------------------------------
Dennis Breen (2) Former Director 07/06/95 07/05/00 800 0.25
---------------------------------------------------------------------------------------------------------------------
Russel Felten (1) Director 12/07/95 12/06/00 1,053 0.19
---------------------------------------------------------------------------------------------------------------------
Earl Johnson Director 12/07/95 12/06/00 1,053 0.19
---------------------------------------------------------------------------------------------------------------------
John Ward Former Director 12/07/95 12/06/00 1,053 0.19
---------------------------------------------------------------------------------------------------------------------
Russel Felten Director 04/04/96 04/03/01 1,053 0.19
---------------------------------------------------------------------------------------------------------------------
Earl Johnson Director 04/04/96 04/03/01 1,053 0.19
---------------------------------------------------------------------------------------------------------------------
Russel Felten Director 04/24/96 04/23/01 800 0.25
---------------------------------------------------------------------------------------------------------------------
Earl Johnson Director 04/24/96 04/23/01 800 0.25
---------------------------------------------------------------------------------------------------------------------
John Ward Former Director 04/24/96 04/23/01 800 0.25
---------------------------------------------------------------------------------------------------------------------
Russel Felten Director 05/08/96 05/07/01 800 0.25
---------------------------------------------------------------------------------------------------------------------
Earl Johnson Director 05/08/96 05/07/01 800 0.25
---------------------------------------------------------------------------------------------------------------------
Earl Johnson Director 09/01/99 08/31/04 5,000 0.44
---------------------------------------------------------------------------------------------------------------------
Russel Felten Director 09/01/99 08/31/04 5,000 0.44
---------------------------------------------------------------------------------------------------------------------
William Murphy Officer 09/01/99 08/31/04 40,000 0.44
---------------------------------------------------------------------------------------------------------------------
Douglas Murphy Officer, Director 09/01/99 08/31/04 40,000 0.44
---------------------------------------------------------------------------------------------------------------------
Bryan Nichols Officer, Director 09/01/99 08/31/04 40,000 0.44
---------------------------------------------------------------------------------------------------------------------
Patti Cordes Customer Service 09/01/99 08/31/04 7,500 0.44
---------------------------------------------------------------------------------------------------------------------
Debbie Hilde Customer Service 09/01/99 08/31/04 6,800 0.44
---------------------------------------------------------------------------------------------------------------------
Corey Cummings Purchasing Direct 09/01/99 08/31/04 13,000 0.44
---------------------------------------------------------------------------------------------------------------------
Jennifer Carpentier Plant Mgr. 09/01/99 08/31/04 13,000 0.44
---------------------------------------------------------------------------------------------------------------------
Harlo Falde Shipping Mgr. 09/01/99 08/31/04 6,800 0.44
---------------------------------------------------------------------------------------------------------------------
Timothy Smith Plant Mgr. 09/01/99 08/31/04 13,000 0.44
---------------------------------------------------------------------------------------------------------------------
Daniel Schrader Consultant 03/02/00 03/01/05 50,000 0.20
---------------------------------------------------------------------------------------------------------------------
Thomas Krosschel Consultant 03/02/00 03/01/05 50,000 0.20
---------------------------------------------------------------------------------------------------------------------
Yvonne Felten Consultant 03/02/00 03/01/05 50,000 0.20
---------------------------------------------------------------------------------------------------------------------
Douglas Murphy Officer, Director 03/02/00 03/01/05 37,500 0.20
---------------------------------------------------------------------------------------------------------------------
William Murphy Officer 03/02/00 03/01/05 37,500 0.20
---------------------------------------------------------------------------------------------------------------------
Bryan Nichols Officer, Director 03/02/00 03/01/05 37,500 0.20
---------------------------------------------------------------------------------------------------------------------
TOTAL 464,265
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In July, 2000, Russell Felten exercised his option to purchase a total of
1,853 shares of common stock of the Company.
(2) Since the end of the Company's most recent fiscal year, options granted to
Earl Johnson and Dennis Breen to purchase a total of 1,600 shares of
common stock of the Company have expired without exercise of the option.
12
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security ownership of certain beneficial owners (5% or greater).
