Item 1. BUSINESS
DI-AN Controls, Inc. [DI-An] was incorporated as a Massachusetts corporation in May 23, 1958. Since 1982, DI-AN designs, manufactures, markets and services computer systems, Point-Of-Sale [POS] systems for the management of food and beverage service in public assembly facilities (stadiums, arenas, convention halls and other entertainment sites).
The DI-AN computer systems are also used for general admission ticketing at fairs, waterparks, and entertainment centers.
These computer systems are marketed by DI-AN under the DI-AN trade mark of "CONCESSION/MASTER" systems. They are to improve the service to patrons of the facilities, control the cash and inventory of the products for sale, and provide management with operating data.
DI-AN markets and sells the CONCESSION/MASTER systems directly to its customers. DI-AN installs the CONCESSION/MASTER systems, trains the operating personnel, and provides after the sale, support and maintenance. DI/AN sold, installed and trained the operating personnel for 30 facilities with CONCESSION/MASTER systems in 1999, 18 systems in 1998 and 20 in 1997.
INDUSTRY OVERVIEW:
DI-AN'S Point-Of-Sale-Terminals [POST] is a key part of the CONCESSION/MASTER system, designed for the needs of the concession stands in public assembly faciities. They are sufficently different from the needs of full service and quick service restaurants, retail stores, and gas station marts, so that there is little compotetion from products designed to serve those markets.
BACK LOG OF ORDERS
Orders for the DI-AN C/M System orders are usually filled quickly from stock. Thus order back-logs are low and not an indicator of future, or near term shipments and sales.
ITEM 2.
ITEM 2. PROPERTIES
The Company does not own any real estate. The company operates from leased premises of 9,000 sq. feet.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS NONE
ITEM 4.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over the counter. Trading activity reported by the transfer agent for the year 1999 was 3 transfers consisting of 800 shares. Trading on the "books" of Cede & Co. is not visible to the transfer agent. Cede & Company is a nominee holder of 319,626 shares. The approximate number of holders of the Company's stock at December 31, 1998 was 800.
At this time, the Company has no plans to institute dividend payments on its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31 1999 1998 1997 1996 1995 (In thousands of dollars, except per share amounts)
Net sales and other operating revenues $ 836 $ 593 $ 556 $ 522 $ 347 Net income (loss) $ 288 $(184) $( 70) $(393) $(558) Total assets $ 826 $ 510 $ 291 $ 163 $ 250 Per common share: Net income (loss) $ 0.35 $(.22) $(.08) $(.48) $(.68)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The gross profit margin increased to 65% from 54% in 1998. This is primarily due to better utilization of available resources. The Company has historically maintained a workforce in excess of its immediate needs to allow it to continue its manufacturing operations and enable it to fulfill order promptly. Due to the increase in sales during 1999, the labor force, which was similar to 1998's, incurred less unproductive time and increased efficiencies in the manufacturing process. On a year to year basis, cost of goods sold and operating expenses increased from 1998 to 1999 by 8% and 6%, respectively. A 41% increase in sales as compared to 1998 allowed the Company to achieve break even operations for the first time in a number of years.
The Company continues to accrue significant expenses to its sole officer and director, and other related parties, that for income tax purposes are not deductible until paid. Consequently, the Company had taxable income in 1999 of approximately $300,000, although the Company incurred a small net loss for financial statement purposes. The Company has sustained operating losses over the past decade and had accumulated federal net operating losses of approximately $2,700,000. Utilization of a portion of these net-operating losses occurred in 1999 due to the Company realizing taxable income. The realization of these net operating loss benefits generated a tax savings and a deferred tax asset of $288,000.
During 1998 the Company placed cash in excess of immediate needs into a US Treasury money market mutual fund. This fund generated interest and dividends of approximately $8,300; however, the liquidation of the asset resulted in capital loss of approximately $13,000 in 1999.
LIQUIDITY AND SOURCES OF CAPITAL
The Company continues to realize insufficient cash flows to meet all of its operating needs. Consequently, the Company's President again deferred receipt of compensation and interest obligations due him for loans made in prior years. The 1999 working capital deficit of approximately $4,952,000 represents a decrease from 1998 of approximately $15,500. Included in current liabilities are notes and other payable aggregating approximately $5,338,000 at December 1999 and $5,353,000 at December 1998 due to the President and related parties. Although the Company was able to make principal payments against the officer's notes payable of $310,000, this decrease was offset by approximately $210,000 of accrued interest charges and $85,000 of accrued salary due the officer. The Company continues to remain dependent upon the officer for all its financing needs, and it is not anticipated that this will change in the coming year.
