SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the year ended December 31, 1998
OR
[ ] Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-21394
Developed Technology Resource, Inc.
Minnesota 41-1713474
State of Incorporation I.R.S. Employer Identification No.
7300 Metro Boulevard, Suite 550
Edina, Minnesota 55439
Address of Principal Executive Office
(612) 820-0022
Issuer's Telephone Number
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value 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 ___ No _X_
Check if no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in the
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB { X }
Issuer's revenues for its most recent year: $1,750,623
As of August 9, 1999, 805,820 shares of the Registrant's Common
Stock were outstanding. The aggregate market value of the Common
Stock held by non-affiliates of the registrant on such date,
based upon the closing bid price of the Common Stock as reported
by the OTC Bulletin Board on August 9, 1999 was $1,218,458. For
purposes of this computation, affiliates of the registrant are
deemed only to be the registrant's executive officers and
directors. See Item 11.
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Developed Technology Resource, Inc. (the Company or DTR) was
incorporated on November 13, 1991 in the State of Minnesota to
locate potentially viable technologies in the former Soviet Union
(fSU) for transfer and sale to companies in the West. During the
first two years of operations, the Company experienced limited
success in technology transfer and shifted its focus to the sale
and distribution of aviation security equipment in the fSU. In
1995, the Company formed a 50/50 joint venture called FoodMaster
Corporation (hereinafter FoodMaster) with Ak-Bulak, a dairy just
outside Almaty, Kazakhstan to produce and sell yogurt and other
dairy products.
During the first quarter of 1996, the Company sold its
aviation security sales and service business to Gate Technologies
for $810,000 which included reimbursement of expenses of $45,000.
This transaction is more fully described in Item 6, "Discontinued
Operations." The financial statements and related information
reflect the sale of this business as discontinued operations.
Additionally, overhead was reduced to the level necessary to
effectively support continuing operations.
After the sale of the aviation security business, the
Company focused its attention almost exclusively on development
of the dairy business in the fSU. Effective August 1996, the
Company obtained an option to purchase 80% of Ak-Bulak, which
went bankrupt subsequent to the establishment of FoodMaster. In
January 1997, FoodMaster formed a joint venture in Akmola (now
called Astana), the new capital of Kazakhstan, and began
production of dairy products at this location in March 1997.
On March 3, 1997, DTR and Agribusiness Partners
International L.P. (API) established the FoodMaster International
LLC (FMI) joint venture to acquire and operate dairies in the
fSU. For a 40% interest in FMI, DTR contributed its 50% ownership
in FoodMaster, the Ak-Bulak option, and its opportunities for a
future acquisition of a dairy in Moldova. Exercise of the Ak-
Bulak option by FMI in March 1997 increased the ownership in
FoodMaster to 90%. API agreed to contribute $6 million dollars
which was paid to FMI between March 1997 and June 1998 to further
develop FMI's existing and future dairy operations in the fSU for
a 60% interest in FMI. On September 11, 1998, DTR and API
amended the FMI joint venture agreement to allow API to
contribute up to an additional $6 million dollars for an
additional 10% ownership. This additional contribution was paid
to FMI between September 1998 and April 1999. As of December 31,
1998, API owned 67% and DTR owned 33% of FMI based on API's
additional investment of $3.8 million. API contributed the
remaining $2.2 million of the additional investment by April 1999
which reduced DTR's ownership to 30%. The investment proceeds
received by FMI were used to fund expansion of existing
facilities and to acquire four additional subsidiaries. DTR has
a right to earn a greater ownership interest in FMI by achieving
certain defined performance targets based on returns to API.
Additionally, DTR manages the day-to-day operations of FMI under
a management contract which has no contractual termination date.
As of December 31, 1998, DTR has a 33% interest in FMI. All
of FMI's subsidiaries are operating plants for manufacturing
dairy products such as milk, yogurt, cheese, and ice cream or
distribution companies to facilitate the distribution of these
products. The following table sets forth FMI's ownership
percentage in its subsidiaries at December 31, 1998 and October
31, 1997:
<PAGE>
December 31, October 31,
Company Name Location 1998 1997
FoodMaster Corporation Almaty, Kazakhstan 90.00% 90.00%
FoodMaster NC* Astana, Kazakhstan 20.00% 0.00%
Fabrica produse lactate Hincesti Hincesti, Moldova 80.50% 73.74%
Soroca Cheese Factory Soroca, Moldova 60.11% 0.00%
JSC Bilosvit-Uman Uman, Ukraine 62.88% 0.00%
FoodMaster Kyiv** Kyiv, Ukraine 100.00% 0.00%
* FoodMaster Corporation owns 60% of FoodMaster NC.
** Denotes distribution company only.
In November 1997, DTR's Board of Directors voted to
establish a wholly-owned subsidiary called SXD, Inc. with an
investment of $800,000 in cash and receivables. SXD owns and
operates DTR's x-ray tube distribution business, and holds a
minority interest in Phygen, Inc., a coating technology business.
In addition, SXD has royalty rights to any patents sold by Armed,
a cancer detection business. As of December 31, 1998, there is
no reportable activity in either Phygen or Armed.
In April 1999, DTR purchased a 67% ownership interest in
Savory Snacks LLC for $123,305. This Wisconsin based company
manages snack food companies in the former Soviet Union.
Ongoing Business Strategy
The Company's strategy is to provide management services
and invest in food businesses in the fSU both by acquiring
additional dairies for FMI and having FMI and other subsidiaries
selling additional products including, but not limited to, dairy
products. The Company plans to invest in and manage companies
that are expected to eventually become market leaders in high
margin products in the areas in which we choose to compete.
This goal will be accomplished by dedication to brand
development, the introduction of "profit products", quality
control and standardization, control of the milk supply, and
training of Company and subsidiary personnel.
Business Operations
Dairy and Food Processing
DTR manages all of the dairy operations and distribution
companies owned by FMI. These dairy operations manufacture and
sell a variety of different dairy products, including but not
limited to kefir, yogurt, cheese, ice cream, ice pops, butter and
sour cream.
From 1995 through February 1997, FoodMaster Corporation
operations were consolidated in DTR's financial statements.
After February 1997, FoodMaster's operations were no longer
reported on a consolidated basis with DTR due to the transfer of
DTR's ownership in FoodMaster to FMI. Beginning in March 1997,
DTR recognizes all of its ownership in dairy operations in its
Statement of Operations under the "Equity in (loss)earnings of
FMI joint venture" and in its Balance Sheet under "Investment in
FMI." In addition, DTR receives management fees for direct
expense reimbursements with the potential to earn a greater
ownership in FMI for reaching defined performance targets. There
is no profit margin in the management fees received and these
fees are reimbursed in accordance with a pre-approved budget
between DTR and FMI.
<PAGE>
X-ray Tubes
The Company distributed x-ray tubes through SXD, Inc. under
an exclusive distribution agreement with Svetlana-Rentgen
("Svetlana"), a company located in the fSU until March 1999.
Revenues from the sale of x-ray tubes accounted for 17.4%, 12.5%
and 8.0% of DTR's total revenues for the year ended December 31,
1998, the two months ended December 31, 1997 and the year ended
October 31, 1997, respectively. There are several companies that
manufacture and sell x-ray tubes in direct competition to DTR.
At present, the Company does not have a measurable market share
and is phasing this division out of its operations.
Food Packaging Equipment
In November 1994, the Company signed an International
Distribution Agreement with NiMCO Corporation of Crystal Lake,
Illinois, granting the Company exclusive rights to sell certain
NiMCO food packaging products in most areas of the fSU. This
exclusivity expired on December 31, 1996. However, DTR
continues to distribute NiMCO food packaging machines out of
Crystal Lake, Illinois on a non-exclusive basis mainly to its
foreign subsidiaries. Sales from food packaging equipment
accounted for 7.8%, 51.9% and 13% of DTR's revenues for the year
ended December 31, 1998, the two months ended December 31, 1997
and the year ended October 31, 1997, respectively.
Competition
Dairy and Food Processing The FMI subsidiary operations compete
with several local companies, as well as foreign importers of
products, under the FMI local brand names of FoodMaster, Alba and
Bilosvit. However, the Company believes that FMI's products are
superior to local competitors and priced competitively with
imports. The FoodMaster name along with the local specialty
brand names are recognized as quality products. In Almaty,
Kazakhstan, FoodMaster's fluid milk products are estimated to
hold a greater than 50% market share.
Food Packaging Equipment Manufacturers producing competing
equipment of similar performance to the NiMCO line of equipment
include Tetra-Laval of Sweden, Elo-Pak of Norway, International
Paper of the United States, Pastu-Pack of the UK, and Galdi of
Italy. Some of these companies have been selling equipment in
the fSU for more than 20 years. The Company does not currently
have a measurable market share. At this time, DTR is not
focusing on selling equipment to parties other than FMI
subsidiaries on an "as needed" basis.
Principal Suppliers
Dairy and Food Processing Suppliers to the dairy operations
consist of numerous dairy farmers located in the vicinity of the
dairies. In addition, FMI receives packaging supplies from many
suppliers throughout Europe and the United States.
Food Packaging Equipment NiMCO, based in Crystal Lake, IL, was
the sole supplier of packaging equipment for dairy based
products.
X-ray Tubes Svetlana Rentgen (Svetlana), based in the fSU, is
the exclusive supplier of tubes. In accordance with its plan to
phase out this operating division, the Company ended its
relationship with Svetlana in March 1999.
<PAGE>
Major Customers
For the year ended December 31, 1998, the two months ended
December 31, 1997 and the fiscal year ended October 31, 1997, the
Company recorded net equipment sales of $440,942, $346,844 and
$2,467,790, respectively. The following table sets forth the
name and location of each customer who accounted for 10% or more
of the Company's sales for 1998 and each period in 1997,
respectively:
Percentage of Sales
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
Customer Name Location 1998 1997 1997
EG&G Astrophysics Long Beach, CA 47.1% 12.5% 9.0%
Control Screening Fairfield, NJ 21.8% 6.9% 1.7%
FoodMaster Int'l LLC Edina, MN 30.5% 40.3% 0.0%
Kostenay Astana, Kazakhstan 0.0% 40.3% 0.0%
Agro-Leasing Almaty, Kazakhstan 0.0% 0.0% 12.9%
Governmental Regulations
The Company's principal revenue-generating business activity
in 1998 and 1997 was managing the FMI subsidiaries' manufacturing
and selling of dairy products in the fSU. The governmental,
political, social, and legal structures within countries of the
fSU are evolving. In general, business must comply with decrees,
laws, and instructions issued from a multitude of government
bodies at the national and local levels.
The government regulations that most affect the Company are
in the areas of taxation, currency and customs regulation,
business registration, and labor laws. To the best of
management's knowledge, the Company is in full compliance with
the laws in all the countries of the fSU in which business is
conducted, and as necessary, may seek legal counsel in the United
States or from local counsel in the applicable fSU country.