The following information sets forth certain information as of May 31, 2000,
about each person or entity who is known to the Company to be beneficial owners
of more than 5% of the Company's Common Stock:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Owner of Class
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Douglas B. Murphy President, CEO 226,988 Shares (1) 9.6%
3730 Lee Road Director
Minnetrista, MN 55364
Common William Murphy VP Sales 234,195 Shares (1) 9.9%
18440 25th Ave. N.
Plymouth, MN 55447
Common Bryan Nichols VP Operations, 217,501 Shares (1) 9.2%
2130 54th St. NW CFO Director
Buffalo, MN 55313
</TABLE>
(1) Includes 77,500 shares of Common Stock issuable upon the exercise of
options and warrants presently exercisable or exercisable within the next
60 days by Doug Murphy, William Murphy and Bryan Nichols.
(b) Security ownership of management.
The following information sets forth certain information as of May 31, 2000,
about each person in a management position or director who is beneficial owners
of the Company's Common Stock:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Owner of Class
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Douglas B. Murphy President, CEO 226,988 Shares (1) 9.6%
3730 Lee Road Director
Minnetrista, MN 55364
Common William Murphy VP Sales 234,195 Shares (1) 9.9%
18440 25th Ave. N.
Plymouth, MN 55447
Common Bryan Nichols VP Operations, 217,501 Shares (1) 9.2%
2130 54th St. NW CFO Director
Buffalo, MN 55313
Common Earl Johnson Director 51,048 Shares (2) 2.2%
325 Highland Drive
Hibbing, MN 55746
Common Russ Felten Director 63,670 Shares (3) 2.7%
7354 Howard Lane
Eden Prairie, MN 55346
Common Officers and Directors as a group (5 persons) 793,402 Shares 33.5%
</TABLE>
(1) Includes 77,500 shares of Common Stock issuable upon the exercise of
options and warrants presently exercisable or exercisable within the next
60 days by Doug Murphy, William Murphy and Bryan Nichols.
13
<PAGE>
(2) Includes 9,506 shares of Common Stock issuable upon the exercise of
options and warrants presently exercisable or exercisable within the next
60 days by Earl Johnson.
(3) Includes 59,506 shares of Common Stock issuable upon the exercise of
options and warrants presently exercisable or exercisable within the next
60 days by Russ Felten.
(c) Changes in control.
There are no arrangements which may result in a change in control of the
Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the past two years the Company has not entered into any material
transactions with an officer, director, or a beneficial owner of 5% or more of
the Company's common stock, except as follows: the Company leases its 13,000
square foot facility at 530 River Street S. in Delano Minnesota from a
partnership consisting of some of its officers and directors. This facility
holds all administrative and a portion of the warehousing and manufacturing
operations of the Company. The lease term extends through September 2003 at an
average annual lease rate per square foot of $5.08. The Company also leases a
10,000 square foot facility at 410 congress Street in Maple Lake Minnesota from
its officers and directors. This facility houses all remaining manufacturing
operations. The lease term for this facility extends through September 2003 at
an average annual lease rate per square foot of $5.50. Both facilities are new
(less than 10 years) and are in excellent condition. Management believes that
the lease rate per square foot and other terms and conditions are not materially
different than prevailing market rates and conditions. Leases for both
facilities provide for an option to renew leases for an additional five years
beyond the expiration of the current lease term. Lease rates will increase 10%
if renewed for the additional five year term.
PART IV
ITEM 13 EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8K.
Documents filed as part of this report.
1) The financial statements filed as part of this report are listed
separately in the Index to Financial Statements immediately following the
signature page.
2) Form 8-K was filed on May 19, 2000 by the registrant notifying a change of
Auditor for the year ending May 31, 2000.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Articles of Incorporation, its Restated Bylaws and the
provisions of the Minnesota Business Corporation Act, which govern the actions
of the Company, provide that present and former officers and directors of the
Company shall be indemnified against certain liabilities and expenses which any
of them may incur as a result of being, or having been, an officer of the
Company. Indemnification is contingent upon certain conditions being met,
including, that the person: has not been previously indemnified by another party
for the same matter; has acted in good faith; has received no improper personal
benefit; and in the case of a criminal proceeding, has no reason to believe that
the conduct complained of was unlawful and reasonably believed that the conduct
complained of was in the best interests of the Company, or in certain
circumstances, reasonably believed that the conduct complained of was not
opposed to the best interests of the Company.
