UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange
Act of 1934.
For the quarterly period ended June 30, 2001.
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act for
the transition period from _________________ to ____________.
Commission File Number: 0-30492
DIVERSIFIED RESOURCES GROUP, INC.
(Exact name of registrant as specified in charter)
Utah 84-0771180
(State of Incorporation) (I.R.S. Employer I.D. No)
355 Interstate Blvd., Sarasota, Fl 34232
(Address of Principal Executive Offices)
(941) 923-1949
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) has filed all reports required to be filed by
Section by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 (X) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of stock
as of October 5, 2001.
18,887,478 $.05 Par Value Common Shares
0 Preferred Shares
Transitional Small Business Disclosure Format:
YES ( ) NO (X)
1
DIVERSIFIED RESOURCES GROUP, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets as of December 31, 2001
and June 30, 2001............................................. 3
Statements of Operations for the three and
six months ended June 30, 2001 and 2000....................... 5
Statement of Stockholders' Equity (Deficit)
for the six months ended June 30, 2001........................ 6
Statements of Cash Flows for the three and six
months ended June 30, 2001 and 2000........................... 8
Notes to Financial Statements................................. 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 26
Item 2. Changes in Securities........................................ 26
Item 3. Defaults Upon Senior Securities.............................. 26
Item 4. Submission of Matters to a Vote of Securities Holders........ 26
Item 5. Other Information............................................ 26
Item 6. Exhibits and Reports on Form 8-K............................. 26
Signatures
2
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
June 30, December 31,
2001 2000
(Unaudited)
CURRENT ASSETS
Cash $ 1,490 $ 1,276
Prepaid expenses - 1,415
Related party receivable (Note 8) 549,159 -
Interest receivable - related party (Note 8) 23,988 -
Total Current Assets 574,637 2,691
FIXED ASSETS (Note 2)
Computers 41,238 41,238
Test equipment 1,569 1,569
Office equipment 20,380 20,380
Software 32,475 32,475
Accumulated depreciation (92,353) (90,780)
Net Fixed Assets 3,309 4,882
OTHER ASSETS
Deposits on land, net (Note 3) - 1,007,942
Total Other Assets - 1,007,942
TOTAL ASSETS $ 577,946 $ 1,015,515
============ ===========
The accompanying notes are an integral part of these consolidated financial statements
3
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, December 31,
2001 2000
(Unaudited)
CURRENT LIABILITIES
Accounts payable - trade $ 10,277 $ 8,826
Accrued expenses (Note 4) 21,461 86,556
Accrued brokerage fees (Note 3) 1,250,000 1,250,000
Income tax payable (Note 2) 16,000 -
Current portion of long-term debt (Note 7) 52,875 1,687,327
Notes payable - related party (Note 8) - 206,715
Total Current Liabilities 1,350,613 3,239,424
LONG-TERM DEBT (Note 7) - 28,160
Total Liabilities 1,350,613 3,267,584
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.10 par value,
1,000,000 shares authorized,
-0- shares issued and outstanding - -
Common stock, $0.005 par value,
100,000,000 shares authorized;
issued and outstanding 18,887,478 shares 94,437 94,437
Additional paid-in capital 6,697,883 6,697,883
Accumulated deficit prior to development stage (4,512,614) (4,512,614)
Accumulated deficit from inception of
the development stage on December 31, 1998 (3,052,373) (4,531,775)
Total Stockholders' Equity (Deficit) (772,667) (2,252,069)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 577,946 $ 1,015,515
============ =============
The accompanying notes are an integral part of these consolidated financial statements
4
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
From
Inception of the
Development
Stage on
For the For the December 31,
Six Months Ended Three Months Ended 1998 Through
June 30, June 30, June 30,
2001 2000 2001 2000 2001
REVENUES
Sales, net $ - $ - $ - $ - $ -
Cost of sales - - - - -
Gross Margin - - - - -
OPERATING EXPENSES
General and administrative 68,095 67,129 41,930 21,491 2,234,011
Depreciation and amortization 6,454 6,340 3,170 800 46,717
Total Operating Expenses 74,549 73,469 45,100 22,291 2,280,728
LOSS FROM OPERATIONS (74,549) (73,469) (45,100) (22,291) (2,280,728)
OTHER INCOME (EXPENSE)
Allowance - land - (491,940) - (262,254) (459,372)
Interest expense (11,800) (39,868) (309) (24,074) (189,942)
Other expense - - - - (10)
Interest income 23,988 - 14,038 - 23,988
Other income - - - - 5,400
Gain on sale of land 1,557,763 - - - 1,557,763
Gain on settlement of debt - - - - 13,975
Total Other Income (Expense) 1,569,951 (531,808) 13,729 (286,328) 951,802
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS 1,495,402 (605,277) (31,371) (308,619) (1,328,926)
LOSS FROM DISCONTINUED OPERATIONS - (54,639) - (39,200) (1,707,447)
INCOME (LOSS) BEFORE INCOME TAXES 1,495,402 (659,916) (31,371) (347,819) (3,036,373)
INCOME TAX EXPENSE (16,000) - - - (16,000)
NET INCOME (LOSS) $1,479,402 $(659,916) $(31,371) $(347,819) $(3,052,373)
=========== ========== ========= ========== ============
BASIC INCOME (LOSS) PER SHARE
Income (loss) before discontinued
operations $ 0.08 $ (0.03) $ (0.00) $ (0.02)
Discontinued operations - (0.00) - (0.00)
BASIC INCOME (LOSS) PER SHARE $ - $ (0.03) $ (0.00) $ (0.02)
=========== ========== ========= ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 18,887,478 18,540,378 18,887,478 18,433,037