Employees
As of August 9, 1999, the Company had four full-time
employees in its offices in Edina, Minnesota; one full-time
employee in Almaty, Kazakhstan; three full-time employees in
Hincesti, Moldova; and three full-time employees in Kyiv,
Ukraine. All of the foreign-based employees are responsible for
managing the dairy and financial operations of the FMI
subsidiaries. The Company is not a party to any collective
bargaining agreements and it considers its employee relations to
be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
During 1997, the Company moved its corporate headquarters
from Minnetonka, Minnesota to Edina, Minnesota. This move
allowed the Company to reduce its space from 2,139 to 1,009
square feet and its monthly base rent from approximately $2,900
to $1,600. The lease has a term of 60 months and expires on April
30, 2002.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In 1996, the Company filed suit against a former officer for
breach of contract. The employee filed a counterclaim for breach
of the severance agreement. In December 1996, the lawsuit was
settled with the former officer relinquishing 48,190 shares of
the Company's Common Stock to satisfy a $29,035 receivable. DTR
has no contingent or future liability.
In 1996, a former employee filed a claim with the Minnesota
Department of Human Rights and concurrently with the Equal
Employment Opportunity Commission (EEOC), charging the Company
with age and national origin discrimination. In 1997, the
Minnesota Department of Human Rights denied the claim. No
further action has been taken by the former employee since the
Department's decision.
In the opinion of management, there are no material legal
proceedings pending or threatened against the Company as of
December 31, 1998 or as of the date of filing of this Form 10-
KSB.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders
during the fourth quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded on the National
Association of Securities Dealer Automated Quotation System
(NASDAQ) from April 23, 1993 until November 3, 1995, when the
Company was de-listed as a result of noncompliance with minimum
per-share price requirements. After a three-for-one reverse split
in December 1995, the Company was re-listed. In the first
quarter of 1996, the Company fell below the listing requirements
and was again de-listed. Since then, the Company's Common Stock
has been quoted on the OTC Bulletin Board under the symbol of
DEVT.
The following table sets forth the high and low daily
average between the bid and sales prices for each quarter as
reported on the NASDAQ or the OTC Bulletin Board during the year
ended December 31, 1998, the two-month transition period ended
December 31, 1997 and the year ended October 31, 1997.
Average Price
Calendar 1998 Low High
First Quarter $ 2 1/2 $ 3 1/8
Second Quarter 2 1/2 6
Third Quarter 2 9/32 5 1/8
Fourth Quarter 3 6 7/8
2 Months Ended December 31, 1997 1 5/8 2 7/8
<PAGE>
Fiscal 1997
First Quarter $ 0 7/8 $ 1 17/32
Second Quarter 1 1 29/32
Third Quarter 1 3/16 1 7/8
Fourth Quarter 1 7/8 2
As of August 9, 1999, the Company had 56 shareholders of
record of its Common Stock. The Company estimates there are 660
beneficial owners of its Common Stock. The transfer agent for
the Company's Common Stock is Norwest Bank Minnesota, N.A., 161
North Concord Exchange, South St. Paul, Minnesota, 55075-0738,
telephone: (800) 468-9716 or (651) 450-4058.
The Company has never declared nor paid any dividends on its
Common Stock. The Board of Directors presently intends to retain
all earnings, if any, for use in the Company's business in the
foreseeable future. Any future determination as to declaration
and payment of dividends will be made at the discretion of the
Board of Directors.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements other than current or historical information
included in this Management's Discussion and Analysis and
elsewhere in this Form 10-KSB, in future filings by Developed
Technology Resource, Inc. (the Company or DTR) with the
Securities and Exchange Commission and in DTR's press releases
and oral statements made with the approval of authorized
executive officers, should be considered "forward-looking
statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. DTR
wishes to caution the reader not to place undue reliance on any
such forward-looking statements.
On March 3, 1997, DTR and Agribusiness Partners
International L.P. (API) established the FoodMaster International
LLC (FMI) joint venture to acquire and operate dairies in the
fSU. For a 40% interest in FMI, DTR contributed its 50% ownership
in FoodMaster, the Ak-Bulak option, and its opportunities for a
future acquisition of a dairy in Moldova. Exercise of the Ak-
Bulak option by FMI in March 1997 increased the ownership in
FoodMaster to 90%. API agreed to contribute $6 million dollars
which was paid to FMI between March 1997 and June 1998 to further
develop FMI's existing and future dairy operations in the fSU for
a 60% interest in FMI. On September 11, 1998, DTR and API
amended the FMI joint venture agreement to allow API to
contribute up to an additional $6 million dollars for an
additional 10% ownership. This additional contribution was paid
to FMI between September 1998 and April 1999. As of December 31,
1998, API owned 67% and DTR owned 33% of FMI based on API's
additional investment of $3.8 million. API contributed the
remaining $2.2 million of the additional investment by April 1999
which reduced DTR's ownership to 30%. The investment proceeds
received by FMI were used to fund expansion of existing
facilities and to acquire four additional subsidiaries. DTR has
a right to earn a greater ownership interest in FMI by achieving
certain defined performance targets based on returns to API.
Effective March 1997, DTR records its proportionate share
(40% from March 1997 to September 1998 and 33% thereafter) of the
net income or loss of FMI in the statement of operations as
equity in (loss) earnings of FMI joint venture under the equity
method of accounting.
DTR also entered into a management agreement on March 3,
1997 with FMI, whereby DTR manages the day to day operations of
FMI, manages the subsidiaries of FMI, and pursues future dairy
acquisitions for FMI for a management fee. The management fee is
a direct expense reimbursement, with no profit margin, in
accordance with a pre-approved budget between DTR and FMI. Thus,
management fees will increase or decrease as DTR's expenses
incurred for management activities increase or decrease, with no
effect on income because there is no profit margin provided for
in the agreement. There is no stated contractual termination
date in this agreement.
<PAGE>
Two Months Two Months
Year Ended Year Ended Ended Ended
December 31, October 31, December 31, December 31,
1998 1997 1997 1996
Revenues:
FM Kazakhstan $ 0 $1,774,870 $ 0 $809,511
Equipment 137,042 428,890 279,644 (287)
X-Ray Tube 303,900 264,030 67,200 37,800
Total Sales 440,942 2,467,790 346,844 847,024
Management Fee Income 1,281,322 802,492 190,548 0
Other Revenues 28,359 39,761 1,215 8,249
Total Revenues $1,750,623 $3,310,043 $538,607 $855,273
Cost of Sales:
FM Kazakhstan $ 0 $ 871,937 $ 0 $503,042
Equipment 100,499 298,067 216,762 1,684
X-Ray Tube 260,950 228,445 57,600 32,900
Total Cost of Sales $ 361,499 $1,398,449 $274,362 $537,626
Results of Operations
Revenues
The Company generated total revenues of $1,750,623 and
$3,310,043 for the years ended December 31, 1998 and October 31,
1997, and revenues of $538,607 and $855,273 for the two-months
ended December 31, 1997 and 1996. This 47% and 37% respective
decrease in revenues is primarily the result of the change from
the consolidated method of reporting FoodMaster's revenues to
reporting the FMI joint venture operating results under the
equity method as discussed above. In addition, it reflects the
new focus of DTR in managing the FMI joint venture.
Sales for the years ended December 31, 1998 and October 31,
1997 totaled $440,942 and $2,467,790, respectively. Sales for
the two months ended December 31, 1997 and 1996 totaled $346,844
and $847,024, respectively. Sales resulted from three areas
within DTR - dairy operations of FoodMaster (until February 1997
only), equipment sales, and x-ray tube sales.
After February 1997, the dairy operations of FoodMaster are
no longer reported on a consolidated basis with DTR due to the
transfer of FoodMaster to FMI. The dairy operations of
FoodMaster are consolidated in the financial statements of FMI,
and DTR recognizes its share of FMI's income or loss as equity in
earnings (loss) of FMI joint venture in DTR's Statements of
Operations. FoodMaster sales from November 1996 through February
1997 were $1,774,870 or 71.9% of DTR's total sales for the year
ended October 31, 1997. FoodMaster sales from November 1996
through December 1996 were $809,511 or 95.6% of DTR's total sales
for the two months ended December 31, 1996.
For the years ended December 31, 1998 and October 31, 1997,
sales of food packaging equipment were $137,042 (31.1%) and
$428,890 (17.4%) of total sales, respectively. Sales of
equipment occur primarily to subsidiaries of FMI throughout each
year depending on the amount of new customers and growth among
existing locations. Sales of food packaging equipment were
$279,644 (80.6%) of total sales in the two months ended December
31, 1997. There were no sales of equipment in the final two
months of 1996. Sales of equipment occur sporadically
throughout the year and are not necessarily comparable by
periods shorter than one year.
<PAGE>
Sales of x-ray tubes by SXD, Inc., DTR's 100% owned
subsidiary, increased 15% to $303,900 in the year ended December
31, 1998 compared to sales of $264,030 for the year ended
October 31, 1997. The $39,870 increase occurred due to an
increase in the quantity of shipments to repeat customers during
1998. In the two months ended December 31, 1997, sales of x-ray
tubes were $67,200 compared to $37,800 in the two months ended
December 31, 1996. The 78% increase occurred due to the timing
and quantity of orders during this period in 1997.
Management fee revenues (which have no profit margin) billed
to FMI for services was $1,281,322, $190,548 and $802,492 for the
year ended December 31, 1998, the two months ended December 31,
1997 and the year ended October 31, 1997, respectively, in
accordance with its management agreement with FMI. The
management fee began in March 1997. Therefore, the year ended
October 31, 1997 only reflects eight months of management fee
revenues. Management fees (which have no profit margin) are
expected to increase with additional acquisitions by FMI. These
acquisitions require additional management personnel, travel,
training, and other resources.
Cost of Sales
Cost of sales for the years ended December 31, 1998 and
October 31, 1997 were $361,449 and $1,398,449, respectively.
Cost of sales for the two months ended December 31, 1997 and 1996
were $274,362 and $537,626, respectively. This 74% and 49%
decrease in cost of sales is partly the result of the change from
the consolidated method of reporting FoodMaster's revenues to
reporting the FMI joint venture operating results under the
equity method as discussed above, as well as other reasons noted
below. Cost of sales reflects the cost of manufacturing the
dairy products of FoodMaster for the final two months in 1996
through February 1997, and the cost of purchasing food packaging
equipment and x-ray tubes.
FoodMaster cost of sales was $871,937 or 49.1% of sales for
the four-month period from November 1996 through February 1997
during the year ended October 31, 1997. FoodMaster incurred
$503,042 of this cost during the final two months of 1996.