In addition, the Company's Restated Articles of Incorporation provide that a
director of the Company shall not be liable for monetary damages for a breach of
such director's fiduciary duty, except for a breach of the duty of loyalty, acts
not in good faith or in knowing violation of law, violations of state securities
laws, or for actions from which the director derived an improper personal
benefit.
14
<PAGE>
Insofar as the indemnification of liabilities arising under the 1933 Act, as
amended, may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions of its Restated Articles of Incorporation,
Restated Bylaws and the provisions of the Minnesota Business Corporation Act, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act, as amended, and is, therefore, unenforceable.
15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 29, 2000.
DENTAL RESOURCES, INC.
BY: /s/
-----------------------------
Douglas B. Murphy, Its President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the date indicated.
Dated: August 29, 2000.
BY: /s/
-------------------------------------------
Douglas B. Murphy, Its President, CEO, Director
BY: /s/
-------------------------------------------
Bryan A. Nichols, Vice President, CFO, Director
BY: /s/
-------------------------------------------
Earl Johnson, Director
BY: /s/
-------------------------------------------
Russel Felten, Director
16
<PAGE>
LIST OF EXHIBITS
Assigned Number Description
--------------- -----------
Exhibit 3.1.1 Restated Articles of Incorporation*
Exhibit 3.1.2 Restated Bylaws*
Exhibit 6.1 Douglas Murphy Employment Contract**
Exhibit 6.2 William Murphy Employment Agreement**
Exhibit 6.3 Bryan Nichols Employment Agreement**
Exhibit 10.1 Nedderman/Bedard Royalty Agreement**
Exhibit 10.2 Cook Royalty Agreement**
Exhibit 27 Financial Data Schedule***
-------------------------------
* - Previously filed as part of Issuer's Registration Statement on Form 10-SB
filed March 7, 2000.
** - Previously filed as part of the Second Amendment to Issuer's Registration
Statement on Form 10-SB filed July 14, 2000.
*** - Filed herewith.
17
<PAGE>
DENTAL RESOURCES, INC.
CONTENTS
================================================================================
Page
----
INDEPENDENT AUDITORS' REPORTS 19-20
FINANCIAL STATEMENTS:
Balance Sheet 21-22
Statement of Income 23
Statement of Stockholders' Equity 24
Statement of Cash Flows 25
NOTES TO FINANCIAL STATEMENTS 26-32
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dental Resources, Inc.
Delano, Minnesota
We have audited the accompanying balance sheet of Dental Resources, Inc. as of
May 31, 2000, and the related statements of income, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dental Resources, Inc. as of
May 31, 2000, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
July 14, 2000
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dental Resources, Inc.
Delano, Minnesota
We have audited the accompanying balance sheet of Dental Resources, Inc. as of
May 31, 1999, and the related statements of income, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dental Resources, Inc. as of
May 31, 1999, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ Froehling, Anderson, Plowman & Wasmuth, LTD
Minnetonka, Minnesota
July 13, 1999
20
<PAGE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
21
DENTAL RESOURCES, INC.
BALANCE SHEET
MAY 31, 2000 AND 1999
================================================================================
<TABLE>
<CAPTION>
ASSETS
2000 1999
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 29,028 $ 46,623
Accounts Receivable, Less Allowance for
Uncollectibles of $3,000 and $2,500 739,587 763,223
Other Receivables 902 10,222
Inventories 596,442 500,499
Prepaid Expenses 31,324 25,418
Deposits 1,500 31,636
Deferred Income Taxes 15,771 -
-------------- --------------
Total Current Assets 1,414,554 1,377,621
-------------- --------------
PROPERTY AND EQUIPMENT: 1,388,144 1,092,588
Less Accumulated Depreciation 731,800 669,438
-------------- --------------
Net Property and Equipment 656,344 423,150
-------------- --------------
OTHER ASSETS:
Patents and Trademarks Less Accumulated
Amortization of $2,541 and $2,041 2,458 2,959
Deferred Income Taxes - 10,880
-------------- --------------
Total Other Assets 2,458 13,839
-------------- --------------
TOTAL ASSETS $ 2,073,356 $ 1,814,610
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
21
<PAGE>
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of Credit Note Payable $ 256,989 $ 244,989
Current Portion of Long-Term Debt 38,400 1,000
Accounts Payable 340,154 381,365
Accrued Expenses 54,804 57,802
Income Taxes Payable 5,550 1,690
-------------- --------------
Total Current Liabilities 695,897 686,846
-------------- --------------
LONG-TERM LIABILITIES:
Long-Term Debt 80,572 -
Deferred Income Taxes 38,041 -
-------------- --------------
Total Long-Term Liabilities 118,613 -
-------------- --------------
COMMITMENTS:
STOCKHOLDERS' EQUITY:
Common Stock - $.01 par value, 20,000,000 Shares Authorized,
1,905,844 and 1,902,511 Shares Issued and Outstanding 19,058 19,025
Additional Paid in Capital 1,593,369 1,587,950
Accumulated Deficit (353,581) (479,211)
-------------- --------------
Total Stockholders' Equity 1,258,846 1,127,764
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,073,356 $ 1,814,610
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
22
<PAGE>
DENTAL RESOURCES, INC.
