U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from______________to_______________
Commission File Number: 0-3-266
Capital Development Group, Inc.
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(Name of Small Business Issuer in Its Charter)
Oregon 93-1113777
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation organization) Identification no.)
4129 Main Street, Suite 100A, Riverside, CA 92501-3625
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(Address of Principal Executive offices) (Zip Code)
(Issuer's Telephone Number): (909) 276-0873
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports 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 [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required by Section
12, 13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
AS OF NOVEMBER 8, 1999 ISSUER HAD 7,158,535 SHARES OF COMMON STOCK, $.0001 PAR
VALUE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
Page 1
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Capital Development Group, Inc.
Balance Sheet
As of September 30, 1999
September 30, 1999 September 30, 1998
ASSETS
Current Assets
Checking/Savings
Trust Account 0 0
Total Checking/Savings 0 0
Total Current Assets 0 0
TOTAL ASSETS 0 0
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable
*Accounts Payable 89,799 9,500
Total Accounts Payable 89,799 9,500
Other Current Liabilities
Due to Porter & Co. 0 0
Loan from Gordon Root 20,000 0
Accounts Payable 0 396,657
Due to Bill Struthers 0 34,800
Due to DWT 7,300 (4,042)
Due to Mike Vahl 64,273 15,483
Total Other Current Liabilities 91,573 442,899
Total Current Liabilities 181,372 452,399
Total Liabilities 181,372 452,399
Equity
Accrued Dividends 0 187,842
Paid in Capital 2,040,942 1,728,357
Offering Expenses (9,150) (9,150)
Common Stock 699 613
Treasury Stock - common for resale (0) (0)
Preferred Stock - Series C 0 26
Dividends Accrued 0 (187,842)
Retained Earnings (2,162,468) (2,148,748)
Net Income (51,395) (23,497)
Total Equity (181,372) (452,399)
TOTAL LIABILITIES & EQUITY 0 0
Page 2
Capital Development Group, Inc.
Income Statement
July through September 1999
Jul - Sept 1999 Jul - Sept 1998
Ordinary Income/Expense
Expense
Management Fees 9,200 3,100
Interest Expense 50 0
Licenses and Fees 145 0
Office Supplies 1 0
Postage and Delivery 0 13
Professional Fees
Accounting Fees 440 0
Legal Fees 5,268 750
Total Professional Fees 5,708 750
Rent 450 450
Telephone 298 57
Transfer Agent 525 0
Travel & Entertainment (158) 105
Total Expense 16,218 4,474
Net Ordinary Income (16,218) (4,474)
Net Income (16,218) (4,474)
Earnings per share on Income(Loss) from Operations (0) (0)
Average number of shares outstanding 7,158,535 6,388,565
Page 3
Capital Development Group, Inc.
Statement of Cash Flows
January through September 1999
September 30, 1999 September 30, 1998
Increase (decrease) in Cash
Cash Flows from operating activities
Net loss (16,218) (4,474)
Change in current liabilities
(Decrease) increase in:
Accounts Payable 440 0
Due to Porter & Co. (1,638) 0
Due to DWT 3,393 (3,308)
Due to Mike Vahl 14,023 3,724
Net cash used for operating activities 0 (4,058)
Net decrease in cash 0 (4,058)
Cash, beginning of quarter 0 4,058
Cash, end of quarter 0 0
Page 4
Capital Development Group, Inc.
Income Statement
January through September 1999
Jan - Sept 1999 Jan - Sept 1998
Ordinary Income/Expense
Expense
Management Fees 25,800 13,250
Interest Expense 50 0
Licenses and Fees 145 0
Office Supplies 4 0
Postage and Delivery 10 13
Professional Fees
Accounting Fees 5,520 600
Legal Fees 14,487 7,414
Total Professional Fees 20,007 8,014
Rent 1,350 1,800
Telephone 674 316
Transfer Agent 525 0
Travel & Entertainment 2,830 105
Total Expense 51,395 23,497
Net Ordinary Income (51,395) (23,497)
Net Income (51,395) (23,497)
Earnings per share on Income(Loss) from Operations (0) (0)
Average number of shares outstanding 7,158,535 6,388,565
Page 5
Capital Development Group, Inc.