Cost of sales on equipment sales was $100,499 resulting in a
gross profit of 26.7% for the year ended December 31, 1998
compared to a cost of $298,067 and gross profit of 30.5% for the
year ended October 31, 1997. During the two-fiscal month period
ended December 31, 1997, the Company recorded cost of $216,762 on
sales of equipment resulting in a gross profit of $62,882 or
22.5%.
X-ray tubes cost of sales were $260,950 and $228,445 for the
years ended December 31, 1998 and October 31, 1997, respectively,
and $57,600 and $32,900 during the two-month periods ended
December 31, 1997 and 1996, respectively. Gross profit remained
consistent with a 13% to 14% margin received on sales during all
reported periods.
Selling, general and administrative
Selling, general and administrative expenses for the year
ended December 31, 1998 were $1,391,611 compared to $1,382,334
for the year ended October 31, 1997. FoodMaster comprised
$515,491 of the SG&A expense in 1997. Therefore, the Company's
other SG&A expenses in 1997 excluding the FoodMaster operations
were $866,843. The $524,768 increase in SG&A expenses excluding
FoodMaster operations is the result of DTR hiring additional
employees and consultants and increasing their travel to manage
the dairy operations of FMI. However, these costs are offset by
the management fees billed to FMI as discussed above under
Revenues.
<PAGE>
Selling, general and administrative expenses for the two
months ended December 31, 1997 were $206,004 compared to $329,119
for the two months ended December 31, 1996. During the two months
of 1996, FoodMaster operations comprised $260,859 of the $329,119
SG&A expenses. Therefore, the Company's other SG&A expenses in
1996 excluding the FoodMaster operations was $68,260. The
$137,744 increase in SG&A expenses excluding FoodMaster
operations is the result of that mentioned above.
Discontinued Operations
Effective December 31, 1995, DTR entered into an agreement
to sell certain assets and the rights to its airport security
equipment in the fSU to Gate Technologies, Inc., a United Kingdom
company owned by a former DTR employee. DTR transferred assets,
inventory, customer lists, promotional materials, and other items
with a net book value on January 31, 1996 of $143,293. In
exchange for these items, DTR received a cash payment of $45,000
to reimburse DTR for expenses related to this business during the
first quarter of 1996 and a note receivable totaling $765,000
payable over 30 months. A portion of these payments is
personally guaranteed by the former employee, and is
collateralized by 16,430 shares of DTR's common stock owned by
the former employee. Additional contingent payments may also be
received based on future performance. DTR retained the right to
pursue airport security management contracts.
Due to the inherent risks associated with operating in the
fSU, including credit risk, the gain on this sale has been
deferred and will be recognized as payments are received. DTR
received total payments of $200,000 during the year ended October
31, 1997. As a result, DTR recorded a gain on discontinued
operations of $200,000 for the year ended October 31, 1997. This
gain on the sale is presented as discontinued operations in the
statements of operations.
In August 1997, the Board of Directors approved a revision
in the sale agreement that increased the balance due to DTR by
$40,000 representing interest on the outstanding balance. The
increase in the receivable balance was accounted for as an
increase in deferred gain. In addition, the payment terms were
revised to require two payments in 1998 with the final payment
due on January 1, 1999.
No payments were received during the year ended December 31,
1998 or during the two-month transition period ended December 31,
1997. Due to the buyer's deliquency in payment and the limited
success of the business that was sold, management reduced the
receivable and the related deferred gain recorded on its balance
sheet by $280,000 at December 31, 1998. The remaining receivable
balance of $200,000 is partially offset by a current deferred
gain of $181,707 at December 31, 1998.
Liquidity and Capital Resources
Operating Activities
DTR increased its cash used in operating activities to
$181,069 during the year ended December 31, 1998 compared to
cash used of $137,571 for the year ended October 31, 1997. The
increase in cash used was primarily due to a reduction in
operating income by approximately $525,000 offset by cash flows
from reducing operating assets.
DTR received $473,520 from operating activities in the
final two months of 1997. This was achieved by receiving a net
$207,781 from FMI in payment for DTR's management fees and
increasing payables by $180,168.
<PAGE>
Investing Activities
In the two months ended December 31, 1997, DTR's 100% owned
subsidiary, SXD, Inc. used $500,000 of its cash to invest in an
unsecured note receivable from an unaffiliated private company.
This investment was returned in 1998 with approximately $199,000
in interest income. During the year ended December 31, 1998,
SXD, Inc. loaned $600,000 to invest in an unsecured note
receivable from another unaffiliated private company. SXD
expects to receive this principal plus interest on its
investment in the fourth quarter of 1999. DTR also purchased
$21,945 in new software and equipment for its office in
Minneapolis, MN in 1998. In addition, the Company received a
$500,000 repayment on the note outstanding at December 31, 1997.
During the year ended October 31, 1997, cash used in investing
activities primarily related to purchases and sales of equipment
by FoodMaster in the beginning of the year.
Financing Activities
In the first quarter of 1998, options to purchase 15,000
shares of DTR's Common Stock were exercised for a purchase price
of $1.50 per share. There were no financing activities during
the two-month transition period ended December 31, 1997. During
the year ended October 31, 1997, DTR's FoodMaster operations
made principal payments of $8,900 on a $70,910 bank loan
obtained in 1996. After this period, the FoodMaster cash flows
were consolidated with FMI in accordance with the transfer
discussed above.
Year 2000
The Company has been addressing Year 2000 (Y2k) issues.
Since the Company is not a direct manufacturer of products and
since all of its assets are less than six years old, most of its
exposure to the Y2k issue falls in the area of third parties.
All of the Company's information technology systems are Y2k
compliant, but the Company is still determining the effect on non-
information technology systems. The Company plans to be Y2k
compliant by October 1999.
The Company does not believe that the costs related to the
Y2k issue will be greater than $25,000 due to the reasons stated
above. The Company may use these funds for an outside consultant
to provide an evaluation of its entire system.
The most risk that the Company faces in its operations is
that of the failure of third party vendors to be ready for the
Y2k. The most direct risk could be a failure on the part of
telecommunication companies, which would impede the daily
communication between the Company and its subsidiaries.
Indirectly, the subsidiaries could experience a failure to
receive timely shipments of supplies which would result in a loss
of an indeterminable amount of revenues.
The Company is currently developing its contingency plan for
the aforementioned risks. It expects to have this plan fully
created by October 1999.
In addition, the Company is currently developing a
contingency plan for FMI and its subsidiaries. Based on a
preliminary evaluation, the effects on the manufacturing
operations are not fully determinable. However, the
manufacturing subsidiaries have working generators that can
support the operations in the event of power failures and all
subsidiary computer operations are expected to be Y2k compliant
by November 1999.
<PAGE>
Adverse Foreign Economic and Currency Conditions
Since August 1998, the countries of the fSU in which the
subsidiaries of FMI operate have faced a series of adverse
economic conditions. Uncertainties regarding the political,
legal, tax or regulatory environment, including the potential for
adverse and retroactive changes in any of these areas could
significantly affect the Company and the carrying value of its
investment in the FMI joint venture. The countries have seen a
significant devaluation of their local currency against the US
dollar, higher interest rates and reduced opportunities for
financing. DTR is committed to working with FMI's subsidiaries
to focus production on profitable products and to address working
capital shortages as needed over the coming year. In July 1999,
FMI sold 10% of its consolidated Kazakhstan operations for cash
of $1.8 million and it converted $1.8 million of its loans to the
Kazakhstan subsidiaries to equity so that its ownership would not
be diluted. This cash infusion was used to pay DTR's management
fees in 1999.
Based on management's current projections for FMI and the
receipt of the $6 million additional investment from API into
FMI, the Company believes that the carrying value of its
investment in FMI at December 31, 1998 is not permanently
impaired and that DTR has sufficient working capital and
liquidity to fund its current operations through the coming year.
Management is continually looking for opportunities for growth.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS - DEVELOPED TECHNOLOGY RESOURCE,
INC.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
DEVELOPED TECHNOLOGY RESOURCE, INC.
Edina, Minnesota
We have audited the accompanying balance sheet of Developed
Technology Resource, Inc. (the Company) as of December 31, 1998,
and the related statements of operations, shareholders' equity
and cash flows for the year ended December 31, 1998, the two-
month transition period ended December 31, 1997 and the year
ended October 31, 1997. These financial statements are the
responsibility of the Company's management. We did not audit the
1998 financial statements of S.A. Fabrica de brinzeturi din
Soroca, S.A. Fabrica de produse lactate din Hancesti, and
FoodMaster Kyiv, three partially-owned subsidiaries of FoodMaster
International L.L.C. (FMI), a joint venture of the Company which
is accounted for by the equity method. The Company's equity
interest in these three FMI subsidiaries' net assets of
approximately $650,000 at December 31, 1998 and net loss of
approximately $102,000 for the year ended December 31, 1998 are
included in the Company's accompanying financial statements.
Each of the financial statements of FMI's three partially-owned
subsidiaries were audited by other auditors whose reports dated
April 30, 1999, April 30, 1999 and April 16, 1999, respectively,
included explanatory paragraphs disclosing that such financial
statements were prepared assuming that each of the three
partially-owned subsidiaries would continue as going concerns
despite suffering losses, having accumulated deficits or current
liabilities which exceed current assets at December 31, 1998
combined with the uncertainty due to the Year 2000 issue and the
current economic environment in Moldova and Ukraine,
respectively, all of which raise substantial doubt about each of
their ability to continue as a going concern. The financial
statements for each of the three partially-owned subsidiaries of
FMI which do not include any adjustments that might result from
the outcome of these uncertainties, have been furnished to us,
and our opinion, insofar as it relates to the amounts included
for such companies, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted
auditing standards. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other
auditors, the Company's financial statements present fairly, in
all material respects, the financial position of Developed
Technology Resource, Inc. as of December 31, 1998 and the results
of its operations and its cash flows for the year ended December
31, 1998, the two-month transition period ended December 31, 1997
and the year ended October 31, 1997 in conformity with generally
accepted accounting principles.
The Company's accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements and
in the reports of the other auditors as described above, there
are significant uncertainties which raise substantial doubt about
the Company's ability to continue as a going concern. The
financial statements of the Company do not include any
adjustments that might be necessary as a result of these
uncertainties.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
September 3, 1999
<PAGE>
<TABLE>
<CAPTION>
DEVELOPED TECHNOLOGY RESOURCE, INC.