STATEMENT OF INCOME
YEARS ENDED MAY 31, 2000 AND 1999
================================================================================
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
SALES $ 5,245,881 $ 4,483,200
COST OF GOODS SOLD 3,816,339 3,233,758
-------------- --------------
GROSS PROFIT 1,429,542 1,249,442
-------------- --------------
EXPENSES:
Marketing 697,674 642,405
General and Administrative 539,141 498,493
-------------- --------------
Total Expenses 1,236,815 1,140,898
-------------- --------------
OPERATING INCOME 192,727 108,544
-------------- --------------
OTHER INCOME AND (EXPENSES):
Finance Charges 4,235 11,019
Gain on Sale of Equipment - 708
Interest Expense (30,380) (24,559)
-------------- --------------
Net Other Income and (Expenses) (26,145) (12,832)
-------------- --------------
INCOME BEFORE INCOME TAXES 166,582 95,712
INCOME TAX EXPENSE 40,952 5,590
-------------- --------------
NET INCOME $ 125,630 $ 90,122
============== ==============
BASIC NET INCOME PER SHARE $ .07 $ .05
============== ==============
DILUTED NET INCOME PER SHARE $ .06 $ .05
============== ==============
AVERAGE COMMON SHARES OUTSTANDING:
Basic 1,903,710 1,901,131
Diluted 2,159,833 1,912,891
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
23
<PAGE>
DENTAL RESOURCES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2000 AND 1999
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid In Accumulated
Shares Amount Capital Deficit Total
------------ ---------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE on May 31, 1998 1,899,427 $ 18,994 $ 1,586,981 $ (569,333) $ 1,036,642
Net Income 90,122 90,122
Common Stock Issued 3,084 31 969 1,000
------------ ---------- -------------- ------------- --------------
BALANCE on May 31, 1999 1,902,511 19,025 1,587,950 (479,211) 1,127,764
Net Income 125,630 125,630
Common Stock Issued 3,333 33 499 532
Compensation Expense on
Warrants Issued 4,920 4,920
------------ ---------- -------------- ------------- --------------
BALANCE on May 31, 2000 1,905,844 $ 19,058 $ 1,593,369 $ (353,581) $ 1,258,846
============ ========== ============== ============= ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
24
<PAGE>
DENTAL RESOURCES, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 2000 AND 1999
================================================================================
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 125,630 $ 90,122
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 108,277 94,237
Amortization 501 500
Gain on Sale of Equipment - (708)
Compensation Expense on Warrants Issued 4,920 -
(Increase) Decrease in:
Accounts Receivable 23,636 (118,851)
Other Receivables 9,320 (7,452)
Inventories (95,943) (16,401)
Prepaid Expenses (5,906) (5,239)
Deposits 30,136 (28,183)
Increase (Decrease) in:
Accounts Payable (41,211) 126,942
Accrued Expenses (2,998) 46,622
Income Taxes Payable 3,860 690
Deferred Income Taxes 33,150 1,620
------------- -------------
Net Cash Provided by Operating Activities 193,372 183,899
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (341,471) (66,346)
------------- -------------
Net Cash Used in Investing Activities (341,471) (66,346)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings (Payments) on Line of Credit 12,000 (49,174)
Principal Payments of Long-Term Debt (7,043) (36,268)
Proceeds from Issuance of Long-Term Debt 125,015 -
Proceeds from Issuance of Common Stock 532 1,000
------------- -------------
Net Cash Provided By (Used In) Financing Activities 130,504 (84,442)
------------- -------------
NET INCREASE (DECREASE) IN CASH (17,595) 33,111
CASH at Beginning of Year 46,623 13,512
------------- -------------
CASH at End of Year $ 29,028 $ 46,623
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest $ 30,380 $ 24,559
Income Taxes $ 3,942 $ 3,280
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
25
<PAGE>
DENTAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company's principal line of business is manufacturing and marketing a number
of specialized dental products and packaging materials for use in the dental and
medical industries.