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements
5
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
Additional Stock
Common Stock Paid-in Subscription Accumulated
Shares Amount Capital Receivable Deficit
Balance, December 31, 1998 8,208,870 $ 41,044 $4,305,137 $(276,125) $(4,512,614)
Receipt of stock subscription
receivable - - - 276,125 -
Common stock issued for services
at $0.155 per share 441,680 2,208 66,252 - -
Common stock issued for services
at $0.15 per share 878,000 4,390 127,310 - -
Common stock issued for services
at $0.22 per share 48,400 242 10,406 - -
Common stock issued for services
at $0.175 per share 406,296 2,032 69,070 - -
Common stock issued for services
at $0.175 per share 168,000 840 28,560 - -
Common stock issued for services
at $0.165 per share 376,000 1,880 60,160 - -
Common stock issued for cash,
services and forgiveness of debt
at $0.22 per share 6,087,920 30,440 1,308,903 - -
Common stock issued for services
at $0.20 per share 1,800,000 9,000 351,000 - -
Net (loss) for the year
ended December 31, 1999 - - - - (2,532,889)
Balance, December 31, 1999 18,415,166 $ 92,076 $6,326,798 $ - $(7,045,503)
The accompanying notes are an integral part of these consolidated financial statements
6
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Additional Stock
Common Stock Paid-in Subscription Accumulated
Shares Amount Capital Receivable Deficit
Balance, December 31, 1999 18,415,166 $ 92,076 $6,326,798 $ - $(7,045,503)
Common stock issued for debt
at $0.35 per share 232,312 1,161 80,148 - -
Common stock issued for debt
at $1.042 per share 240,000 1,200 248,800 - -
Contributed capital - - 42,137 - -
Net loss for the year ended
December 31, 2000 - - - - (1,998,886)
Balance, December 31, 2000 18,887,478 94,437 6,697,883 - (9,044,389)
Net income for the six months
ended June 30, 2001 (unaudited) - - - - 1,479,402
Balance, June 30, 2001 (unaudited) 18,887,478 $ 94,437 $6,697,883 $ - $(7,564,987)
========== ======== ========== ========== ============
The accompanying notes are an integral part of these consolidated financial statements
7
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
From
Inception of the
Development
Stage on
December 31,
For the Six Months Ended 1998 Through
June 30, June 30,
2001 2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,455,414 $(659,916) $(3,076,361)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 6,454 8,781 46,717
Gain on settlement of debt of debt - - (13,975)
Stock issued for services - - 1,425,300
Allowance of deposits on land - 491,940 459,372
Loan service fee - - 410,077
Stock subscription received by services and forgiveness - - 276,125
Gain on sale of land (1,557,763) - (1,557,763)
Changes in assets and liabilities:
(Increase) decrease in inventory - 2,793 200
(Increase) decrease in accounts receivable - 3,246 -
(Increase) decrease in prepaid expenses 1,415 8,433 3,182
(Increase) decrease in other assets - 1,080 5,045
Increase (decrease) in cash overdraft - (987) (17,481)
Increase (decrease) in accounts payable 1,451 17,358 (1,538)
Increase (decrease) in brokerage fees payable - - 1,250,000
Increase (decrease) in accrued expenses (65,095) 34,295 (167,928)
Increase (decrease) in accrued income tax payable 16,000 - 16,000
Net Cash (Used) by Operating Activities (142,124) (161,567) (943,028)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) in deposits on land - (491,940) (1,467,314)
Proceeds from sale of land 2,565,705 - 2,565,205
Net Cash Provided (Used) by Investing Activities 2,565,705 (491,940) 1,098,391
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - related party 69,626 677,600 1,798,316
Payments on notes payable - related party (825,500) (5,500) (2,324,244)
Proceeds from notes payable - - 1,500,000
Payments on notes payable (1,667,493) (22,130) (1,722,934)
Collections from related parties - - 6,984
Issuance of common stock for cash - - 543,393
Contributed capital - - 42,137
Net Cash Provided (Used) by Financing Activities $(2,423,367) $ 649,970 $ (156,348)
The accompanying notes are an integral part of these consolidated financial statements
8
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
From
Inception of the
Development
Stage on
December 31,
For the Six Months Ended 1998 Through
June 30, June 30,
2001 2000 2001
NET (DECREASE) IN CASH $ (214) $ (3,537) $ (985)
CASH AT BEGINNING OF PERIOD 1,276 3,565 2,475
CASH AT END OF PERIOD $ 1,490 $ 28 $ 1,490
========== =========== ============
CASH PAID FOR:
Interest expense $ - $ - $ -
Income taxes $ - $ - $ -
NON CASH FINANCING ACTIVITIES:
Common stock issued in settlement of debt $ - $ 58,078 $ 421,309
Common stock issued for fixed asset $ - $ - $ 5,000
The accompanying notes are an integral part of these consolidated financial statements
9
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 1- ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company was incorporated under the laws of the State of Utah on July 31,
1984. The Company has a wholly-owned Delaware subsidiary, named Data 1, Inc., a
wholly-owned subsidiary named Memory 1, Inc., and a wholly-owned subsidiary
named Cordless Power Corporation. The Company changed its name to Diversified
Resources Group, Inc. in May 1999. The Company has not paid dividends. Dividends
that may be paid in the future will depend on the financial requirements of the
Company and other relevant factors. The Company is considered a development
stage company per SFAS No. 7 because it has not substantially began operations.
