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Board of Directors
Diversified Resources Group, Inc. and Subsidiaries
(Formerly Data 1, Inc.)
(A Development Stage Company)
Sarasota, Florida
We have audited the accompanying consolidated balance sheet of Diversified Resources
Group, Inc. and Subsidiaries (formerly Data 1, Inc.) (a development stage company) as of
December 31, 1998 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended December 31, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Diversified Resources Group, Inc.
and Subsidiaries (formerly Data 1, Inc.) (a development stage company) as of December 31,
1998, and the consolidated results of their operations and their cash flows for the years
ended December 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the consolidated
financial statements, the Company's recurring losses from operations and net accumulated
deficit raise substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 4. The consolidated financial
statements do not include any adjustments that might result from the outcome of this
uncertainty.
Jones, Jensen & Company
Salt Lake City, Utah
June 17, 1999
C O N T E N T S
Independent Auditors' Report
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Consolidated Balance Sheet
ASSETS
December 31, 1998
CURRENT ASSETS
Cash $ 2,475
Inventory 200
-----
Total Current Assets 2,675
FIXED ASSETS (Note 1)
Computers 41,238
Test equipment 1,569
Office equipment 15,379
Software 32,475
Accumulated depreciation (65,972)
--------
Net Fixed Assets 24,689
OTHER ASSETS
Due from related parties 6,984
Prepaid expenses, net 3,183
Deposits 5,045
------
Total Other Assets 15,212
______
TOTAL ASSETS $ 42,576
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1998
CURRENT LIABILITIES
Cash overdraft $ 17,481
Accounts payable - trade 83,868
Accrued expenses (Note 3) 189,389
Current portion of long-term debt (Note 8) 26,148
-------
Total Current Liabilities 316,886
LONG-TERM DEBT (Note 8) 168,248
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 par value, 50,000,000 shares authorized;
issued and outstanding 41,044,353 shares 41,044
Additional paid-in capital 4,305,137
Stock subscription receivable (276,125 )
Accumulated deficit (4,512,614 )
------------
Total Stockholders' Equity (Deficit (442,558 )
____________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)$ 42,576
Consolidated Statements of Operations
From
Inception of the
Development
Stage on
December 31,
For the Years Ended 1998 Through
December 31, December 31,
1998 1997 1998
REVENUES
Sales, net $ 17,273 $ 1,662,290 $ -
Cost of sales 11,554 1,618,609 -
------------------------------
Gross Margin 5,719 43,681 -
EXPENSES
General and administrative 685,411 935,005 -
Depreciation and amortization 28,945 534,643 -
------------------------------
Total Expenses 714,356 1,469,648 -
LOSS FROM OPERATIONS (708,637 ) (1,425,967 ) -
OTHER INCOME (EXPENSE)
Interest expense - (50,514 ) -
Interest income 1,984 1,076 -
Other income 17,426 31,117 -
-------------------------------
Total Other Income (Expense) 19,410 (18,321 ) -
LOSS BEFORE REORGANIZATION ITEMS (689,227 ) (1,444,288 ) -
REORGANIZATION ITEMS
Gain on restructuring of debt
(Note 10) 5,956,183 - -
-------------------------------
Total Income from
Reorganization Items 5,956,183 - -
INCOME (LOSS) BEFORE INCOME TAXES 5,266,956 (1,444,288 ) -
INCOME TAX EXPENSE - - -
NET INCOME (LOSS) $ 5,266,956 $ (1,444,288 ) $ -
BASIC INCOME (LOSS) PER SHARE
Net loss before
reorganization items $ (0.02 ) $ (0.08 )
Reorganization items 0.19 (0.00 )
BASIC INCOME (LOSS) PER SHARE $ 0.17 $ (0.08 )
WEIGHTED AVERAGE SHARES
OUTSTANDING 30,798,039 19,091,973
Consolidated Statements of Stockholders' Equity (Deficit)
Additional Stock
Common Stock Paid-in Subscription Accumulated
Shares Amount Capital Receivable Deficit
Balance, December 31, 1996 19,091,973 $ 19,092 $ 3,332,971 $ (115,000 ) $ (8,335,282 )