Statement of Cash Flows
January through September 1999
September 30, 1999 September 30, 1998
Increase (decrease) in Cash
Cash Flows from operating activities
Net loss (51,395) (23,497)
Change in current liabilities
(Decrease) increase in:
Accounts Payable (9,448) (4,000)
Due to Bill Struthers 0 (8,000)
Due to DWT 5,262 (1,755)
Due to Mike Vahl 35,581 (1,912)
Net cash used for operating activities (20,000) (39,164)
Net decrease in cash (20,000) (39,164)
Cash, beginning of year 20,000 39,164
Cash, end of year 0 0
Page 6
NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Organizational Data:
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Capital Development Group, Inc. (the Company) was incorporated on May 19, 1993
as an Oregon corporation. The Company was organized to engage in the business of
purchasing healthcare receivable from hospitals and other healthcare
institutions at a discount and administering the collection process of such
receivables. The source of funding for such purchases will be its wholly owned
subsidiary, CDG Credit Corporation which has not yet commenced operations. The
Company has developed its own "Administrator One" software to monitor purchase
and collections of accounts receivable.
Accounting Method
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The Company maintains its books of account on the accrual basis of accounting.
Under this method of accounting, revenue is recognized when they are earned, or
billed, and expenses are recognized when goods or services are received, whether
paid or not.
Cash and Cash Equivalents
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For purposes of the statement of cash flows, cash and cash equivalents include
cash on hand, funds on deposit with financial institutions, and investments with
original maturities of three months or less. The Company maintains an account in
trust with their attorney in Portland Oregon.
Property & Equipment:
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Property and equipment owned by the Company are fully depreciated. The Company
does not anticipate that future cash flows will be generated from its property
and equipment. Therefore, property and equipment is considered impaired, with a
net value of zero, and is not reflected on the balance sheet. The original cost
of computer equipment and software development is $155,010. The Company has not
purchased any additional equipment.
Income Taxes:
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Income tax expense is based on pre-tax financial accounting income and includes
deferred taxes for the effects of timing differences between financial
accounting and taxable earnings. Tax credits are accounted for as a reduction of
tax expense in the years in which the credits reduce taxes payable.
The Company currently has net operating loss carry-forwards to future periods
for book and tax purposes of approximately $2,214,000 in the first quarter of
1999. A deferred tax asset for the NOL carry forwards has not been recorded as
its realization in future periods is questionable at this time. Net operating
losses may be carried forward for 15 years for loss years prior to August 6,
1997 and twenty years for loss years after August 6, 1997.
Page 7
Earnings Per Share
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Earnings per share are not reflected in the interim financial statements.
Estimates
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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.
NOTE 2 - RELATED PARTY TRANSACTIONS:
The Company President who is also a 72% shareholder, provides management
services for a fee, and is also reimbursed for expenses incurred for Company
related activities. The company has been unable to compensate and reimburse the
President in a consistent manner, and has therefore recorded accrued liabilities
of $64,273 in 1999. Total charges to the Company for management and expenses are
$9,200 in the third quarter of 1999. Long-term accounts payable in 1997 and the
note payable in 1998 are also payable to various shareholders and an investment
consultant of the company. $44,300 of the long-term accounts payable in 1997
were converted to 103,600 shares of common stock at the end of 1998. The
remaining $12,000 was paid in cash in 1998.
The terms of the note payable include annual interest payable at 8.5 %, and is
unsecured. The note is due December 31, 1999.
The Company has received a licensing commitment from The Vahl Software Group, an
assumed name of the Company President, for Administrator II, which is a new
software package that is functionally similar to Administrator I. The license
agreement for Administrator II will require the Company to pay The Vahl Software
Group a royalty of $0.25 for each medical account receivable processed through
Administrator II.
NOTE 3 - PREFERRED STOCK AND COMMON STOCK ISSUANCES:
The Company has authorized third series preferred stock, none of which is issued
and outstanding at September 30, 1999.
The third series preferred stock has no voting rights, is entitled to a
preference to common shares of stock in liquidation and is convertible to one
share of common stock under certain conditions. The stated conversion price at
which the preferred stock could be converted to common stock is $2.40 per share,
or fraction thereof. The third series preferred stock had accumulated dividends
at the rate of 8.5% of the purchase price of the stock.
Page 8
In 1998, common stock was issued in three separate occasions; All 256,865 shares
of third series preferred stock outstanding were completely converted to common
stock at a rate of 1.75 shares of common stock for each share of preferred stock
held.
In addition, all accrued dividends payable on the preferred stock were converted
into common stock at the rate if $1.00 per share, resulting in the issuance of
264,259 shares of stock issued in exchange for $264,259 dollars of preferred
dividends accrued, but never declared and paid.
The company also converted $44,300 in accounts payable to 103,600 shares of
common stock as part of its settlements with creditors.
Had these conversions occurred at the beginning ot the year, the per share
earnings would have been decreased by $.0006 on income before extraordinary
items, and $.0039 on net income.