Memory 1, Inc. (Mem 1) was organized February 6, 1996 under the laws of the
State of Florida to engage in the business which includes the manufacturing and
marketing of computer memory devices. During 1999, the Company discontinued the
computer memory business and Mem 1 is currently inactive.
Cordless Power Corporation was organized April 19, 1999 under the laws of the
State of Florida to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Florida. Cordless Power
Corporation was originally engaged in the business of retailing cellular
telephone batteries and accessories. During 2000, Cordless Power Corporation
discontinued operations.
On May 17, 1999, the shareholders of the Company approved and amended the
Articles of Incorporation to increase the Company's authorized common shares to
100,000,000.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company's consolidated financial statements are prepared using the accrual
method of accounting. The Company has adopted a calendar year end.
b. Basic Income (Loss) Per Share
The computation of basic income (loss) per share of common stock is based on the
weighted average number of shares outstanding at the date of the consolidated
financial statements as follows:
For The Six Months Ended
June 30,
2001 2000
Numerator:
Income (loss) before discontinued operations $ 1,479,402 $ (605,277)
Discontinued operations $ - $ (54,639)
Denominator (weighted average number
of shares outstanding) 18,887,479 18,540,378
Income (loss) per share
Loss before discontinued operations $ 0.08 $ (0.03)
Discontinued operations $ - $ (0.00)
$ 0.08 $ (0.03)
=========== ===========
10
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. Basic Income (Loss) Per Share (Continued)
Dilutive income (loss) per share is not presented as there are no potentially
dilutive items outstanding.
c. Income Taxes
The income tax benefit (expense) differs from the amount computed at the federal
statutory rates as follows:
For the
Six Months For the Year
Ended Ended
June 30, December 31,
2001 2000
(Unaudited)
Income tax benefit at statutory rate $ - $ 128,747
Computed "expected" tax expense (494,840) -
Change in valuation allowance 478,840 (128,747)
Income tax payable $ (16,000) $ -
=========== ===========
Deferred tax assets at December 31, 2000 are comprised of the following:
Net operating loss carryforward $3,169,742 $3,664,582
AMT credit carryforwards 16,000 -
Depreciation - -
Valuation allowance (3,185,742) (3,664,582)
$ - $ -
=========== ===========
At June 30, 2001 and December 31, 2000, the Company had a net operating loss
carryforward of approximately $9,438,224 and $10,893,638 that may be offset
against future taxable income through 2021. At June 30, 2001, the Company has
calculated an estimate of AMT to be $16,000 and an AMT credit carryforward of
the same amount. The AMT credit carryforward can be used to offset future
ordinary income tax for an indefinite period of time. No tax benefit has been
reported in the financial statements because the Company believes there is a 50%
or greater chance the carryforward will expire unused. Accordingly, the
potential tax benefits of the loss carryforward and the AMT credit carryforward
are offset by a valuation allowance of the same amount.
d. Cash Equivalents
The Company considers all highly liquid investments and deposits with a maturity
of three months or less when purchased to be cash equivalents.
11
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. Revenue Recognition
Revenue was recognized upon shipment of goods to the customer. Sales primarily
required immediate payment or cash on delivery. Now that the Company had
discontinued the operations of Cordless Power, there are currently no sources of
revenue.
f. Reclassification
Prior period consolidated financial statements have been reclassification to
conform with current consolidated financial statement presentation.
g. Depreciation
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the related assets, primarily from three to seven years.
h. Principles of Consolidation
The consolidated financial statements include those of the Company and its
wholly-owned subsidiaries Data 1, Inc., Memory 1, Inc., and Cordless Power
Corporation. All significant intercompany accounts and transactions have been
eliminated.
i. 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
j. Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred.
k. Recent Accounting Pronouncements
The Company has adopted the provisions of FASB Statement No. 138 "Accounting for
Certain Derivative Instruments and Hedging Activities, (an amendment of FASB
Statement No. 133.)" Because the Company had adopted the provisions of FASB
Statement No. 133, prior to June 15, 2000, this statement is effective for all
fiscal quarters beginning after June 15, 2000. The adoption of this principle
had no material effect on the Company's consolidated financial statements.