Net loss for the year
ended December 31, 1997 - - - - (1,444,288 )
Balance, December 31, 1997 19,091,973 19,092 3,332,971 (115,000 ) (9,779,570 )
Adjustment for reduction of exercise
price of options - - (103,500 ) 103,500 -
Common stock issued for cash
at $0.05 per share 4,707,504 4,708 230,667 - -
Common stock issued for
settlementof debt at
$0.05 per share 11,952,380 11,952 585,666 - -
Common stock issued for
subscriptions receivable
at $0.05 per share 5,292,496 5,292 259,333 (264,625 ) -
Net income for the year
ended December 31, 1998 - - - - 5,266,956
_________________________________________________________________
Balance, December 31, 1998 41,044,353 $ 41,044 $ 4,305,137 $ (276,125 ) $ (4,512,614 )
Consolidated Statements of Cash Flows
From
Inception of the
Development
Stage on
December 31,
For the Years Ended 1998 Through
December 31, December 31,
1998 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,266,956 $ (1,444,288 ) $ -
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 28,945 534,643 -
Loss on disposition of fixed assets 2,977 - -
Gain on restructuring of debt (5,956,183 ) - -
Loss from market valuation - 7,009 -
Allowance for doubtful accounts - (123,000 ) -
Changes in assets and liabilities:
(Increase) decrease in inventory 4,129 704,738 -
(Increase) decrease in accounts receivable 2,339 123,702 -
(Increase) decrease in prepaid expenses (3,183 ) (13,362 ) -
(Increase) decrease in other receivables - 75,226 -
(Increase) decrease in other assets 31,126 (13,362 ) -
Increase (decrease) in cash overdraft 17,481 - -
Increase (decrease) in accounts payable 63,817 95,624 -
Increase (decrease) in accrued expenses 79,718 24,801 -
---------- --------- ---
Net Cash (Used) by Operating Activities (461,878 ) (28,269 ) -
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of fixed assets - 1,700 -
Sale of investments - 11,585 -
Purchase of fixed assets - (3,981 ) -
------ -------- ----
Net Cash Provided by Investing Activities - 9,304 -
CASH FLOWS FROM FINANCING ACTIVITIES:
Collections from related parties 213,837 76,924 -
Loans to related parties - (70,000 ) -
Issuance of common stock 235,375 - -
--------- -------- ---
Net Cash Provided by Financing Activities $ 449,212 $ 6,924 $ -
Net Increase (Decrease) in Cash $ (12,666 ) $ (12,041 ) $ -
CASH AT BEGINNING OF YEAR 15,141 27,182 -
CASH AT END OF YEAR $ 2,475 $ 15,141 $ -
CASH PAID FOR:
Interest expense $ - $ 50,514 $ -
Income taxes $ - $ - $ -
NON CASH FINANCING ACTIVITIES:
Common stock issued in settlement of debt $ 597,618 $ - $ -
Common stock issued for
subscriptions receivable $ 264,625 $ - $ -
Notes to Consolidated Financial Statements December 31, 1998 and 1997
NOTE 1 - ACCOUNTING POLICIES AND PROCEDURES
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., and a wholly- owned subsidiary named Memory 1, Inc.
(Mem 1). 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. Memory 1, Inc. (Mem 1) was organized February 6, 1996 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. Mem 1 is currently inactive. A summary of the significant policies consistently applied in
the preparation of the consolidated financial statements follows:
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.
c. Income Taxes At December 31, 1998, the Company had a net operating loss carryforward of approximately
$4,500,000 that may be offset against future taxable income through 2013. 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 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.
e. Revenue Recognition Revenue is recognized upon shipment of goods to the customer. Sales primarily require
immediate payment or C.O.D.
f. Restated Consolidated Financial Statements Prior period consolidated financial statements have been restated 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 straight-line and accelerated methods over the estimated useful lives of the related assets, primarily from three to
seven years.