NOTE 4 - LONG-TERM NOTES PAYABLE
At September 30, 1999, long-term notes payable consisted of a $20,000 demand
note payable to a stockholder of the Company. Interest accrues at a rate of 8.5%
and is due upon demand. The note is not secured by Company assets.
NOTE 5 - EXTRAORDINARY ITEMS AND COMMITMENTS AND CONTINGENCIES:
At December 31, 1998, the Company made a good faith effort with its creditors to
settle debts incurred in prior years. Creditors representing the majority of the
outstanding debt accepted the settlement, but several creditors did not respond.
In 1998, those liabilities to vendors that did not respond were written off and
recorded as an extraordinary gain on restructuring of debt. These vendors may
seek payment from the Company in the future, although the Company views this as
unlikely. Moreover, the Company will resist claims for past obligations by
raising defenses of estoppel and time limitation, among others.
Page 9
Item 2. Management Discussion and Analysis or Plan of Operation
(a) Plan of Operation
In recent months, our president, Mike Vahl, and one of our significant
shareholders, Gordon Root, have satisfied our cash requirements by
lending funds to us in exchange for demand promissory notes. Generally,
these notes have amounted to less than $1,000 per month. Once we begin
negotiations for our initial purchase of MARs, we anticipate that our
expenses will increase to approximately $10,000 to $25,000 per month,
consisting of legal fees, travel costs, consulting fees and related
expenses. We do not, at present, possess resources to pay these
expenses, but Messrs. Vahl and Root have indicated a willingness to
continue lending essential funds to us until we complete a financing
and acquisition plan for our initial MARs, and until we begin to
receive cash flow from those MARs. However, neither Mr. Vahl nor Mr.
Root is obligated to continue lending money to us, nor is either of
them prohibited from demanding payment for outstanding loans at any
time.
During the fourth quarter of 1999, we plan to finalize our license
agreement with VSG for Administrator II. Due to the affiliated
relationship between VSG and CDG, Mr. Root and CDG counsel will
negotiate and approve the license on behalf of CDG. Although various
terms of the license agreement are yet to be negotiated, we have
received a firm commitment from VSG for a non-exclusive, royalty based
license that will require CDG to pay VSG a royalty of $0.25
(twenty-five cents) for each MAR processed through Administrator II. We
have also confirmed that VSG will warrant the Y2K readiness of
Administrator II, which VSG can confidently provide because of
Administrator II's use of the PICK operating system.
In order to process MARs, we must acquire various computer hardware
components. Initially, we plan to limit our hardware purchases to an
application server, a DSL connection to the Internet, two workstations,
and the related peripherals. If we acquire additional MARs, it may
become necessary to expand our equipment base to include additional
workstations and data storage. We also plan to acquire miscellaneous
office furniture and equipment to outfit our planned administrative
offices.
Additionally, we will be required to hire full time employees to
implement our MAR collection and claims management. We anticipate
hiring 2-3 employees in 1999 and another 3-5 employees in 2000.
In connection with the documentation of the license for Administrator
II, the purchase of hardware components and the engagement of full time
employees, we will be seeking approximately $2 million to $5 million in
additional equity investment in order to finance our initial purchase
of MARs. We have had
Page 10
preliminary discussions with counsel and with prospective investment
bankers regarding the appropriate method and process for raising equity
capital. In connection with the purchase of the MARs (and by using the
MARs as collateral), we will also seek an operating line of credit that
will allow us to expand our MARs acquisitions. The investment bankers
with whom we have spoken believe that we can obtain a secured operating
line of credit in an amount equal to six to ten times the amount of the
proposed equity financing. The funds from the operating line, together
with the equity funding and operating revenues, should be sufficient to
satisfy our capital requirements for the foreseeable future.
(b) Management's Discussion and Analysis of Financial Condition and Results
of Operations
During the past four years, our directors and officers have been
working to correct problems arising from a major fraud committed
against CDG. The fraud involved $3,500,000 in counterfeit certificates
of deposit that were issued to CDG in exchange for significant equity
and $500,000 in cash. The fraud left CDG in a tenuous financial
position that we have sought diligently to correct. The only revenue we
generated during the past four years was a software license fee from
Aries Financial Group in the amount of $100,000. We used these funds,
in large part, to reach accords with most of our creditors, all of whom
were due monies for products or services provided prior to March 1995.
As a result of the debt compromise reached with creditors, our payables
have been reduced to $89,359. While we now have an accumulated deficit
of $2,162,468 and negative shareholder equity in the amount of
$181,372, we believe we have substantially reduced the likelihood of
material claims by our creditors and that our financial condition, due
to the significant debt reduction, is more stable than in the months
immediately following the fraud.