BALANCE SHEET
December 31, 1998
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 5,412
Receivables:
Trade, net of allowance of $12,690 129,169
Sale of discontinued operations 200,000
FoodMaster International L.L.C. (FMI) 611,080
Other 4,000
Note receivable 600,000
Prepaid and other current assets 158,798
Total current assets 1,708,459
Furniture and Equipment, net 43,794
Investment in FMI 991,699
$2,743,952
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 241,458
Accrued liabilities 163,761
Deferred gain 187,065
Total current liabilities 592,284
Non-current Deferred Gain 33,627
Shareholders' Equity:
Undesignated stock, $.01 par value, 1,666,667
shares authorized, no shares issued or
outstanding --
Common stock, $.01 par value, 3,333,334
shares authorized, 805,820 shares issued
and outstanding 8,058
Additional paid-in capital 5,956,323
Accumulated deficit (3,846,340)
Total shareholders' equity 2,118,041
$2,743,952
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
DEVELOPED TECHNOLOGY RESOURCE, INC.
STATEMENTS OF OPERATIONS
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1998 1997 1997
<S> <C> <C> <C>
Revenues:
Sales $ 440,942 $ 346,844 $ 2,467,790
Management fees from FMI
joint venture 1,281,322 190,548 802,492
Commissions and other income 28,359 1,215 39,761
1,750,623 538,607 3,310,043
Cost and expenses:
Cost of sales 361,449 274,362 1,398,449
Selling, general and administrative 1,391,611 206,004 1,382,334
1,753,060 480,366 2,780,783
Operating (loss) income (2,437) 58,241 529,260
Other income:
Interest income, net 202,027 17,194 12,059
Equity in (loss) earnings of FMI
joint venture (386,088) (25,672) 62,650
(Loss) income from continuing operations before
income taxes and minority inte (186,498) 49,763 603,969
Income tax expense -- -- --
(Loss) income from continuing operations
before minority interest (186,498) 49,763 603,969
Minority interest in earnings of FoodMaster -- -- (93,553)
(Loss) income from continuing operations (186,498) 49,763 510,416
Gain from discontinued operations -- -- 200,000
Net (Loss) Income $ (186,498) $ 49,763 $ 710,416
Continuing (Loss) Income per Common Share:
Basic $ (0.23) $ 0.06 $ 0.64
Diluted $ (0.23) $ 0.05 $ 0.58
Discontinued (Loss) Income per Common Share:
Basic $ -- $ -- $ 0.25
Diluted $ -- $ -- $ 0.23
Net (Loss) Income per Common Share:
Basic $ (0.23) $ 0.06 $ 0.89
Diluted $ (0.23) $ 0.05 $ 0.81
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
DEVELOPED TECHNOLOGY RESOURCE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1998 and October 31, 1997 and
Two-Month Transition Period Ended December 31, 1997
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1996 839,010 $ 8,390 $ 5,347,851 $(4,420,021) $ 936,220
Redemption of shares
in exchange for
accounts receivable (48,190) (482) (28,553) -- (29,035)
Net income -- -- -- 710,416 710,416
Balance, October 31, 1997 790,820 7,908 5,319,298 (3,709,605) 1,617,601
Net income -- -- -- 49,763 49,763
Balance, December 31, 1997 790,820 7,908 5,319,298 (3,659,842) 1,667,364
Exercise of options 15,000 150 22,350 -- 22,500
Sale of interest in FMI
joint venture -- -- 614,675 -- 614,675
Net loss -- -- -- (186,498) (186,498)
Balance, December 31, 1998 805,820 $ 8,058 $ 5,956,323 $(3,846,340) $ 2,118,041
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
DEVELOPED TECHNOLOGY RESOURCE, INC.
STATEMENTS OF CASH FLOWS
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1998 1997 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (Loss) Income $ (186,498) $ 49,763 $ 710,416
Adjustments to Reconcile Net
Income to Cash Provided/(Used)
by Operating Activities:
Depreciation 14,915 4,432 39,390
Provision for doubtful accounts 2,182 -- (224,492)
(Gain)loss on sale of furniture and
equipment 1,217 2,088 (2,541)
Gain on sale of discontinued operations -- -- (200,000)
Minority interest in earnings of
joint venture -- -- 93,553
Equity in loss (earnings) of FMI
joint venture 386,088 25,672 (62,650)
Changes in Operating Assets and Liabilities,
net of transfers to joint venture:
Receivables (53,768) 135 212,826
Receivable from FMI joint venture (239,279) 207,782 (625,727)
Inventories -- -- (226,517)
Prepaid and other current assets (100,511) 4,694 40,570
Accounts payable and accrued liabilities (56) 180,168 220,894
Deferred gains (5,359) (1,214) (68,417)
Customer deposits -- -- (44,876)
Net cash (used) provided by
operating activities (181,069) 473,520 (137,571)
INVESTING ACTIVITIES:
Proceeds from sale of furniture
and equipment 1,400 -- 81,438
Purchases of furniture and equipment (21,945) (435) (294,751)
Proceeds from note receivable 500,000 -- --
Issuance of note receivable (600,000) (500,000) --
Deferred acquisition costs -- -- 35,616
Net cash used by investing activities (120,545) (500,435) (177,697)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 22,500 -- --
Principal payments on note payable -- -- (8,900)
Net cash provided (used) by financing
activities 22,500 -- (8,900)
DECREASE IN CASH AND CASH EQUIVALENTS (279,114) (26,915) (324,168)
CASH AND CASH EQUIVALENTS,
Beginning of period 284,526 311,441 635,609
CASH AND CASH EQUIVALENTS,
End of period $ 5,412 $ 284,526 $ 311,441
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
DEVELOPED TECHNOLOGY RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998 and October 31, 1997 and
Two-Month Transition Period Ended December 31, 1997
1. Summary of Significant Accounting Policies
Business
Developed Technology Resource, Inc. (DTR or the Company)
invests in and manages dairy and distribution operations in
the countries of the former Soviet Union (fSU) through
FoodMaster International L.L.C. (FMI), its joint venture with
Agribusiness Partners International L.P. (API). In addition to
managing FMI, DTR sells packaging equipment and manages the
operations of its 100% owned subsidiary, SXD, Inc.
During 1998, SXD, Inc. distributed X-ray tubes under DTR's
exclusive agreement with a Russian manufacturer, issued
unsecured short-term loans, and held ownership interests in
the coatings technology business of Phygen, Inc. and the
cancer detection business of Armed which had no reportable
business activity during 1998 or 1997. The x-ray tube
distribution agreement expired in March 1999 and the company
is phasing out this operation during 1999.
Going Concern Considerations
Since August 1998, the countries of the fSU, in which the
subsidiaries of FMI operate, have faced a series of adverse
economic conditions. Uncertainties regarding the political,
legal, tax or regulatory environment, including the potential
for adverse and retroactive changes in any of these areas
could significantly affect the Company. The countries have
seen a significant devaluation of their local currency against
the US dollar, higher interest rates and reduced opportunities
for financing. As a result of these situations, several of
the subsidiaries have suffered significant losses in 1998 and
carry an accumulated deficit at December 31, 1998. DTR is
committed to working with FMI's subsidiaries to focus
production on profitable products and to address working
capital shortages as needed over the coming year.
The year 2000 (Y2k) issue arises because many computerized
systems use two digits rather than four to identify a year.
Date sensitive systems may recognize the year 2000 as 1900 or
some other date, resulting in errors when information using
the Y2k date is processed. The effects of the Y2k issue may
be experienced before, on, or after January 1, 2000 and if not
addressed, the impact on operations and financial reporting
may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal
business operations. It is not possible to be certain that
all aspects of the Y2k issue affecting the Company, including
those relating to the efforts of customers, suppliers, or
other third parties, will be fully resolved. Due to the nature
of the subsidiaries' equipment and relative compliance with
Y2k in its computerized systems, no serious interruptions in
production or financial processing are expected. The direct
risks are those resulting from the general economic
environment, and relationships with suppliers and customers.
Change in Fiscal Year
The Company changed its fiscal year end from October 31 to
December 31 in order to correspond with the calendar year end
of its subsidiaries and FMI joint ventures. As a result, the
accompanying financial statements report the two-month
transition period results from November 1, 1997 to December
31, 1997 in addition to the years ended December 31, 1998 and
October 31, 1997.
<PAGE>
Basis of Presentation
From 1995 through February 1997, the financial statements
include the operations of DTR and FoodMaster Corporation
(FoodMaster), DTR's 50% owned subsidiary in Almaty,
Kazakhstan. All significant intercompany transactions and
balances have been eliminated in consolidation. On March 3,
1997, DTR contributed its 50% ownership of FoodMaster to the
FMI joint venture for a 40% ownership in FMI. Effective March
1997, DTR records its proportionate share of the net income or
loss of FMI in the statements of operations as equity in
earnings of FMI joint venture under the equity method of
accounting. The excess of DTR's underlying equity in net
assets of FMI over the carrying value of its investment
($2,873,726 at December 31, 1998, net of accumulated
amortization) is being amortized to income over 15 years.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid
investments with original maturities of three months or less
at the time of purchase.
The Company maintains its cash in bank deposit accounts, which
at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is
calculated on the straight-line basis over the estimated
useful lives of the assets, primarily three to five years.
Revenue Recognition
Revenue is recognized upon shipment of products to customers
and as services are provided to FMI under the management
agreement.
Net (Loss) Income per Common Share
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(FAS) No. 128, Earnings Per Share, which was required to be
adopted by DTR in 1998. This statement also required any
prior periods to be restated.
Net (loss) income per common share is computed by dividing net
(loss) income by the weighted average number of common and
common equivalent shares outstanding during the year. Under
the new standard for calculating basic net income (loss) per
share, the dilutive effect of stock options and warrants is
eliminated. However, stock options and warrants are included
in the calculation of diluted net income per share when the
result is dilutive.
Segment Reporting
In June 1997, the FASB issued FAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This
statement is effective for years beginning after December 15,
1997. The Company evaluated this statement and determined
that no additional disclosures about segments were necessary.
The Company does not manage based on operating segments.
Use of Estimates
The preparation 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 at the date of the financial
statements and reported amounts of revenues and expense during
the reporting period. Actual results could differ from those
estimates.
<PAGE>
Financial Instruments
FAS No. 107, Disclosures about Fair Value of Financial
Instruments, requires disclosure of fair value information
about financial instruments. Fair value estimates discussed
herein are based upon certain market assumptions and pertinent
information available to management as of December 31, 1998.
The respective carrying value of financial instruments
approximated their fair values. These financial instruments
include cash and cash equivalents, trade receivables, notes
receivable, accounts payable and accrued liabilities. Fair
values were assumed to approximate carrying values for these
financial instruments since they are short-term in nature and
their carrying amounts approximate fair values or they are
receivable or payable on demand.
New Accounting Standards
In June 1997, the FASB issued FAS No. 130, Reporting
Comprehensive Income, which establishes standards for
reporting and display of comprehensive income and its
components in a full set of general purpose financial
statements. Comprehensive income includes all changes in
shareholders' equity except those resulting from investments
by and distributions to owners. FAS No. 130 is not currently
applicable for the Company because the Company did not have
any items of other comprehensive income in any of the periods
presented.