ACCOUNTING ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from those estimates.
INVENTORIES
Inventories are recorded at the lower of first-in, first-out cost or market.
Inventories consist of the following:
May 31
-------------------------------
2000 1999
------------ ------------
Raw Materials $ 162,731 $ 110,090
Work in Process 314,703 172,192
Finished Goods 119,008 218,217
------------ ------------
Totals $ 596,442 $ 500,499
============ ============
PROPERTY AND DEPRECIATION
Property and equipment are recorded at original cost. Additions, improvements or
major renewals are capitalized. Any gains or losses on property and equipment
retirements are reflected in the current year operations.
Depreciation is computed using the straight-line method at rates based on
estimated service lives of the assets as follows:
Molds 3-7 Years
Furniture and Fixtures 3-10 Years
Leasehold Improvements 10 Years
Computer Software 3-10 Years
LONG-LIVED ASSETS
The Company reviews long-lived assets on an individual level for impairment
whenever changes in circumstances indicate the carrying value may not be
recoverable. Recoverability is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized would be measured by the amount by which the carrying value of the
assets exceed their fair value. Fair value is determined based on discounted
cash flows or appraised values, depending on the nature of the asset. Assets to
be disposed of are carried at the lower of the carrying amount or their fair
value less disposal costs. At May 31, 2000 and 1999, no impairment loss
provision was required or recorded in the financial statements.
26
<PAGE>
DENTAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The provision for income taxes consists of an amount for taxes currently payable
and a provision for tax consequences deferred to future periods. Deferred income
taxes 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 bases. The major temporary differences
relate primarily to operating loss carryforwards, depreciation and inventory.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was $122,000 and
$94,000 for the years ended May 31, 2000 and 1999.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development expense was $6,094 and $6,984 for the years ended May 31, 2000 and
1999.
NET INCOME PER COMMON SHARE
Basic net income per share is based on the weighted average number of common
shares outstanding during each year. Diluted net income per common share
includes the dilutive effect of potential common shares outstanding. The Company
calculates the dilutive effect of outstanding stock options and warrants using
the treasury stock method. A reconciliation of earnings per share for the years
ended May 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------------- -----------------------------------
Basic Diluted Basic Diluted
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Earnings $ 125,630 $ 125,630 $ 90,122 $ 90,122
============== ============== ============== ==============
Average Shares Outstanding 1,903,710 1,903,710 1,901,131 1,901,131
Effect of Dilutive Securities:
Options and Warrants - 256,123 - 11,760
-------------- -------------- -------------- --------------
Equivalent Shares 1,903,710 2,159,833 1,901,131 1,912,891
============== ============== ============== ==============
Earnings Per Share $ .07 $ .06 $ .05 $ .05
============== ============== ============== ==============
</TABLE>
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. A significant portion of
the Company's sales are to customers in the dental and medical industries, and,
consequently, the Company is directly affected by the financial well-being of
those industries. However, the credit risk associated with trade receivables is
minimal due to the Company's large customer base and ongoing monitoring of the
credit worthiness of customers. Historically, credit losses have not been
significant.
27
<PAGE>
DENTAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximates carrying
value. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair values were estimated based on
current rates offered to the Company for debt with similar terms and maturities.
RECLASSIFICATIONS
Certain amounts in the 1999 financial statements and notes have been
reclassified to conform with the 2000 presentation. This reclassification had no
effect on net income or stockholders' equity.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
May 31
-----------------------------------
2000 1999
-------------- --------------
Molds $ 621,347 $ 591,647
Furniture and Fixtures 510,267 398,188
Leasehold Improvements 99,499 74,281
Computer Software 26,044 28,472
Under Construction 130,987 -
-------------- --------------
Total $ 1,388,144 $ 1,092,588
============== ==============
NOTE 3 - LINE OF CREDIT NOTE PAYABLE
The Company has a revolving line of credit agreement with Oakley National Bank
of Buffalo Minnesota which enables the Company to borrow up to $350,000 at 1.5%
above the prevailing prime interest rate (11.00% at May 31, 2000). The loan is
secured by inventory and accounts receivable.