We used approximately $10,000 of the funds from the license to Aries
Financial Group to fund litigation against the perpetrators of the
fraud, none of whom are currently affiliated with CDG. We were
successful in obtaining a judgment in the litigation that resulted in a
judicial declaration that the 3,875,000 shares issued to the
perpetrators of the fraud are void for lack of consideration. As a
result, the number of shares of outstanding CDG common stock was
reduced by more than 38%, retroactively effective May 1995. We also
were awarded monetary damages against the perpetrators equal to the
cash consideration paid to the perpetrators, but the prospect of
financial recovery is remote. Significantly, all of the individuals who
approved the fraudulent transaction, including former president Tom
Morrow, are no longer affiliated with CDG.
Mr. Vahl, CDG's president, has indicated a willingness to continue to
loan money to CDG until we become operational and profitable, but he is
under no obligation to do so, and he may therefore withdraw his lending
commitment at any time.
Page 11
Assuming that Mr. Vahl continues to provide necessary capital, we
expect to become operational in the first quarter of 2000. Prior to
that time, we expect to:
1) License Administrator II from VSG.
2) Line up a network of brokers to provide a steady stream of MARs.
3) Secure equity funding and a line of credit or alternative financing
arrangement necessary to purchase MARs or secure MARs management
agreements.
4) Start operations.
In light of the significant delays in the payment of healthcare
receivables, we believe that healthcare providers remain anxious to
liquidate their claims in exchange for immediate payment. The state of
the healthcare industry is such that medical insurers are delaying
payments to the healthcare providers by 60 to 90 days or more, which
often creates significant cash flow difficulties for the providers.
However, a number of uncertainties may have an effect on our business,
financial conditions and operations, and those effects may be material
and adverse. These uncertainties include the following.
We will require additional funding to commence operations.
We currently have no cash reserves and have accumulated significant
liabilities. If we do not receive additional capital during the fourth
quarter of 1999 and/or the first quarter of 2000, we will be unable to
implement our business plan and we will not generate revenues
sufficient to satisfy our existing liabilities. The result is that our
stock price could fluctuate significantly and could become valueless.
We may be subject to claims by creditors for claims arising before
1995.
We have searched for and reached accord with what we believe to be most
of our creditors. However, we believe other creditors exist and that
some of them may have claims that have not lapsed or been extinguished
by statutes of limitation or similar legal principles. Some of these
creditors may later bring claims against us for amounts owed or claimed
to be owed from prior obligations. If one or more of these claims is
significant in comparison to our operations, we may be forced into a
bankruptcy or similar proceeding. Such an event would affect our
operations, business and financial condition materially and adversely.
Page 12
We may be unable to continue borrowing money from Messrs. Vahl and
Root, and one or both of them may call our outstanding obligations.
We recently have met our current expenses by borrowing money from two
of our controlling shareholders, Messrs. Mike Vahl and Gordon Root, in
exchange for demand promissory notes. We anticipate continuing to fund
our necessary expenses by borrowing additional funds from these
individuals until we acquire MARs and begin to generate revenues
sufficient to satisfy our current obligations. However, neither Mr.
Vahl nor Mr. Root is subject to a binding obligation to lend additional
funds to CDG, and there can be no assurance that either of them will
continue to do so. If we fail to obtain the necessary capital by
borrowing money from these individuals or from other sources, our
business, financial condition and operation will be affected materially
and adversely.
Additionally, we owe substantial sums of money to both Mr. Vahl and Mr.
Root, under terms that require payment on demand. If either or both of
them should demand repayment of all or a portion of the loans before we
generate sufficient revenues to fund these payments, such a demand
would have a material adverse effect on our business, operations and
financial condition.
We are entering into a market that currently is experiencing
significant competition.
The market for medical billing services and related entities currently
is served by a substantial number of businesses, including both medical
practice management companies and billing and collection services. Many
entities with which we will compete are substantially better funded and
have gathered significant market share. Moreover, some of these
enterprises have significant cash reserves and can better fund
shortfalls in collections that might have a more pronounced impact on
companies such as ours. Some of these companies also have greater
experience and/or more efficient collection methods than we might
develop. If we fail to compete effectively with businesses that provide
similar services, our business operations and financial condition will
be affected materially and adversely.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No legal proceedings have occurred or are occurring in this quarter.
ITEM 2. CHANGES OF SECURITIES
No changes have occurred this quarter.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No defaults have occurred this quarter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during this quarter.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL DEVELOPMENT GROUP, INC.
(Registrant)
By: /s/ Michael P. Vahl
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Name: Michael P. Vahl
Title: President and Secretary
Date: November 22, 1999