In June 1998, the FASB issued FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement
is effective for fiscal quarters of all years beginning after
June 15, 2000. The Company has not yet evaluated the full
impact of adoption.
2.Ak-Bulak Option
Effective August 1996, the Company obtained an option to
purchase 80% of Ak-Bulak, an inactive company which owned the
other 50% of the FoodMaster joint venture. To exercise the
option, the Company agreed to pay certain pre-defined
outstanding debts of Ak-Bulak and to make capital improvements
to the dairy owned by FoodMaster. As of March 2, 1997, DTR
had paid $171,774 in connection with the exercise of this
option. On March 3, 1997, DTR contributed its 50% ownership
in FoodMaster along with this option to the FMI joint venture.
FMI repaid DTR for all but $14,045 of the costs paid through
March 2, 1997 to exercise the option (See Note 3).
3.Investment in FoodMaster International L.L.C. (FMI)
On March 3, 1997, DTR and API established the FMI joint
venture to acquire and operate dairies in the fSU. For a 40%
interest in FMI, DTR contributed its 50% ownership in
FoodMaster, the Ak-Bulak option (See Note 2), and its
opportunities for a future acquisition of a dairy in Moldova.
Exercise of the Ak-Bulak option by FMI in March 1997 increased
the ownership in FoodMaster to 90%. API agreed to contribute
$6 million dollars which was paid to FMI between March 1997
and June 1998 to further develop FMI's existing and future
dairy operations in the fSU for a 60% interest in FMI. On
September 11, 1998, DTR and API amended the FMI joint venture
agreement to allow API to contribute up to an additional $6
million dollars for an additional 10% ownership. This
additional contribution was paid to FMI between September 1998
and April 1999. As of December 31, 1998, API owned 67% and
DTR owned 33% of FMI based on API's additional investment of
$3.8 million. API contributed the remaining $2.2 million of
the additional investment by April 1999 which reduced DTR's
ownership to 30%. The investment proceeds received by FMI
were used to fund expansion of existing facilities and to
acquire four additional subsidiaries. DTR has a right to earn
a greater ownership interest in FMI by achieving certain
defined performance targets based on returns to API.
<PAGE>
Effective March 1997, DTR records its proportionate share (40%
from March 1997 to September 1998 and 33% thereafter) of the
net loss or income of FMI in the statement of operations as
equity in (loss) earnings of FMI joint venture under the
equity method of accounting.
DTR also entered into a management agreement on March 3, 1997
with FMI, whereby DTR manages the day to day operations of FMI
and the dairy operations owned by FMI, and pursues future
dairy acquisitions for FMI for a management fee. The
management fee is a direct expense reimbursement, with no
profit margin, in accordance with a pre-approved budget
between DTR and FMI. Thus, management fees will increase or
decrease as DTR's expenses incurred for management activities
increase or decrease, with no effect on income because there
is no profit margin provided for in the agreement. There is
no stated contractual termination date in this agreement. The
Company recorded management fee revenue of $1,281,322,
$190,548 and $802,492 for the year ended December 31, 1998,
the two months ended December 31, 1997 and the year ended
October 31, 1997, respectively, in accordance with its
management agreement with FMI.
Summarized financial information from the audited financial
statements of FMI accounted for on the equity method is as
follows:
December 31, 1998
Current assets $5,991,784
Total assets 17,289,249
Current liabilities 4,212,351
Noncurrent liabilities 1,363,486
Joint-venture equity 11,713,412
DTR's 33% share of FMI 's equity 3,865,426
DTR's negative goodwill (2,873,727)
DTR's carrying value of FMI's equity 991,699
<TABLE>
<CAPTION>
Two Months Eight Months
Year Ended Ended Ended
December 31, December 31, October 31,
1998 1997 1997
<S> <C> <C> <C>
Sales $20,366,221 $ 1,419,478 $ 6,784,384
Gross profit 5,271,770 (142,061) 2,504,523
Net loss (1,724,330) (155,121) (207,138)
DTR's share of FMI's loss before
amortization of DTR's negative
goodwill (604,345) (62,048) (82,855)
DTR's share of equity in loss of
FMI joint venture after
amortization of negative goodwill (386,088) (25,672) 62,650
</TABLE>
4.Note Receivable
On December 3, 1998, SXD made a loan and received a $600,000,
unsecured, convertible promissory note with an unrelated third
party. All principal together with accrued interest of 8% per
annum was due and payable on March 15, 1999. This note has
been extended to November 30, 1999 to allow the debtor
additional time to raise funds and repay the note.
<PAGE>
5.Furniture and Equipment
Furniture and equipment are summarized as follows:
Estimated
Useful Life
Software 5 years $ 10,512
Furniture & equipment 5 years 120,493
Leasehold improvements 5 years 4,982
135,987
Less accumulated depreciation 92,193
Furniture and equipment, net $ 43,794
6.Discontinued Operations
Effective December 31, 1995, DTR entered into an agreement to
sell certain assets and the rights to its airport security
equipment in the fSU to Gate Technology, a United Kingdom
company owned by a former DTR employee. DTR transferred
assets, inventory, customer lists, promotional materials, and
other items with a net book value on January 31, 1996 of
$143,293. In exchange for these items, DTR received a cash
payment of $45,000 to reimburse DTR for expenses related to
this business during the first quarter of 1996 and a note
receivable totaling $765,000 payable over 30 months. A
portion of these payments is personally guaranteed by the
former employee, and is collateralized by his ownership of
16,430 shares of DTR's common stock. Additional contingent
payments may also be received based on future performance.
DTR retained the right to pursue airport security management
contracts.
Due to the inherent risks associated with operating in the
fSU, including credit risk, the gain on this sale has been
deferred and will be recognized as payments are received. DTR
received total payments of $200,000 during the year ended
October 31, 1997. As a result, DTR recorded a gain on
discontinued operations of $200,000 for the year ended October
31, 1997. This gain on the sale is presented as discontinued
operations in the statements of operations.
In August 1997, the Board of Directors approved a revision in
the sale agreement that increased the balance due to DTR by
$40,000 representing interest on the outstanding balance. The
increase in the receivable balance was accounted for as an
increase in deferred gain. In addition, the payment terms
were revised to require two payments in 1998 with the final
payment due on January 1, 1999.
No payments were received subsequent to January 1, 1999,
during the year ended December 31, 1998 or during the two-
month transition period ended December 31, 1997. Due to the
buyer's deliquency in payment and the limited success of the
business that was sold, management reduced the receivable and
the related deferred gain recorded on its balance sheet by
$280,000 at December 31, 1998. The remaining balance of
$200,000 is still recorded as a receivable and is offset by a
$181,707 deferred gain at December 31, 1998.
7.Commitments & Contingencies
Leases
The Company leases its office facilities under a five-year
operating lease that expires on April 30, 2002. The following
schedule sets forth the future minimum rental payments
required under the operating lease:
<PAGE>
Year Ending Operating
December 31, Leases
1999 18,919
2000 19,423
2001 19,928
2002 10,090
$ 86,774
Rent expense was $66,911, $8,059, and $25,500 for the year
ended December 31, 1998, the two-month transition period ended
December 31, 1997 and the year ended October 31, 1997,
respectively. Rent expense exceeds the amount shown in the
above operating lease commitments due to apartment rentals for
ex-pat employees on a month-to-month basis. These rental fees
are charged back to FMI through the management fee each month.
8.Stock Options and Warrants
Under the Company's 1992 Stock Option Plan (the Plan), the
Board of Directors may grant qualified or nonqualified options
for up to 66,667 shares of common stock to employees and non-
employees. Options granted to employees generally vest over a
five year period. Certain options granted to employees
contain provisions whereby vesting is accelerated in the event
the employee is terminated without cause as defined in the
option agreements. Options granted to non-employees vest
equally over one year after the date of grant and are
exercisable for ten years from the date of grant. Effective
September 30, 1996, the Plan was amended to increase the
shares available for granting to 600,000 shares.
On November 6, 1997, the Board of Directors adopted the 1997
Outside Directors Stock Option Plan, superseding the 1993
Outside Directors Stock Option Plan. Under the terms of this
plan, the Company reserved 100,000 shares of common stock for
issuance to outside directors as compensation for their
services as board members. In exchange for the surrender of
all stock options previously granted to the outside directors,
the Board granted stock options under the new plan for 15,000
shares of common stock at an exercise price of $1.50 per share
to the current outside directors. Options for the purchase of
shares are issued to the directors each year upon their
election at the annual shareholders meeting and vest quarterly
throughout the year. The number of options granted each year
is determined by the Board of Directors and the option price
will be set as the average between the bid and ask prices of
the Company's Common Stock on the date of issuance.
The Company applies APB Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting
for the above employee plans. Under the provisions of APB
Opinion 25, if options are granted or extended at exercise
prices less than fair market value, compensation expense is
recorded for the difference between the grant price and the
fair market value at the date of the grant.
FAS No. 123, Accounting for Stock Based Compensation, requires
the Company to provide pro- forma information regarding net
income and per share amounts as if compensation cost for the
Company's stock options had been determined in accordance with
the fair value based method prescribed by FAS No. 123. The
Company estimates the fair value of each stock option at the
grant date by using a Black-Scholes option-pricing model. The
following assumptions were used for options issued during the
periods:
<PAGE>
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1998 1997 1997
Dividend Yield None None None
Volatility 105.5 - 115.3% 119.4 - 132.8% 102.6 - 120.8%
Risk Free Interest Rate 5.8% - 5.9% 5.6% - 5.7% 6%
Expected Lives in Months 30 - 120 3 - 30 18 - 120
Had compensation costs been determined based on the fair value
of options at their grant dates in accordance with FAS No.