12
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Recent Accounting Pronouncements (Continued)
The Company has adopted the provisions of FASB Statement No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(a replacement of FASB Statement No. 125.)" This statement provides accounting
and reporting standard for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, the transfer of financial assets, the Company recognized the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after June 30, 2001. This statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
adoption of this principle had no material effect on the Company's consolidated
financial statements.
The Company has adopted the provisions of FIN 44 "Accounting for Certain
Transactions Involving Stock Compensation (an interpretation of APB Opinion No.
25.)" This interpretation is effective July 1, 2000. FIN 44 clarifies the
application of Opinion No. 25 for only certain issues. It does not address any
issues related to the application of the fair value method in Statement No. 123.
Among other issues, FIN 44 clarifies the definition of employee for purposes of
applying Opinion 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and accounting for an
exchange of stock compensation awards in a business combination. The adoption of
this principle had no material effect on the Company's consolidated financial
statements.
l. Pronouncements Issued Not Yet Adopted
In July, 2001, the Financial Accounting Standards Board issued two statements -
Statement 141, Business Combinations, and Statement 142, Goodwill and Other
Intangible Assets, which will potentially impact the Company's accounting for
its reported goodwill and other intangible assets.
Statement 141:
o Eliminates the pooling method for accounting for business combinations.
o Requires that intangible assets that meet certain criteria be reported
separately from goodwill.
o Requires negative goodwill arising from a business combination to be recorded
as an extraordinary gain
13
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l. Pronouncements Issued Not Yet Adopted (Continued)
Statement 142:
o Eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life.
o Requires, at a minimum, annual impairment tests for goodwill an other
intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, the Company is required to:
o Re-evaluate goodwill and other intangible assets that arose from business
combinations entered into before July 1, 2001. If the recorded other intangibles
assets do not meet the criteria for recognition, they should be reclassified to
goodwill. Similarly, if there are other intangible assets that meet the criteria
for recognition but were not separately recorded from goodwill, they should be
reclassified from goodwill.
o Reassess the useful lives of intangible assets and adjust the remaining
amortization periods accordingly.
o Write-off any remaining negative goodwill.
The company has not yet completed its full assessment of the effects of these
new pronouncements on its financial statements and so is uncertain as to the
impact. The standards generally are required to be implemented by the Company in
its 2002 financial statements.
m. Long-Lived Assets
All long-lived assets are evaluated yearly for impairment per SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." Any impairment in value is recognized as an expense in the
period when the impairment occurs.
n. Unaudited Financial Statements
The accompanying unaudited financial statements include all of the adjustments
which, in the opinion of management, are necessary for a fair presentation. Such
adjustments are of a normal recurring nature.
14
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 3- COMMITMENTS AND CONTINGENCIES
a. Leases
Effective June 30, 1999, the Company terminated its lease for facilities in
Sarasota, Florida it had been leasing on a month-to-month basis. Lease payments
were $1,551 per month. The Company has since relocated to a facility leased by
an affiliate company and pays rent under a consulting agreement with this
company.
b. Employment Contracts
Effective August 11, 1996, the Company has entered into 5 year employment
agreements with the President and Chief Financial Officer. These contracts were
terminated in 1999.
On May 31, 1999, the Company and the President and Chief Executive Officer of
the Company entered into a settlement of employment agreement, wherein, for
certain considerations, including his resignation, he would receive $100,000
plus continued health benefits payable over a 54 week period. On July 12, 1999,
the Company and the Vice President - Finance and Chief Financial Officer entered
into an identical agreement. The President and Chief Executive Officer was fully
paid in April of 2000 and the Vice-President and Chief Financial Officer was
fully paid in July of 2000.
c. Real Estate
On July 31, 1999, the Company entered into an agreement whereby it was assigned
the rights to acquire a 607.74 acre tract of undeveloped land in Wake County,
North Carolina from Matheny Development, LLC, ("Matheny Development"), a North
Carolina limited liability controlled by James M. Matheny, one of the Company's
directors for $21,000,000. The agreement called for a $100,000 earnest money
deposit on signing, with 75% of the $21,000,000 purchase price due in cash at
July 31, 1999, and the remaining 25% balance due in the form of an interest
bearing promissory note. As part of the assignment, the Company agreed to pay
Matheny Development $2,100,000 as liquidated damages if the purchase was not
closed by the due date plus extensions, unless the contract is breached by
Matheny Development. If Matheny Development breaches the contract, the Company
had the option of pursuing all necessary actions to obtain specific performance
by Matheny Development or to assign the contract to Matheny Development and pay
liquidated damages of $2,100,000. The assignment also provided that the Company
pay a non-refundable extension fee of $76,562 per month to extend the contract
beyond the July 31, 1999 closing date. The Company had paid $459,372 in
extension payments through December 31, 1999 and has extended the agreement
through August 2000.