INFLATION
Inflation was not a significant factor during 1999, 1998, or 1997.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in Item 14 of this Form 10-K.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name, Age, Position with Registrant, Began Term of Other Business Experience Office
ROBERT D. KODIS, 78, President, Treasurer, 1958 Director, DI-AN Controls Corporation.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
CASH & CASH EQUIVALENT FORMS OF REMUNERATION IN 1999 Securities, Salaries, Property, Fees, Insurance Directors' Benefits, and Aggregate of Fees, Reimbursement Contingent Commissions of Personal Forms of Name Capacities and Bonuses Benefits Remuneration
Robert D. Kodis President, $4903.92 None None Treasurer, & Director
Robert D. Kodis was not paid his full salary during the year due to cash flow constraints, the Company accrued salary amounting to $80,096.08 related to his services for the year 1999. Mr. Kodis has a total accured salary for 1999 and prior years of $781,291.00.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Amount and Class Name and Address of of Beneficial Percentage Title of Class Beneficial Owner Ownership of Class
Common Stock, Robert D. Kodis 327,825 (1) 40% $.10 Par Value 85 Wallis Road Brookline, MA
Common Stock, Kodis Family Trust 100,500 12% $.10 Par Value Reva J. Kodis, Trustee
(1) This amount representing 40% of the voting power of all shares of outstanding capital stock of the Company includes 50,000 shares owned by the wife and children of Mr. Kodis. It does not include 100,500 shares, representing 12% of the voting power, owned by the Robert D. Kodis Family Trust as to which Mr. Kodis disclaims beneficial interest and Mr. Kodis has no vote or investment power with respect to such shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1999 the Company owed the principal shareholder, Robert D. Kodis, $1,537,741 in notes payable at the interest rate of 12%. The loans were made to fund the operating needs of the Company. Accrued interest in the amount of $1,781,280 is also owed to the principal shareholder, Robert D. Kodis. Accrued rent of $1,179,436.is owed to The Kodis Girls Trust, owners of the facility leased by the Companyin prior years. The amount represents unpaid rent for the years 1991 through October 1996.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report.
(3) Listing of Exhibits (3) Articles of incorporation and bylaws. These exhibits are included with a Registration Statement on Form S-1 which was filed on August 26, 1968 and is incorporated herein by reference.
(b) Reports on Form 8-K filed in the fourth quarter of 1998: NONE
(c) Exhibits - See Item 14(a)(3) above for list of exhibits incorporated herein by reference.
(d) Financial Statement Schedules - The response to this portion of Item 14 is included as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
DI-AN CONTROLS, INC. (Registrant)
Robert D. Kodis, President (Date) and Treasurer (Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Robert D. Kodis, Director (Date) Di/An CONTROLS, INC.
FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
CONTENTS
Page
Independent Auditors' Report 1
Financial Statements:
Balance Sheets 2
Statements of Operations and Accumulated Deficit 3
Statements of Cash Flows 4
Notes to Financial Statements 5-9
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders Di/An Controls, Inc.
We have audited the accompanying balance sheets of Di/An Controls, Inc. (a Massachusetts corporation) as of December 31, 1999 and 1998 and the related statements of operations and accumulated deficit, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Di/An Controls, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
The comparative amounts in the statements of operations and accumulated deficit and cash flows relating to 1997 have not been audited by us. The statement of operations and accumulated deficit for the year ended December 31, 1997, and the related statement of cash flows for the year then ended, have been compiled from information supplied by the Company. We have not audited or reviewed these statements and, accordingly, we do not express an opinion or any other form of assurance on them.