123, the Company would have shown the following effect:
Decrease in Net Income $ 122,000 $ 33,150 $ 98,567
Decrease in EPS Basic 0.15 0.04 0.12
Decrease in EPS Diluted 0.10 0.03 0.11
The following table summarizes the information about the
Company's warrant and stock option activity for the year ended
December 31, 1998, the two-month transition period ended
December 31, 1997 and the year ended December 31, 1997:
<TABLE>
<CAPTION>
Outside Weighted-
1992 Stock Option Plan Directors Average
Employee Stock Option Exercise
Warrants Options Plan Total Price/Share
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1996 46,667 542,416 10,001 599,084 $ 2.90
Cancelled/expired/
or surrendered (18,334) (17,416) (3,333) (39,083) $11.84
Granted -- 85,000 3,334 88,334 $ 1.23
Balance, October 31, 1997 28,333 610,000 10,002 648,335 $ 2.22
Surrendered -- -- (10,002) (10,002) $ 2.07
Granted -- -- 30,000 30,000 $ 1.50
Balance, December 31, 1997 28,333 610,000 30,000 668,333 $ 2.19
Expired (28,333) (6,667) -- (35,000) $18.14
Exercised -- -- (15,000) (15,000) $ 1.50
Granted -- 35,000 10,000 45,000 $ 2.85
Balance, December 31, 1998 -- 638,333 25,000 663,333 $ 1.41
Exercisable, December 31, 1998 -- 235,333 25,000 260,333 $ 1.50
</TABLE>
<PAGE>
The following table summarizes information about the Company's
stock plans at December 31, 1998:
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Price at 12/31/98 Life (years) Price at 12/31/98 Price
$1.19 to $1.50 600,000 7.33 $1.23 232,000 $1.24
$2.75 to $3.125 58,333 5.04 2.88 23,333 3.00
$6.75 5,000 .41 6.75 5,000 6.75
663,333 260,333
9.Stock Redemption
In December 1996, 48,190 shares of common stock were redeemed
in exchange for the satisfaction of a $29,035 account
receivable owed by a former employee.
10.Income Taxes
The Company utilizes the liability method of accounting for
income taxes as set forth in FAS No. 109, Accounting for
Income Taxes. FAS No. 109 requires an asset and liability
approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial
statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Deferred income tax assets and liabilities were as follows:
December 31,
1998
Deferred tax asset $1,060,000
Deferred tax liabilities (6,500)
Valuation allowance (1,053,500)
--
Deferred income tax assets and liabilities consist primarily
of net operating loss (NOL) carryforwards and the allowance
for doubtful accounts, and differences between the financial
and tax basis of furniture and equipment, respectively.
At December 31, 1998, the Company had NOL carryforwards of
approximately $2,932,000 for income tax purposes. The NOL
carryforwards expire in years 2007 through 2011 if not
previously utilized. Utilization of the available NOL
carryforward may be limited due to future significant changes
in ownership under Internal Revenue Codes Section 382. These
potential future tax benefits are not recognized in the
financial statements since realization is not reasonably
assured.
The Company intends to permanently reinvest the earnings of
FMI. Therefore, no U.S. deferred income taxes are provided on
these earnings.
<PAGE>
11.Earnings Per Share
In 1998, the Company adopted FAS No. 128, Earnings per Share.
Earnings per share (EPS) amounts presented for 1997 have been
restated for the adoption of FAS No. 128. The following table
reflects the calculation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1998 1997 1997
<S> <C> <C> <C>
Basic Earnings Per Common Share:
Income from continuing operations $ (186,498) $ 49,763 $ 510,416
Gain from discontinued operations $ -- $ -- $ 200,000
Net income $ (186,498) $ 49,763 $ 710,416
Average shares outstanding 805,615 790,820 795,969
Basic EPS on continuing operations $ (0.23) $ 0.06 $ 0.64
Basic EPS on discontinued operations $ -- $ -- $ 0.25
Basic EPS on net income $ (0.23) $ 0.06 $ 0.89
Diluted Earnings Per Common Share:
Income from continuing operations $ (186,498) $ 49,763 $ 510,416
Gain from discontinued operations $ -- $ -- $ 200,000
Net income $ (186,498) $ 49,763 $ 710,416
Average shares outstanding 805,615 790,820 795,969
Shares issued from the assumed
exercise of stock options -- 615,000 588,334
Shares assumed to be repurchased
with proceeds from exercise -- (332,055) (509,772)
Total 805,615 1,073,765 874,531
Diluted EPS on continuing operations $ (0.23) $ 0.05 $ 0.58
Diluted EPS on discontinued operations $ .-- $ .-- $ 0.23
Diluted EPS on net income $ (0.23) $ 0.05 $ 0.81
</TABLE>
The assumed exercise of common stock equivalents (658,333
shares) have not been included in the computation of diluted
earnings per common share for the year ended December 31, 1998
as their effect would be antidilutive.
<PAGE>
12.Related Party Transactions
During 1998, DTR sold a packaging machine and inventory items
to FMI for $118,130 and $16,294, respectively. The cost of
these items were $82,592 and $17,907 respectively. During the
two-month transition period ended December 31, 1997, DTR sold
one packaging machine to FMI for $139,822 with a cost of
$106,802. There were no related party transactions in the
year ended October 31, 1997.
13.Economic Dependence
For the year ended December 31, 1998, the two-month transition
period ended December 31, 1997 and the year ended October 31,
1997, the Company had two customers which comprised 100% of
its x-ray tube sales of $303,900, $67,200 and $264,030,
respectively. In addition, the Company had one supplier for
these x-ray tubes. Purchases from this supplier totaled
$260,950, $57,600 and $228,445 for the year ended December 31,
1998, the two-month transition period ended December 31, 1997
and the year ended October 31, 1997, respectively. Sales to
related parties comprised 30.5% at $134,424 and 40.3% at
$139,822 of total sales for the year ended December 31, 1998
and the two-month transition period ended December 31, 1997,
respectively. There were no sales to related parties during
the year ended October 31, 1997. For the year ended December
31, 1998 and the two-month transition period ended December
31, 1997, the Company had two non-related customers which
comprised 68.9% and 52.8% of total sales. During the year
ended October 31, 1997, there was only one non-related
customer who accounted for total sales of greater than 10% at
12.9%. Sales to these non-related parties totaled $303,900,
$183,022 and $318,125 during these respective periods.
14.Supplemental Disclosures of Cash Flow Information
Non-cash operating and investing activities:
For the year ended December 31, 1998, the Company reduced the
deferred gain and corresponding receivable from the sale of
discontinued operations by $280,000 as discussed in Note 6.
In September 1998, API began its purchase of an additional 10%
of FMI for $6 million dollars as discussed in Note 3. As a
result, DTR recorded a $614,675 increase in the value of its
investment for the cash contributed by API to FMI through
December 31, 1998 in order to recognize the unrealized gain
from the reduction in its ownership interest in FMI. The API
capital contribution to FMI also increased DTR's paid-in-
capital in December 1998.
For the year ended October 31, 1997, the Company contributed
$626,917 in net assets of its FoodMaster joint venture to
FoodMaster International L.L.C. (FMI) for its 40% interest as
discussed in Note 3. In addition, the Company redeemed 48,190
shares of common stock in exchange for the satisfaction of a
$29,035 account receivable as discussed in Note 9. Finally,
the Company increased the deferred gain and a corresponding
receivable from the sale of discontinued operations by $40,000
for additional interest due to DTR as discussed in Note 6.
The non-cash effects of these transactions have been removed
from the appropriate categories in the operating and investing
section of the Company's Statements of Cash Flows for the year
ended December 31, 1998 and 1997.
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
Supplemental cash flow information: 1998 1997 1997
Cash paid for:
Interest $ 2,110 $ -- $ --
<PAGE>
15. Subsequent Events
In April 1999, DTR purchased a 67% ownership interest in
Savory Snacks LLC for $123,305. This Wisconsin based company
manages snack food companies in the former Soviet Union.
In April 1999, API completed its additional $6 million
contribution to the FMI joint venture bringing DTR's ownership
in FMI to 30%.
In July 1999, FMI sold 10% of its consolidated Kazakhstan
operations for cash of $1.8 million and it converted $1.8
million of its loans to the Kazakhstan subsidiaries to equity
so that its ownership would not be diluted. This cash
infusion was used to pay DTR's management fees in 1999.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On December 23, 1997, Developed Technology Resource, Inc.
dismissed Lurie, Besikof, Lapidus & Co., LLP, the principal
accountant previously engaged to audit the registrant's financial
statements for the year ended October 31, 1996, as its
independent accountant. Lurie, Besikof, Lapidus & Co., LLP's
reports on the financial statements for the year ended October
31, 1996 do not contain an adverse opinion or disclaimer of
opinion, and was not modified as to uncertainty, audit scope, or
accounting principles. In connection with the audit for the year
ended October 31, 1996 and through December 23, 1997, there have
been no disagreements with Lurie, Besikof, Lapidus & Co., LLP 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 Lurie,
Besikof, Lapidus & Co., LLP would have caused them to make
reference thereto in their report on the financial statements for
such period. The decision to change accountants has been
approved by the Board of Directors of the registrant.
On December 23, 1997, Deloitte & Touche LLP was appointed as
the registrant's new independent accountant to audit the
registrant's financial statements. The registrant did not, prior
to engaging the new accountant, consult with the new accountant
regarding the application of accounting principles to a specific
or contemplated transaction or regarding the type of audit
opinion that might be rendered on the registrant's financial
statements.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
The following table sets forth the current and proposed directors
and executive officers of the Company, their ages and positions
with the company as of August 9, 1999:
Name Age Position
Peter L. Hauser(1)(2) 58 Director
Roger W. Schnobrich(1)(2) 69 Director
John P. Hupp 40 Director, President
LeAnn H. Davis 29 Chief Financial Officer,
Corporate Secretary
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Pursuant to an Underwriting Agreement dated April 23, 1993,
between the Company and Equity Securities Trading Co., Inc.
("Equity Securities") in connection with the Company's initial
public offering, the Company granted Equity Securities the right
until April 1998 to nominate one member who is reasonably
<PAGE>
satisfactory to the Company for election to the Company's Board
of Directors. Equity Securities never exercised this right to
nominate a member to the board for this election.
Each nominee, if elected, will serve until the Annual
Meeting of Shareholders in the year 2000 and until a successor
has been elected and duly qualified or until the director's
earlier resignation or removal.
Mr. Hauser has been a director of the Company since October
1993. Since 1977, he has been employed by Equity Securities
Trading Co., Inc., a Minneapolis-based brokerage firm, and is
currently a vice president and principal.
Mr. Schnobrich has been a director of the Company since
October 1993. He is a partner with Hinshaw & Culbertson, a
Minneapolis law firm which serves as legal counsel to the
Company. Until 1997, he was an owner and attorney with Popham,
Haik, Schnobrich & Kaufman, Ltd., a Minneapolis-based law firm
which he co-founded in 1960. He also serves as a director of
Rochester Medical Corporation, a company that develops,
manufactures and markets improved, latex free, disposable
urological catheters.
Mr. Hupp has been the Company's President since June 1995,
and a director since April 1996. He was Corporate Secretary from
July 1994 until September 1997, and was Director of Legal Affairs
from July 1993 to June 1995. From June 1992 until June 1993, Mr.
Hupp was President of Magellan International Ltd., which marketed
on-line and hard copy information for a Russian information
company. From March to June 1992, he served as Of Counsel for
the law firm of Hale & Dorr, establishing the firm's Moscow
office. His work included negotiating and establishing joint
ventures for clients. From September 1990 to January 1992, Mr.