NOTE 4 - LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
May 31
-----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Note payable to Oakley National Bank of Buffalo, Minnesota in monthly
installments of $4,028 including variable interest at 1% above the prevailing
prime rate (10.5% at May 31, 2000) to March 2003 when the remaining balance
is payable. Secured by equipment, inventory and accounts receivable. $ 118,972 $ -
Note payable in monthly installments of $500. - 1,000
-------------- --------------
Total 118,972 1,000
Less Amount Due Within One Year 38,400 1,000
-------------- --------------
Long-Term Debt $ 80,572 $ -
============== ==============
</TABLE>
28
<PAGE>
DENTAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 4 - LONG-TERM DEBT (CONTINUED)
Principal payments required during the next three years are: 2001- $38,400; 2002
- $42,300; and 2003 - $38,272.
NOTE 5 - INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Year Ended May 31
------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Current:
State $ 7,802 $ 3,970
Deferred 33,150 1,620
----------- ------------
Total Income Tax Expense $ 40,952 $ 5,590
=========== ============
The provision for income taxes varied from the federal statutory rate as
follows:
Year Ended May 31
------------------------------
2000 1999
----------- ------------
Federal Tax at Statutory Rate 29.0% 22.0%
State Income Taxes, Net of Federal Benefit 3.9 3.2
Non Deductible Expenses .8 .5
Benefit of Operating Loss Carryforwards - (24.8)
Adjust Deferred Tax Rates (8.9) -
Other (.2) 4.9
------ ------
Effective Tax Rate 24.6% 5.8%
====== ======
The components of deferred income taxes are as follows:
May 31
------------------------------
2000 1999
----------- ------------
Current Deferred Tax Assets:
Allowance for Uncollectibles $ 835 $ -
Inventory 14,936 -
----------- ------------
Total Current Deferred Tax Assets $ 15,771 $ -
=========== ============
Noncurrent:
Deferred Tax Assets:
Operating Loss Carryforwards $ 6,645 $ 36,835
Compensation on Stock Warrants 1,370 -
Deferred Tax Liabilities:
Depreciation (46,056) (25,955)
----------- ------------
Net Noncurrent Deferred Tax
Asset (Liability) $ (38,041) $ 10,880
=========== ============
</TABLE>
The Company has federal net operating loss carryforwards of $33,000 as of May
31, 2000, which will expire in 2007.
29
<PAGE>
DENTAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 6 - COMMITMENTS
OPERATING LEASES -
The Company leases office, manufacturing and warehouse space under operating
leases from a partnership consisting of officers and directors of the Company.
The leases require monthly payments of $10,083 plus real estate taxes, insurance
and other miscellaneous costs. The leases expire September 30, 2003, but provide
for an option to renew for an additional five years.
Total rent expense (including real estate taxes, insurance and other costs which
are required to be paid by the Company) and future, minimum obligations under
the leases are as follows for years ending May 31:
Expense:
1999 $ 138,264
2000 138,733
Commitments:
2001 $ 120,996
2002 120,996
2003 120,996
2004 40,332
------------
Total $ 403,320
============
EMPLOYMENT CONTRACTS -
The Company has entered into five-year employment agreements with three
officers. Each agreement provides for a bonus based on net income of the Company
and for severance payments of three years' annual salary. The agreements expire
in May 2002.
NOTE 7 - RETIREMENT PLANS
The Company has a defined contribution 401(k) profit sharing plan in effect for
its employees who meet certain age and service requirements. Employees may elect
to contribute an amount up to the maximum dollar amount allowed by the IRS. The
Company contributes up to 3% of the employee's salary. Contributions for this
plan were $9,408 for the year ended May 31, 2000. No contribution was made for
the year ended May 31, 1999.
NOTE 8 - STOCK OPTIONS AND WARRANTS
In 1998, the Company approved a stock option plan which allows issuance of stock
options to officers and key employees. The exercise price for each option is to
be no less than 100% of the fair market value of the common stock on the day the
option is granted. Options under this plan have a term of five years. A total of
550,000 shares of common stock have been reserved for this plan. As of May 31,
2000, 359,900 shares remained available to be issued under this plan.