h. Principles of Consolidation The December 31, 1998 consolidated financial statements, include those of Data 1,
Inc. and Memory 1, Inc. 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.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
a. Escrow Agreements The Company is a party to a February 8, 1994, escrow agreement entered into as a source
of working capital. Under the terms of the escrow agreement certain funds were held by the Company's attorney in
an escrow account and disbursed to repay principal and to pay interest to the funding source. This agreement was
terminated under the terms of the bankruptcy proceedings discussed in Note 10.
b. Leases Effective June 30, 1999, the Company terminated its lease for facilities in Sarasota, Florida it has 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.
c. 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. See Note 11.
NOTE 3 - ACCRUED EXPENSES
The Company's accrued expenses is comprised of the following items:
December 31,
1998
Accrued payroll and payroll taxes $ 88,525
Settlement agreement 100,000
Other 864
------------
Total $ 189,389
NOTE 4 - 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 1998. 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. Thereafter, the Company
intends to seek a merger with an existing, operating company.
NOTE 5 - CUSTOMERS AND EXPORT SALES
During 1998 and 1997, the Company operated primarily in one industry segment which
includes the manufacturing and marketing of computer memory devices. The Company's
financial instruments subject to credit risk are primarily trade accounts receivable
from its customers.
For the Years Ended December 31,
1998 1997
Domestic sales $ 17,273 $ 1,662,290
In 1998 and 1997, the Company had 0 and 2 customer(s), respectively, which each exceeded
10% of its net sales.
NOTE 6 - STOCK OPTIONS
Except for stock options for 1,000,000 shares of common stock granted to and exercised
by the President and Chief Financial Officer, respectively, under the terms of the
bankruptcy proceedings discussed in Note 9, there are no other stock options available.
NOTE 7 - RELATED PARTY TRANSACTIONS
A related shareholder of the Company had borrowed $250,567, plus accrued interest of
$25,120 during 1995, of which $34,384 remained outstanding at December 31, 1997.
Additional amounts of $200,000 and $70,000 were borrowed by this party in December 1996,
and May 1997 respectively. Payments of $94,773 were made against the amounts borrowed
bringing the total amount outstanding to $209,611 at December 31, 1997. This amount was
repaid in 1998.
NOTE 8 - LONG-TERM DEBT
Long term debt at December 31, 1998 consisted of the following:
Various notes payable given in settlement of accounts payable,
non-interest bearing, quarterly payments of $7,405, unsecured. $ 105,089
Note payable to a related party, non-interest bearing,
quarterly payments of $5,500, unsecured. 89,307 194,396
Less current maturities (26,148 )
Long-term debt $ 168,248
Aggregate maturities required on long-term debt at December 31,1998 are as follows:
Year Amount
1999 $ 26,148
2000 39,319
2001 42,560
2002 46,068
2003 34,908
2004 and thereafter 5,393
Total $ 194,396
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 or
Reorganization. The notes are non-interest bearing, so interest has been imputed at 8%
per annum. The balances are shown net of a discount of $41,483.
NOTE 9 - STOCK SUBSCRIPTION RECEIVABLE
Stock subscriptions receivable include amounts of $56,250 and $55,250 which represent
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 $164,625 represents 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 discussed in Note 11,
and the amount subscribed to by the related party was received in 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.
The Debtor received approval from the bankruptcy Court to pay or otherwise honor certain
of its prepetition obligations. These obligations have all been liquidated through the
bankruptcy proceedings, and the Plan of Reorganization of the debtor is scheduled to be
consummated in July 1999.
NOTE 11 - SUBSEQUENT EVENTS
Name Change and Increase in Authorized Shares 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 shares and change the name of the Company to
Diversified Resources Group, Inc. from Data 1, Inc. Purchase of Employment Contracts 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 Company
essentially has reverted to the status of a startup company as it emerges from the
bankruptcy proceedings discussed in Note 10. As of December 31, 1998, the Company
entered into the development state, and will be considered to be a development stage
company until it commences operations as planned. |