An allowance of $459,372 had been set up against these land deposit payments due
to uncertainty of the Company being able to finance the transaction by the
August 2, 2000 due date.
15
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
c. Real Estate (Continued)
During November 2000, the Company entered into an agreement to assign its rights
to acquire certain real estate obtained from Matheny Development back to Matheny
Development and issue 7,500,000 shares of common stock to Matheny Development.
In exchange for assigning these rights and transferring these shares, Matheny
Development has agreed to forgive $1,250,000 in debt due from the Company as
outlined in the original assignment, authorize the forgiveness of one-third of
the debt due Sagedale Farms, LLC, reimburse all amounts expended to extend the
original assignment, or $1,467,314, and pay the Company $1,000,000 in cash. As a
result of the rights back to Matheny, the Company believes it no longer has any
additional obligation or exposure for failure to perform in any way. The Company
received all amounts due under this agreement in February 2001 and anticipates
issuing the shares in the near future.
d. Consulting Fee Agreement
On July 7, 1999, the Company entered into a consulting fee agreement with United
Funding Solutions, Inc. (United) wherein the Company would pay United $100,000
per year for 5 years. Additionally, the Company issued United 2,000,000 shares
of common stock valued at the trading price of $0.016 per share, or $32,000.
Pursuant to the agreement, the Company could be required to issue up to
18,000,000 additional shares of common stock. The stock would be issued at a
formula of one share for each dollar of gross profit earned by the Company.
On September 20, 2000, the contract with United Funding Solutions, Inc. was
terminated by the Company due to the fact that the Company had discontinued
operations and United Funding Solutions, Inc was not performing the services
required by the contract.
NOTE 4- ACCRUED EXPENSES
The Company's accrued expenses is comprised of the following items:
June 30, December 31,
2001 2000
(Unaudited)
Accrued directors fees $ 19,600 $ 16,000
Accrued interest payable 1,857 70,552
Other 4 4
Total $ 21,461 $ 86,556
============ ===========
NOTE 5- GOING CONCERN
The Company's consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. The Company has incurred losses from its inception through December
2000. Management intends to restructure its product lines to generate desired
levels of revenues and profit as it emerges from the bankruptcy proceedings
discussed in Note 10.
The Company is also considering pursuit of a highly speculative and uncertain
startup venture. The Company estimates it would need approximately $500,000 to
complete the acquisition, which the Company has available from the subsequent
sale of its real estate. There can be no assurance that the Company will pursue
this venture or of its ultimate success.
16
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 5- GOING CONCERN (Continued)
The Company intends to raise funding through the sale of its common stock, but
has minimal funding agreements in place. In the interim, management is committed
to meeting the minimum operating needs of the Company over the next 12 months.
NOTE 6- LOSS FROM DISCONTINUED OPERATIONS
In August 2000, the Board of Directors of the Company decided to discontinue the
business that includes the manufacturing and marketing of computer memory
devices due to falling profit margins in the industry. The June 30, 2000
consolidated statement of operations has been restated to show the discontinued
operations. The following is a summary of the loss from discontinued operations:
From
Inception of the
Development
Stage on
December 31,
For the Six Months Ended 1998 Through
June 30, June 30,
2001 2000 2001
(Unaudited) (Unaudited) (Unaudited)
REVENUES
Sales, net $ - $ 42,637 $ 82,456
Cost of sales - 13,213 55,186
Gross Margin - 29,424 27,270
EXPENSES
General and administrative - 83,442 1,501,535
Depreciation and amortization - - -
Total Expenses - 83,442 1,501,535
LOSS FROM OPERATIONS - (54,018) (1,474,265)
OTHER INCOME (EXPENSE)
Interest expense - (621) (6,932)
Other expense - - (226,250)
Total Other Income (Expense) - (621) (233,182)
NET LOSS BEFORE INCOME TAXES - (54,639) (1,707,447)
INCOME TAX EXPENSE - - -
NET (LOSS) $ - $ (54,639) $ (1,707,447)
========== ========== =============
No income tax benefit has been attributed to the loss from discontinued operations.