Hupp was Senior Project Manager and Corporate Counsel with
Management Partnership International, Ltd. (MPI). Prior to his
work at MPI, Mr. Hupp was a trial lawyer for the firm of
Bollinger & Ruberry and Pretzel & Stouffer in Chicago for six
years. Mr. Hupp received a J.D. Degree from the University of
Illinois College of Law and B.A. degrees in Russian Area Studies
and Political Science. Mr. Hupp has intensive language training
from the Leningrad State University in St. Petersburg, Russia.
LeAnn H. Davis, CPA was employed by the Company as the
Controller on July 7, 1997 and on September 25, 1997 was named
Chief Financial Officer and Corporate Secretary. Prior to joining
the Company, Ms. Davis worked as CFO of Galaxy Foods Company in
Orlando, Florida from December 1995 to June 1997. From 1994 to
1995, she was a senior auditor for Coopers and Lybrand LLP in
Orlando, FL. From 1992 to 1994, she worked for the local public
accounting firm of Pricher and Company in Orlando as a senior
auditor and tax accountant. Prior to 1992, Ms. Davis worked for
Arthur Andersen LLP as a staff auditor. Ms. Davis obtained a BS
in Business Administration and a BS in Accounting from Palm Beach
Atlantic College in West Palm Beach, Florida in May 1990, and a
Masters in Accounting from Florida State University, Tallahassee,
Florida in August 1991.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash
compensation for year ended December 31, 1998, the two-month
transition period ended December 31, 1997, and the years ended
October 31, 1997 and 1996 awarded to or earned by the Chief
Executive Officer:
<PAGE>
Summary Compensation Table
Annual Compensation Long-Term
Fiscal Other Annual Compensation
Year Salary Bonus Compensation Awards/Options
Name and Principal Ended ($) ($) ($) (#)
Position
John P. Hupp, 1998 $95,000 $16,000 none none
President(1) 2-month
1997 $15,000 none none none
1997 $87,500 none none none
1996 $75,000 none none 250,000(2)
(1)Mr. Hupp became President on June 16, 1995. Beginning June
15, 1993, as the Company's Director of Legal Affairs, Mr.
Hupp began to receive a full-time salary of $5,000 per month.
Effective June 16, 1995, upon assuming the position of
President, his salary was increased to $6,250 per month.
Effective January 1997, his salary was increased to $7,500
per month; and effective October 1998, his salary was
increased to $9,167 per month.
(2)Under the Amendment dated September 30, 1996 to the 1992
Stock Option Plan, Mr. Hupp was issued an option to purchase
250,000 shares at an exercise price of $1.22. This amendment
was approved by the shareholders at the 1996 Annual Meeting.
Aggregated Option Exercises: Last Fiscal Year and Fiscal Year-End
Option Values
The following table summarizes for the named executive
officers the number of stock options exercised during the year
ended December 31, 1998, the aggregate dollar value realized upon
exercise, the total number of unexercised options held at
December 31, 1998 and the aggregate dollar value of in-the-money
unexercised options held at December 31, 1998. Value realized
upon exercise is the difference between the fair market value of
the underlying stock on the exercise date and the exercise price
of the option. Value of Unexercised In-the-Money Options at year-
end is the difference between its exercise price and the fair
market value of the underlying stock on December 31, 1998 which
was $3.34 per share.
Aggregated Option Exercises in Fiscal 1997 and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Unexercised In-the-Money Options
Name and Acquired Options at at
Principal on Value December 31, 1998(#) December 31, 1998 ($)
Position Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
John P. Hupp(1), None None 101,667 150,000 $212,000 $318,000
President
(1) Includes 250,000 options granted under September 30,1996
employment agreement.
Employment Agreements
Mr. Hupp's original employment agreement dated June 1, 1995
was amended on September 30, 1996 and then amended and restated
on October 1, 1998. The new employment agreement provides for
compensation of $110,000 per year and standard employee benefits
during the employment term expiring September 30, 2001. In
addition, Mr. Hupp or his successors will receive salary and
benefits for a twelve month period upon total death or disability
of Mr. Hupp or if the Company terminates the Agreement without
cause. Under terms of the Agreement, Mr. Hupp will devote his
best efforts to the performance of his duties, and agrees to
certain restrictions related to participation in activities felt
to conflict with the best interests of the Company.
<PAGE>
Compensation of Directors
No director who is also an employee of the Company received
any additional compensation for services as a director.
The non-employee directors of the Company include Messrs.
Hauser and Schnobrich. During 1998, non-employee directors
received no cash compensation for their services as a director or
committee member. Mr. Schnobrich is an attorney with Hinshaw &
Culbertson, which serves as counsel for the Company and which
receives payment of legal fees for such services.
It is the Company's intention to issue to each outside
director an option for 5,000 shares of the Company's Common Stock
each year under terms of the 1997 Outside Director's Stock Option
Plan upon their election to the Board at the Company's annual
meeting. The option will vest equally over the calendar year.
Options granted under the 1997 Outside Directors Stock
Option Plan are not intended to and do not qualify as incentive
stock options as described in Section 422 of the Internal Revenue
Code.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table contains information as of August
9, 1999, concerning the beneficial ownership of the Company's
Common Stock by persons known to the Company to beneficially own
more than 5% of the Common Stock, by each director, by each
executive officer named in the Summary Compensation Table, and by
all current and nominated directors and executive officers as a
group. Shares reported as beneficially owned include those for
which the named persons may exercise voting power or investment
power, and all shares owned by persons having sole voting and
investment power over such shares unless otherwise noted. The
number of shares reported as beneficially owned by each person as
of August 9, 1999, includes the number of shares that such person
has the right to acquire within 60 days of that date, such as
through the exercise of stock options or warrants that are
exercisable within that period.
Name and Address of Amount and Nature Percentage
Beneficial Owner of Beneficial Owner Owned(A)
Vladimir Drits 71,835 (1) 6.9%
11901 Meadow Lane West
Minnetonka, MN 55305
Erlan Sagadiev 103,000 (2) 10.0%
7300 Metro Blvd, Suite 550
Edina, MN 55439
Roger W. Schnobrich (B) 35,700 (3) 3.5%
222 South Ninth Street
Suite 3200
Minneapolis, MN 55402
<PAGE>
John P. Hupp (B),(C) 104,300 (4) 10.1%
7300 Metro Blvd, Suite 550
Edina, MN 55439
Peter L. Hauser (B) 41,000 (5) 4.0%
2820 IDS Tower
Minneapolis, MN 55402
Beneficial Owners of 5% or 355,835 34.5%
more, Officers and
Directors as a group
All current directors and 181,000 17.6%
officers as a group
(3 people)
(A) The total number of shares outstanding assuming the exercise
of all currently exercisable and vested options and warrants
held by all executive officers, current directors, and holders
of 5% or more of the Company's issued and outstanding Common
Stock is 1,030,820 shares. Does not assume the exercise of any
other options or warrants.
(B) Designates a Director of the Company.
(C) Designates an Executive Officer of the Company.
(1) Includes 23,335 shares of Common Stock gifted by Mr. Drits
to his spouse and children.
(2) Includes presently exercisable options for the purchase of
100,000 shares at $1.22 per share and 1,667 shares at $6.75
issued under terms of the 1992 Stock Option Plan as Amended
September 30, 1996.
(3) Includes presently exercisable options for the purchase of
15,000 shares at $1.50 per share and 5,000 shares at $3.00 issued
under the terms of the 1997 Outside Directors Stock Option Plan.
(4) Includes presently exercisable options for the purchase of
100,000 shares at $1.22 per share and 1,667 shares at $6.75
issued under terms of the 1992 Stock Option Plan as Amended
September 30, 1996.
(5) Includes 6,000 shares held in IRA for the benefit of Mr.
Hauser. Includes presently exercisable options for the purchase
of 5,000 shares at $3.00 issued under the terms of the 1997
Outside Directors Stock Option Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following Exhibits are filed as part of this Form
10-KSB:
No. Exhibit Description
3.1 Articles of Incorporation of the Company dated
November 11, 1991(1)
3.2 Certificate of Amendment of Articles of
Incorporation of the Company dated June 16, 1992(1)
3.3 Bylaws of the Company(1)
3.4 Certificate of Amendment of Articles of
Incorporation of the Company, changing registered
office address dated March 2, 1993(1)
3.5 Certificate of Amendment of Articles of
Incorporation of the Company dated November 30, 1995(3)
4.1 Form of stock certificate representing Common
Stock, $.01 par value per share, of the Company, issued
by Company after a 1 for 3 reverse split effective
December 12, 1995(3)
4.2 Form of Subscription Agreement and Investment
Representations in connection with private placement of
300,000 shares of Common Stock(1)
4.3 Amended Incentive Stock Option Grant - Erlan
Sagadiev dated December 11, 1996(6)
4.4 Amended Incentive Stock Option Grant - John Hupp
dated December 11, 1996(6)
10.1 Asset Sale Agreement between Company and a
corporation to be organized by Oleg Yermakov selling
the Company's security equipment distribution business
and certain assets to Oleg Yermakov, contingent on
certain future events(5)
10.2 Exclusive Distributor Agreement dated October 1995
between Company and SECTOR 6, Security Division of
N.V. COMAUTO S.A. effective until September 30, 1998(5)
10.3 Contract for Fiduciary Management of State Shares
of the Open Type Joint Stock Company, Ak-Bulak with
their Subsequent Buy-out Option (4)
10.4 1992 Stock Option Plan as amended and restated
effective September 30, 1996(8)
10.5 Form of Stock Option Agreement(1)
10.6 Limited Liability Company Agreement of FoodMaster
International L.L.C. as amended and restated September
11, 1998(9)
10.7 FoodMaster International L.L.C. Share Transfer
Agreement dated March 3, 1997(6)
10.8 FoodMaster International L.L.C. Bill of Sale,
Assignment and Assumption Agreement dated March 3,
1997(6)
10.9 Management Agreement between DTR and FoodMaster
International L.L.C. as amended and restated September
11, 1998(9)
<PAGE>
10.12 Form of Assignment of Financial Advisory
Agreement from the Company to FAI Limited Partnership
effective January 31, 1993(1)
10.13 Employment Agreement between DTR and Erlan
Sagadiev effective September 30, 1996(6)
10.14 Employment Agreement between DTR and John
Hupp effective October 1, 1998 as amended and
restated(9)
10.15 Developed Technology Resource, Inc. 1993
Outside Directors Stock Option Plan effective December
17, 1993(2)
10.16 Office Lease between DTR and McNeil Real
Estate dated March 11, 1997 effective until April 30,
2002(8)
10.20 Partnership Agreement dated January 16, 1992
among the Company, Armen P. Sarvazyan and Stanislav
Yemelyanov concerning the formation of Medical
Biophysics International, as amended by Partnership
Agreement Amendment dated August 20, 1992(1)
10.21 Letter of Understanding dated June 18, 1992
between the Company and Armen P. Sarvazyan concerning
Medical Biophysics International, and May 22, 1992
letter from the Company to Dr. Armen P. Sarvazyan,
Ph.D.(1)
10.22 Assignment of rights to Intracavity
Ultrasonic Device for Elasticity Imaging from Armen P.