March 3, 2000
BALANCE SHEETS 1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 165,100 $ 39,386 Investments 26,553 224,914 Accounts receivable, net of allowance for bad debts: 1999- $3,000, 1998-$0 104,362 20,101 Inventory 187,037 184,038 Other current assets 5,057 7,038
TOTAL CURRENT ASSETS 488,109 475,477
EQUIPMENT
Equipment and tooling 22,477 22,477 Accumulated depreciation (22,477) (22,477)
NET EQUIPMENT AND IMPROVEMENTS - -
OTHER ASSETS
Cash surrender value, life insurance, net of loans payable: 1999-$465,118, 1998-$457,251 35,358 31,947 Deposits 2,917 2,917 Deferred income tax asset 300,000 -
TOTAL OTHER ASSETS 338,275 34,864
TOTAL ASSETS $ 826,384 $ 510,341
1999 1998
LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES
Accounts payable and accrued expenses $ 51,672 $ "4,963"
Other current liabilities "49,707" "53,325" "Note payable, officer" " 1,537,741" "1,847,741"
Related party liabilities " 3,800,618" "3,505,590"
TOTAL CURRENT LIABILITIES " 5,439,738" " 5,411,619"
COMMITMENTS AND CONTINGENCIES (Note K) - -
STOCKHOLDERS' DEFICIT
Common stock "82,641" "82,641"
Additional paid-in capital "1,124,451" " 1,124,451"
Accumulated deficit "(5,820,446)""(6,108,370)"
TOTAL STOCKHOLDERS' DEFICIT "(4,613,354)""(4,901,278)"
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $"826,384" $"510,341"
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
1999 1998 1997 Audited Audited Unaudited
SALES $ 836,390 $ 592,817 $ 555,544
COST OF GOODS SOLD 291,233 269,955 99,501
GROSS PROFIT ON SALES 545,157 322,862 456,043
OPERATING EXPENSES 331,670 310,597 324,637
INCOME FROM OPERATIONS 213,487 12,265 131,406
OTHER INCOME (EXPENSE)
Interest expense (208,629) (195,894) (207,500) Gain on sale of equipment - - 6,215 Interest and dividend income 8,277 - - Loss on investment (13,211) (71) -
TOTAL OTHER INCOME (EXPENSE) (213,563) (195,965) (201,285)
NET LOSS BEFORE INCOME TAXES (76) (183,700) (69,879)
NET BENEFIT FROM INCOME TAXES 288,000 - -
NET INCOME (LOSS) 287,924 (183,700) (69,879)
Accumulated deficit, beginning of year (6,108,370) (5,924,670)(5,854,791)
ACCUMULATED DEFICIT, END OF YEAR (5,820,446) (6,108,370)(5,924,670)
NET INCOME (LOSS) PER SHARE $ 0.35 $ (0.22) $ (0.08)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN CALCULATION
OF INCOME (LOSS) PER SHARE 826,405 826,405 826,405
STATEMENTS OF CASH FLOWS
1999 1998 1997 Audited Audited Unaudited
OPERATING ACTIVITIES: Net income (loss) $ 287,924 $ (183,700) $(69,879) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization - - 6,263 Gain on sale of equipment - - (6,215) Loss on sale of investments 13,211 - - Change in allowance for bad debts 3,000 (13,715) - Cash value life insurance (3,411) 370 (2,971) Deferred income taxes (300,000) - - Increase (decrease) in cash from: Accounts receivable (87,261) 14,825 19,153 Inventory (2,999) 41,033 (180,973) Other current assets 1,981 (6,582) 1,094 Other assets - - 14,544
Accounts payable and accrued expenses 46,709 (24,438) (26,006) Other current liabilities (3,618) (18,188) 40,869 Related party liabilities 295,028 279,260 309,008 Total adjustments (37,360) 272,565 174,766
NET CASH OPERATING ACTIVITIES 250,564 88,865 104,887
INVESTING ACTIVITIES: Sales of investments 193,405 - - Purchases of investments (8,255) (225,000) - Proceeds from disposal of equipment - - 7,238
NET CASH INVESTING ACTIVITIES 185,150 (225,000) 7,238
FINANCING ACTIVITIES: Net borrowings (repayments), officer's loan (310,000) 166,226 (131,000)
NET CASH FINANCING ACTIVITIES (310,000) 166,226 (131,000)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 125,714 30,091 (18,875)
Cash and cash equivalents, beginning of year 39,386 9,295 28,170
CASH AND CASH EQUIVALENTS, END OF YEAR $165,100 $39,386 $9,295 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
No cash was disbursed for interest or income taxes in 1999, 1998, or 1997.
A. DESCRIPTION OF BUSINESS
Di/An Controls, Inc., located in Braintree, Massachusetts, manufactures and installs point-of-sale terminals and management software to entertainment and sports facilities throughout the United States. The Company was incorporated in 1958. Credit is extended under terms customary in the industry.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Use of estimates - The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates relate primarily to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
2. Cash and cash equivalents - For purposes of financial statement presentation, the Company considers all highly liquid instruments with a maturity of three months or less to be cash.
3. Inventory - Inventory is stated at the lower of cost or market using the first-in, first-out method.
4. Equipment and depreciation - Equipment and tooling are stated at cost. Depreciation is provided over the estimated useful lives of the assets by straight line methods for financial reporting and accelerated methods for income tax purposes. Equipment and tooling are depreciated using lives ranging from three to ten years.
5. Investments - The Company classifies its marketable debt securities as "held to maturity" if it has the positive intent and ability to hold the securities to maturity. All other marketable securities are classified as "available for sale". Securities classified as "available for sale" are carried in the financial statements at fair market value. Realized gains and losses, determined using specific identification of the securities, are included in earnings; unrealized holding gains and losses are reported as a separate component of stockholders' equity, where considered to be material. Securities classified as held to maturity are carried at amortized cost.