17
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 7- LONG-TERM DEBT
Long-term debt consisted of the following:
Note payable to Sagedale Farms, LLC, bearing 10%
interest, due July 7, 2001. $ - $ 1,660,077
Various notes payable given in settlement of
accounts payable, non-interest bearing, quarterly
payments of $7,405, unsecured. 50,434 55,410
Total 50,434 1,715,487
Less current maturities (50,434) (1,687,327)
Long-term debt $ - $ 28,160
=========== ============
Aggregate maturities required on long-term debt at are as follows:
Year Amount Amount
2001 $ 50,434 $ 1,687,327
2002 - 19,858
2003 - 8,302
Total $ 50,434 $ 1,715,487
======== ===========
This amount represents notes issued under the bankruptcy proceedings discussed
in Note 10 as payment for certain amounts due as provided for in the Company's
Plan of Reorganization. The notes are non-interest bearing, interest has been
imputed at 8% per annum.
The balances are shown net of a discount of $21,148 and $26,029. Amortization of
the discount was $4,881 and $9,761 as of June 30, 2001 and December 31, 2000,
respectively.
Because the Company has not made its 2nd quarter payment of 2001, it is
delinquent in its payments. The entire amount owed is showed being presented as
a current liability.
NOTE 8- RELATED PARTY TRANSACTIONS
Notes Payable
Tampa Bay Financial, Inc., a related party, has an open line of credit with the
Company with a balance outstanding of $206,515 at December 31, 2000. The notes
are payable on demand and accrue interest at 10% per annum, unsecured. Interest
expense amounted to $38,818 for the year ended December 31, 2000. As of June 30,
2001, the Company had paid the amount owed to Tampa Bay Financial, Inc. in full
and had overpaid them. The Company has recognized a receivable of $549,159. The
receivable is unsecured and bears interest at 10%. The Company has recognized an
interest receivable in the amount of $23,988 at June 30, 2001.
18
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 9- STOCK SUBSCRIPTION RECEIVABLE
Stock subscriptions receivable at December 31, 1998 included amounts of $6,250
and $5,250 which represented notes given to the Company as consideration for
stock options exercised by the President and Chief Executive Officer, and the
Vice President - Finance and Chief Financial Officer, respectively. The balance
of $264,625 represented an amount subscribed to by a related party to provide
working capital to the Company while the Company was emerging from the
bankruptcy proceedings discussed in Note 10. The notes due from the two officers
were liquidated in the settlement of employment contracts, and the amount
subscribed to by the related party was received in the form of services
performed during 1999.
NOTE 10-REORGANIZATION ITEMS
On September 24, 1997, Data 1, Inc. (the "Debtor") filed a petition for relief
under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy
Court for the Middle District of Florida, Tampa Division, Case No.:
97-15827-8P1. Under Chapter 11, certain claims against the Debtor in existence
prior to the filing of the petitions for relief under the federal bankruptcy
laws are stayed while the Debtor continues business operations as
debtor-in-possession. These claims are reported in the December 31, 1997 balance
sheet as "liabilities subject to compromise." Claims secured against the
Debtor's assets ("secured claims") also are stayed, although the holders of such
claims have the right to move the Court for relief from the stay. There are no
secured claims.
On June 19, 1998, the bankruptcy court entered a final order confirming the plan
of reorganization. The order provided that the creditors could settle their
prepetition claims pursuant to three options. Option 1 provided for a note
payable of 10% of the allowed claim payable in 17 quarterly payments beginning
May 1, 1999. Option 2 provided for a combination of a note payable for 5% of the
allowed claim and shares of common stock for 5% of the allowed claim. Option 3
provided for shares of common stock for 10% of the allowed claim.
Pursuant to the confirmed plan, the Company issued notes payable totaling
$235,879 with a net present value of $194,395, and issued 11,952,380 shares
valued at $597,618 pursuant to the options available to the creditors.
The Company recognized a gain on restructuring of debt of $5,956,183 in 1998.
NOTE 11-DEVELOPMENT STAGE COMPANY
The Company essentially has reverted to the status of a startup company as it
emerged from the bankruptcy proceedings discussed in Note 10 and will be
considered to be a development stage company as it recommences its planned
principal operations in the computer chip business.
19
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 12-STOCK ISSUANCES
During March 1999, the Company issued 441,680 shares of its previously
authorized, but unissued, common stock for services valued at $68,460, or $0.155
per share.
During April 1999, the Company issued 878,000 shares of its previously
authorized but unissued common stock for services valued at $131,700, or $0.15
per share.
During May 1999, the Company issued 48,400 shares of its previously authorized,
but unissued, common stock for services valued at $10,648, or $0.22 per share.
During June 1999, the Company issued 406,296 shares of its previously
authorized, but unissued, common stock for services valued at $100,502, or
$0.175 per share.
During June 1999, the Company issued 168,000 shares of its previously
authorized, but unissued, common stock for services valued at $29,400 or $0.175
per share.
During June 1999, the Company issued 376,000 shares of its previously
authorized, but unissued, common stock for services valued at $62,040, or $0.165
per share.
During July 1999, the Company issued 6,087,920 shares of its previously
authorized, but unissued, common stock for services valued at $691,949, cash of
$543,393, property of $5,000 and debt of $99,000, or $0.22 per share.