Sarvazyan, Stanislav Emelianov and Andrei R. Skovoroda
to Medical Biophysics International dated December 19,
1992(1)
10.23 Assignment of rights to Method and Apparatus
for Elasticity Imaging from Armen P. Sarvazyan and
Stanislav Emelianov to Medical Biophysics International
dated December 19, 1992(1)
10.24 Assignment of rights to Method and Device for
Mechanical Tomography of Tissue from Armen P. Sarvazyan
to Medial Biophysics International dated January 16,
1993(1)
10.42 Form of Underwriter's Warrants dated May 5,
1993 between the Company and Equity Securities Trading
Co., Inc.(2)
10.43 Form of Directors and Officers
Indemnification Agreement issued to each of the
Company's officers and directors on October 15, 1993 by
action of the Board of Directors(2)
10.44 Developed Technology Resource, Inc. 1997
Outside Directors Stock Option Plan effective November
1, 1997(7)
10.45 Amendment to Asset Sale Agreement (Exhibit
10.1) dated August 20, 1997 (7)
21.1 Subsidiaries of Developed Technology Resource,
Inc. as amended(10)
23.1 Consent of KPMG Moldova(10)
23.2 Consent of KPMG Moldova(10)
23.3 Consent of KPMG Ukraine(10)
27 Financial Data Schedule(10)
<PAGE>
99.1 KPMG Auditors' Report on S.A. Fabrica de brinzeturi
din Soroca dated April 30, 1999(10)
99.2 KPMG Auditors' Report on S.A. Fabrica de produse
lactate din Hancesti dated April 30, 1999(10)
99.3 KPMG Auditors' Report on FoodMaster Kyiv dated
April 16, 1999(10)
(1)Incorporated by reference to the same exhibit number included
in the Company's registration statement on Form SB-2, as
Amended, filed with the Commission as file number 33-58626C
in 1993.
(2)Incorporated by reference to the same exhibit number included
in the Company's Annual Report on Form 10-KSB filed with the
Commission for the fiscal year ended October 31, 1993.
(3)Incorporated by reference to exhibit numbers 1A and 3A
included in the Company's Form 8-A/A filed with the
Commission on December 12, 1995.
(4)Incorporated by reference to exhibit number 10 included in
the Company's Quarterly Report on Form 10-QSB for the third
fiscal quarter ended July 31, 1996.
(5)Incorporated by reference to the same exhibit number included
in the Company's Annual Report on Form 10-KSB filed with the
Commission for the fiscal year ended October 31, 1995.
(6)Incorporated by reference to exhibit numbers 4.1, 4.2, 10.1,
10.2, 10.3, 10.4, 10.5 and 10.6 included in the Company's
Quarterly Report on Form 10-QSB filed with the Commission for
the first fiscal quarter ended January 31, 1997.
(7)Incorporated by reference to the same exhibit number included
in the Company's Annual Report on Form 10-KSB filed with the
Commission for the fiscal year ended October 31, 1997.
(8)Incorporated by reference to the same exhibit number included
in the Company's Quarterly Report on Form 10-QSB filed with
the Commission for the first fiscal quarter ended January 31,
1998.
(9)Incorporated by reference to the same exhibit number included
in the Company's Quarterly Report on Form 10-QSB filed with
the Commission for the third calendar quarter ended September
30, 1998.
(10)Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DEVELOPED TECHNOLOGY RESOURCE,
INC.
Date: September 3, 1999 By /s/ John P. Hupp
___________________________
Name: John P. Hupp
Title: President
Date: September 3, 1999 By /s/ LeAnn H. Davis
____________________________
Name: LeAnn H. Davis, CPA
Title: Chief Financial Officer
(Principal Financial &
Accounting Officer)
</TABLE>
EXHIBIT 21.1
Subsidiaries of Developed Technology Resource, Inc.
FoodMaster International LLC
Developed Technology Resource, Inc. is a 30% owner of this
Delaware joint venture.
SXD Inc.
Developed Technology Resource, Inc. owns 100% of the capital
stock of this Minnesota Corporation.
Phygen Inc.
Developed Technology Resource, Inc. owns 10% of the capital
stock of this Minnesota Corporation.
EXHIBIT 23.1
kpmg Moldova
To the Directors and Stockholders of
Fabrica de brinzeturi din Soroca:
Consent of Independent Auditors
We consent to incorporation by reference in the registration
statement No. 33-6867 on Form S-8 of Developed Technology
Recource Inc. of our report dated April 30, 1999 relating to
the balance sheets of Fabrica de brinzeturi din Soroca as of
December 31, 1998 and the related statements of operations and
cash flows for the three month period then ended, which report
appears in the December 31, 1998 annual report on form 10-KSB
of Developed Technology Resources Inc.
Our report, dated April 30, 1999 contains an explanatory
paragraph that states that the Company has suffered losses and
has an accumulated deficit as at December 31, 1998. These
matters, combined with the uncertainty due to the year 2000
issue and the current economic environment in Moldova, raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG Moldova
Chisinau, Moldova
April 30, 1999
EXHIBIT 23.2
kpmg Moldova
To the Directors and Stockholders of
FPL Hancesti:
Consent of Independent Auditors
We consent to incorporation by reference in the registration
statement No. 33-6867 on Form S-8 of Developed Technology
Resources Inc. of our report dated April 30, 1999 relating to
the balance sheets of FPL Hancesti as of December 31, 1997 and
1998 and the related statement of operations and cash flows
for the year ended December 31, 1998, which report appears in
the December 31, 1998 annual report on form 10-KSB of
Developed Technology Resources Inc.
Our report, dated April 30, 1999, contains an explanatory
paragraph that states that the Company has suffered recurring
losses and has an accumulated deficit as at December 31, 1998.
These matters, combined with the uncertainty due to the year
2000 issue and the current economic environment in Moldova,
raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG Moldova
Chisinau, Republic of Moldova
April 30, 1999
EXHIBIT 23.3
To the Directors and Stockholders of
Foodmaster Kyiv:
Consent of Independent Auditors
We consent to the incorporation by reference in the
registration statement No. 33-6867 on Form S-8 of Developed
Technology Resource, Inc. of our report dated April 16,
1999, relating to the balance sheet of Foodmaster Kyiv as
of December 31, 1998 and the related statements of
operations, cash flows and changes in stockholders' equity
for the eight month period then ended, which report appears
in the December 31, 1998 annual report on Form 10-KSB of
Developed Technology Resource, Inc.
Our report dated April 16, 1999, contains an explanatory
paragraph that states that the Company has suffered a
significant loss in 1998 and as of December 31, 1998
current liabilities exceed current assets by USD 39,558.
These matters, combined with the uncertainty due to the
year 2000 issue and the current economic environment in
Ukraine, raise substantial doubt about the Company's
ability to continue as a going concern. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ KPMG Ukraine Ltd.
September 1, 1999
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
[CASH] 5,412
[SECURITIES] 0
[RECEIVABLES] 141,859
[ALLOWANCES] (12,690)
[INVENTORY] 0
[CURRENT-ASSETS] 1,708,459
[PP&E] 135,987
[DEPRECIATION] (92,193)
[TOTAL-ASSETS] 2,743,952
[CURRENT-LIABILITIES] 592,284
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 8,058
[OTHER-SE] 2,109,983
[TOTAL-LIABILITY-AND-EQUITY] 2,743,952
[SALES] 440,942
[TOTAL-REVENUES] 1,750,623
[CGS] 361,449
[TOTAL-COSTS] 1,753,060
[OTHER-EXPENSES] 386,088
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (202,027)
[INCOME-PRETAX] (186,498)
[INCOME-TAX] 0
[INCOME-CONTINUING] (186,498)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (186,498)
[EPS-BASIC] (.23)
[EPS-DILUTED] (.23)
</TABLE>
EXHIBIT 99.1
REPORT OF THE INDEPENDENT AUDITORS'
To the Board of Directors and Shareholders of
S.A. Fabrica de Brinzeturi Soroca
We have audited the accompanying balance sheets of S.A.
Fabrica de brinzeturi Soroca ("the Company") as of December
31, 1998 and September 30, 1998, and the related the
statements of operations and cash flows for the three month
period ended December 31, 1998. 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards in the United States. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of the Company as of December 31, 1998 and the
results of its operations and cash flows for the three month
period then ended, in conformity with generally accepted
accounting principles in the United States.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company
has suffered losses and has an accumulated deficit at December
31, 1998. These matters combined with the uncertainty due to
the year 2000 issue and the current economic environment in
Moldova raise substantial doubt about its ability to continue
as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
Chisinau (Moldova),
/s/ KPMG Moldova
April 30, 1999
EXHIBIT 99.2
REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
S.A. FPL Hancesti
We have audited the accompanying balance sheets of S.A. FPL
Hancesti ("the Company") as of December 31, 1998 and 1997,
and the related statement of operations and cash flows for the
year ended December 31, 1998. 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards in the United States. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of the Company as of December 31, 1998 and 1997 and
the results of its operations and cash flows for the year
ended December 31, 1998, in conformity with generally accepted
accounting principles in the United States.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company
has suffered recurring losses and has an accumulated deficit
at December 31, 1998. These matters combined with the
uncertainty due to the year 2000 issue and the current
economic environment in Moldova raise substantial doubt about
its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Chisinau (Moldova),
/s/ KPMG Moldova
EXHIBIT 99.3
The Board of Directors and Stockholders
Foodmaster Kyiv:
Independent Auditors' Report
We have audited the accompanying balance sheet of Foodmaster
Kyiv as of December 31, 1998, and the related statements of
operations, changes in stockholders' equity, and cash flows
for the period 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 in the United States. 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 assesing the accounting principles used and
significant estimates made by management as well as
evaluating the overall financial statement presentation. We
believe that our audit provides 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 Foodmaster Kyiv as of December 31, 1998 and the
results of its operations and its cash flows for the period
then ended in conformity with generally accepted accounting
principles in the United States.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
As discussed in note 1(b) to the financial statements, the
Company has suffered a significant loss in 1998 and as of
December 31, 1998 current liabilities exceed current assets
by USD 39,558. These matters, combined with the uncertainty
due to the year 2000 issue and the current economic
environment in Ukraine, raise substantial doubt about the
Company's ability to continue as a going concern.
Management's plans in regard to these issues are also
described in note 1(b). The financial statements do not
include any adjustments that might result from the outcome
of this uncertainty.
/s/ KPMG Ukraine Ltd.
April 16, 1999