6. Revenue recognition - Revenue from service contracts is earned ratably over the life of the contract.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Income taxes - Deferred income taxes are the result of the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities. Generally, deferred income taxes are classified as current or non-current in accordance with the classification of the related asset or liability. Those not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred income tax assets in circumstances where management believes recoverability of a portion of the assets is not reasonably assured.
C. CONTINUED OPERATIONS
The Company incurred significant operating losses from 1988 to 1994 and accumulated indebtedness to the principal stockholders which exceeds the cash that can reasonably be expected to be generated from operations. In recent years, the Company's sales have grown, and there has been a profit from operations. In most years, the interest expense from this debt has exceeded the profit from operations. At December 31, 1999, the Company has a deficiency in working capital of approximately $5,000,000, an increase of approximately $15,000 from the prior year. The Company continues to be dependent upon sales of its one product, the Concession/Master system of hardware and software.
These conditions substantially limit the Company's ability to obtain capital or expand operations. The Company's ability to continue depends upon future events, which include its ability to obtain sufficient operating capital, the forbearance of its creditors, and the development of new and enhanced products. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
D. INVESTMENTS
Investments at December 31, 1999 consist of $26,553 in a money market fund. This investment may be redeemed at any time and has been classified as available for sale by the Company. In 1999, a loss of $13,211 was realized on the sale of a treasury fund investment. On the two investments, dividend income re-invested amounted to $8,277 in 1999. The investments' carrying value is the fair value of the publicly traded securities.
E. INVENTORY Inventory at December 31, consists of the following:
1999 1998
Raw materials $ 72,174 $ 73,335 Work in process 14,863 110,703
Total $ 187,037 $ 184,038
F. NOTE PAYABLE, OFFICER
The note payable, officer is due on demand and bears interest at 12%. No interest is charged on the accrued interest on this note. The note is secured by substantially all of the assets of the Company. Interest on this note accrued for the years ending 1999, 1998 and 1997 was $208,629, $195,894, and $207,500, respectively.
G. CAPITAL STRUCTURE
The Company has 2,500,000 shares of $.10 par value stock authorized of which 826,405 are issued and outstanding.
Common shares are voting and dividends are paid at the discretion of the Board of Directors.
H. RELATED PARTY ACTIVITY
Through January, 1998, the Company rented property from a Trust, which is a member of the group that owns the majority of the Company's stock. Unpaid liabilities incurred in connection with this lease agreement are included in related party liabilities, which are as follows at December 31,
1999 1998
Rent $ 1,179,436 $ 1,179,436 Interest on note payable, officer 1,781,280 1,572,651 Accrued compensation, officer 839,902 753,503
$ 3,800,618 $ 3,505,590
I. CONCENTRATIONS
1. In 1999, 1998, and 1997 a single customer accounted for approximately 28%, 38% and 20%, respectively, of total sales.
2. In 1999, purchases from three vendors amounted to approximately 69% of total purchases. In 1998 and 1997, purchases from six vendors accounted for approximately 82% and 35% of total purchases, respectively.
3. From time to time, the Company's cash balances in one financial institution exceed the amount insured by the federal government.
J. INCOME TAXES
The provision for income taxes for 1999 consists of the following:
Deferred federal $( 300,000) Current state 12,000
$( 288,000)
Included in current year income is approximately $300,000 of expenses due to related parties. In accordance with the Internal Revenue Code, these expenses are not deductible until actually paid. A reconciliation of the income tax provision at the federal statutory rate to the income tax provision at the effective tax rate is as follows:
Income taxes computed at the federal statutory rate: $ 100,000 Tax benefit from utilization of net operating loss ( 100,000) State taxes 12,000 Reduction in valuation allowance ( 300,000)
$( 288,000)
The following is a summary of the significant components of the Company's deferred tax assets as of December 31:
1999 1998
Net operating losses $ 800,000 $ 940,000 Accrued expenses, related parties 1,500,000 1,400,000 2,300,000 2,340,000
Valuation allowance (2,000,000) (2,340,000)
Net asset $ 300,000 $ -
J. INCOME TAXES (continued)
The Company has approximately $2,400,000 of federal net operating losses available that expire between 2003 and 2009. In accordance with Section 382 of the Internal Revenue Code, utilization of net operating losses can be limited if a significant change in ownership occurs.
K. COMMITMENTS
In January, 1997, the Company entered into a five-year lease for its current operating facilities. Minimum annual amounts due under this lease are as follows:
2000 $ 35,000 2001 35,000 2002 2,917
Total $ 72,917
Rent expense for the years ending December 31, 1999, 1998 and 1997 amounted to $35,000, $35,000 and $32,083, respectively.
L. RESEARCH AND DEVELOPMENT
The Company incurred research and development costs amounting to $38,029, $41,995, and $52,379 during the three years ended December 31, 1999, 1998 and 1997, respectively.