30
<PAGE>
DENTAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 8 - STOCK OPTIONS AND WARRANTS (CONTINUED)
In 2000, the Company also granted stock warrants to officers and consultants of
the Company. These warrants allow the holder to purchase the Company's common
stock at $0.20 per share. The warrants have a term of five years.
No options or warrants were granted during the fiscal year ended May 31, 1999.
The following summarizes transactions for stock options and warrants for the
years ended May 31, 2000 and 1999:
<TABLE>
<CAPTION>
Stock Options Warrants
----------------------------- ------------------------------
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Outstanding at May 31, 1998 18,540 $ .24 - $ -
Exercised (3,084) .35 - -
Expired (458) .35 - -
----------- ------------
Outstanding May 31, 1999 14,998 .21 - -
Issued 190,100 .44 262,500 .20
Exercised (3,333) .16 - -
----------- ------------
Outstanding May 31, 2000 201,765 $ .43 262,500 $ .20
=========== ============
</TABLE>
All stock options and warrants are fully vested and currently exercisable as of
May 31, 2000. Exercise prices of stock options outstanding range from $.19 to
$.44. The weighted average fair value of options and warrants granted during the
year ended May 31, 2000 was $.41 and $.30, respectively. The weighted average
remaining life of all options and warrants outstanding at May 31, 2000 was 4.49
years.
The Company follows the disclosure provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation," but applies APB Opinion No.25, "Accounting for Stock
Issued to Employees" for measurement and recognition of stock-based transactions
with its employees. Compensation expense for stock warrants issued to
non-employee consultants is being expensed over the life of the consulting
agreement. The Company recognized $4,920 of compensation expense for the year
ended May 31, 2000 and will recognize $14,761 and $9,842 of compensation expense
for the years ending May 31, 2001 and May 31, 2002. If the Company had elected
to recognize compensation cost for its stock based transactions with employees
using the method prescribed by SFAS No. 123, net income and earnings per share
would have been as follows at May 31, 2000.
Fair Value of Options and Warrants Issued $ 155,077
Proforma Compensation Expense (Before Taxes) 125,554
Net Income 30,465
Basic Net Income Per Share .02
Diluted Net Income Per Share .01
31
<PAGE>
DENTAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 8 - STOCK OPTIONS AND WARRANTS (CONTINUED)
The fair value of the options and warrants granted was estimated using the
Black-Scholes option pricing model, using the following assumptions:
Risk-Free Interest Rate 6.32%
Expected Life 5 years
Expected Volatility 80.6%
Dividend Yield 0.0%
NOTE 9 - SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company has one reportable segment which is the manufacturing and marketing
of five associated groups of dental related products. The Company's five product
groups are: Proform thermo-forming equipment and supplies, Hygienist chemicals
and consumables, Packaging products, Procure ultraviolet light-cured ovens and
composites, and Pro-flex denture materials. These products are sold worldwide.
The Company does not currently own any assets outside the United States.
Gross revenues by product group are as follows:
<TABLE>
<CAPTION>
Year Ended May 31, 2000
--------------------------------------------------------
Total Domestic Foreign
-------------- -------------- --------------
<S> <C> <C> <C>
Pro-form $ 2,533,187 $ 1,646,571 $ 886,616
Hygienist 802,062 561,444 240,618
Packaging 1,639,578 1,229,683 409,895
Procure 74,570 52,945 21,625
Pro-flex 196,484 170,941 25,543
-------------- -------------- --------------
Totals $ 5,245,881 $ 3,661,584 $ 1,584,297
============== ============== ==============
Year Ended May 31, 1999
--------------------------------------------------------
Total Domestic Foreign
-------------- -------------- --------------
Pro-form $ 1,977,550 $ 1,285,408 $ 692,142
Hygienist 734,876 514,413 220,463
Packaging 1,491,456 1,118,592 372,864
Procure 65,661 46,619 19,042
Pro-flex 213,657 192,292 21,365
-------------- -------------- --------------
Totals $ 4,483,200 $ 3,157,324 $ 1,325,876
============== ============== ==============
</TABLE>
The Company derived 21% of its sales from one customer for each of the years
ended May 31, 2000 and 1999.
32