During December 1999, the Company issued 1,800,000 shares of its previously
authorized, but unissued, common stock for services valued at $360,000, or $0.20
per share.
During April 2000, the Company issued 232,312 shares of common stock for debt at
$0.35 per share for a total of $81,309.
During July 2000, the Company issued 240,000 shares of common stock for debt at
$1.042 per share for a total of $250,000.
Tampa Bay Financial, a shareholder of the Company, contributed $42,137 for expenses.
Stock issuances for services and debt during 2000 and 1999 were valued at the
trading price on the dates of issue.
NOTE 13-LEGAL PROCEEDINGS
The United States Securities and Exchange Commission ("SEC") has entered a
formal order of investigation styled as "In the matter of Diversified Resources
Group, Inc. (NY/6573)." On or about September 30, 1999, the Company received a
subpoena duces teum requesting that the Company provide the Northeast Regional
Office of the SEC with various documents regarding past, present and intended
business operations, financial statements and underlying financial records,
prior news releases, and other documentation. The Company has provided the
documentation requested and has and intends to continue to fully cooperate with
this formal order of investigation.
20
DIVERSIFIED RESOURCES GROUP, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 14-SUBSEQUENT EVENT
On September 17, 2001, the Company authorized a 1-for-5 reverse stock split of
all of the Company's outstanding common stock. The Company also changed the par
values of the preferred stock to $0.10 per share and the common stock to $0.005
per share. These changes are retroactively reflected in the financial
statements.
21
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW
The following discussion and analysis should be read in conjunction with the
balance sheet as of June 30, 2001 and the financial statements as of and for the
three months ended June 30, 2001 and 2000 included with this Form 10-QSB.
We are considered to be in the development stage as defined in Financial
Accounting Standards Board Statement No. 7, and we are currently in the initial
stages of recreating strategic relationships within the electronic components
industry that have proven management and state-of-the-art technologies. The
results of operations for the six months and the three months ended June 30,
2001 are not necessarily indicative of the results for any future interim period
or for the year ending December 31, 2001. We expect to expand into new areas,
using the capital from the sale of the Fall River Project principal operations,
which we hope to commence before the end of 2001. We anticipate that operating
expenses will continue to increase as our business is expanded in the future,
and further anticipate that these expenses will continue to be incurred in
advance of projected revenue.
Readers are referred to the cautionary statement, which addresses
forward-looking statements made by the Company.
RESULTS OF OPERATIONS
The results of operations for the three months ended June 30, 2001 are not
necessarily indicative of the results for any future interim period or for the
year ending December 31, 2001. In particular, we have Cordless Power
Corporation, our rechargeable battery operation in 2000. The Company believes
assets from the sale of our real estate operations can help us build operations
that are more successful in the future. However, we do anticipate that operating
expenses will continue to increase as our business is expanded in the future,
and further anticipate that these expenses will continue to be incurred in
advance of projected revenue.
Three Months Ended June 30, 2001 and 2000
We incurred a net loss of $(31,371) for the three months ended June 30, 2001 as
compared with a net loss of $(347,819) for the three months ended June 30, 2000.
The principal difference between these periods arose from a nonrecurring
$260,000 writedown charged to real estate investments in 2000 during which there
was question as to their recoverability, and the effect of having interest
income from the proceeds of selling those real estate operations in 2001, when
in 2000 we were incurring interest from the debt to finance them, plus the
22
termination of our Cordless Power rechargeable battery operations in 2000.
Our operating expenses consist primarily of general and administrative expenses,
depreciation, and amortization. General and administrative expenses increased
from $21,491 for the three months ended June 30, 2000 to $41,930 for the three
months ended June 30, 2001, and principally includes payroll and related taxes;
professional fees for consulting, business development, legal and accounting;
office supplies expense; travel expense and organizational costs. Most of these
expenses are attributable to overhead costs associated with our headquarters and
operations center, and the additional expenses related to real estate consultant
services. This increase was due to the delay of certain expenses (mostly
professional fees) normally incurred in the first quarter into the second
quarter.
Six Months Ended June 30, 2001 and 2000
We incurred a net income of approximately $1,470,402 for the six months ended
June 30, 2001 as compared with a net loss of $(659,916) for the six months ended
June 30, 2000, due to the effect of our Falls River real estate transaction
described in other income (expense) below.
General and administrative expenses increased to $68,095 for the six months
ended June 30, 2001 from $67,129 for the six months ended June 30, 2000, and
principally includes payroll and related taxes; professional fees for
consulting, business development, legal and accounting; office supplies expense;
travel expense and organizational costs. Most of these expenses are attributable
to overhead costs associated with our headquarters and operations center, and
the additional expenses related to real estate consultant services.
Although our rechargeable battery area did improve during 2000, resulting from a
change in suppliers that increased profitability, this improvement was not
sufficient to bring us to profitability without a significant increase in sales.
Our operating expenses consist primarily of general and administrative expenses,
depreciation, and amortization.
Other Income (Expenses)
The allowance for loss on real estate increased by $491,940 for the six-month
period ended June 30, 2000, which represented the entire amounts invested at
that time, since the recoverability of our investment was in question. This
increase was due to the monthly extension fees paid into the Falls River Land
Development, which was being reserved for since there is no assurance as to the
recoverability of our investment. We recovered all amounts advanced in January
2001, which resulted in a gain of $1,557,763 on our books.
Depreciation and Amortization
Depreciation and amortization expense includes charges relating to depreciation
of property and equipment, which consist principally of furniture and equipment.
We depreciate our equipment over periods ranging from five (5) to seven (7)
years. Depreciation and amortization expense was $ 800 for the three-month
23
period ending June 30, 2000; compared with $3,170 for the three month period
ended June 30, 2001. Depreciation and amortization expense was $6,454 for the
six-month period ending June 30, 2001, compared with $6,340 for the six-month
period ended June 30, 2000. The Company maintains office equipment and software,
which it expects to be replaced during the next year.
Interest
Interest expense was $24,074 during the three months period ended June 30, 2000
compared to $309 in the corresponding period of this fiscal year. Interest
expense relates primarily to real estate activities and the debt undertook to
settle with creditors arising from our bankruptcy. We did not capitalize any
interest. We did not received any significant interest income in 2000 but did
receive $23,988 and $14,038 in interest for the six months and three months
ended June 30, 2001 from investing of proceeds received in our real estate
transaction.
Interest expense was $11,800 during the six months period ended June 30, 2001
compared to $39,868 in the corresponding period of the prior fiscal year,
Interest expense related primarily to debt undertook to settle with creditors
arising from our bankruptcy and debt incurred to fund rest estate operations. We
did not incur any significant interest income or expense and did not capitalize
any interest. All reductions between years are result of payoff of real estate
debt in January 2001.
Inflation and Deflation
We do not believe that either inflation or deflation will have a significant
effect on operations for the near future.
Financial Position, Liquidity and Capital Resources
Our operating requirements will continue to exceed our cash flow from operations
until we have successfully built a successful operating business. Operating
activities during the six months ended June 30, 2001 used cash of $142,124.
Operating activities were primarily funded through the proceeds of $2,565,705
from the sale of our Falls River real estate project. In addition to our
operating requirements, we had payments of approximately $1,650,000 of debt plus
the payoff of $200,000 of debt to Tampa Bay Financial, Inc. and the advancement
of approximately $550,000 to Tampa Bay Financial, Inc.
We also expect to settle $1,250,000 of brokerage fees from the settlement of our
real estate transaction with common stock in the fourth quarter of this year.
Furthermore, with the recently completed 5 for 1 reverse split and increase in
authorized common shares we will have additional unissued shares available to be
used to raise additional equity including the pursuit of acquisitions of
operating businesses.
Due to the need for working capital, we will continue to seek additional debt
and/or equity financing from existing shareholders and other investment capital
resources, however, no assurance can he given that we will be able to obtain
24
other commitments. We will require the proceeds of this and subsequent offerings
to expand our operations and finance our future working capital requirements.
Based upon our current plans and assumptions relating to our business plan, we
anticipate that with the sale of the Falls River project we will have a capital
base to begin pursuing new operations and/or acquisitions.
CAUTIONARY STATEMENT
This Form 10-QSB, press releases and certain information provided periodically
in writing or orally by the Company's officers or its agents contain statements
which constitute forward-looking statements within the meaning of Section 27A of
the Securities Act, as amended and Section 21E of the Securities Exchange Act of
1934. The words expect, anticipate, believe, goal, plan, intend, estimate and
similar expressions and variations thereof if used are intended to specifically
identify forward-looking statements. Those statements appear in a number of
places in this Form 10-QSB and in other places, particularly, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (i)
the Company's liquidity and capital resources; (ii) the Company's financing
opportunities and plans and (iii) the Company's future performance and operating
results. Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) any material inability of the Company to successfully
identify, consummate and integrate the acquisition of operating businesses at
reasonable and anticipated costs to the Company; (ii) any material inability of
the Company to successfully internally develop its products; (iii) any adverse
effect or limitations caused by Governmental regulations; (iv) any adverse
effect on the Company's continued positive cash flow and abilities to obtain
acceptable financing in connection with its growth plans; (v) any increased
competition in business; (vi) any inability of the Company to successfully
conduct its business in new markets; and (vii) other risks including those
identified in the Company's filings with the Securities and Exchange Commission.
The Company undertakes no obligation to publicly update or revise the forward
looking statements made in this Form 10-QSB to reflect events or circumstances
after the date of this Form 10-QSB or to reflect the occurrence of unanticipated
events
25
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Securities Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
October 5, 2001 /s/Carl Smith
Date Carl Smith, Chief Executive Officer
26
