UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2005
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________to__________
Commission file Number 0-25429
Florida 65-0877741
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1059 East Tri-County Blvd., Oliver Springs, TN 37840
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(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (865) 482-8480
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of exchange on which registered
None None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-K [X]
State issuer's revenues for its most recent fiscal year: $1,927,598
The aggregate market value of the voting stock held by non-affiliates of the Company, computed by reference to the closing price of such stock as of March 24, 2006 ($.085) was $403,686. For purposes of the computation we consider all directors and holders of 10% or more of our common stock to be affiliates. Therefore, the number of shares of our common stock held by non-affiliates as of March 27, 2006 was 4,749,247.
As of March 27, 2006, there were 19,634,821 shares of common stock, $0.01 par value, issued and outstanding.
Transmittal Small Business Disclosure Format (check one) Yes [ ] No [X]
Item 1. Description of Business.
Statements included in this report regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. When we use words like "intend," "anticipate," "believe," "estimate," "plan" or "expect," we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important factors that could cause our actual results to differ materially from our current expectations elsewhere in this report. You should understand that forward-looking statements made in this report are necessarily qualified by these factors. We are not undertaking to publicly update or revise any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise.
Corporate Background
We were organized as Fairfax Group, Inc. under the laws of the State of Florida on April 23, 1998. We became the successor to Fairfax Group, Inc., a Nevada corporation ("Fairfax Nevada") as a result of a merger consummated on September 8, 1998. Prior to the merger, Fairfax Nevada had never engaged in any substantive commercial business or other business operations, but had a shareholder base of approximately 500 shareholders. Unless the context otherwise requires, all references to the "Company" "we" "our" and other similar terms means the corporation originally incorporated under the name Fairfax Group, Inc. in Florida.
On March 6, 2001, we, Diversified Product Investigations, Inc., a Florida corporation, and the individual holders of the outstanding capital stock of Diversified Product Investigations, Inc. (the "Holders") consummated a reverse acquisition (the "Reorganization") pursuant to a certain Share Exchange Agreement ("Agreement") of such date. Pursuant to the Agreement, the Holders tendered to us all of the issued and outstanding shares of common stock of Diversified Product Investigations, Inc. in exchange for 10,332,420 shares of our common stock. The reorganization was accounted for as a reverse acquisition.
Simultaneously with the closing of the Reorganization, the then sole officer and director of the Company resigned his positions in accordance with the terms of the Agreement. John Van Zyll, Ann M. Furlong, Marvin Stacy, Dean Madden and David Dowell were elected to serve on the Board of Directors of the Company (the "Board"). The Board subsequently appointed John Van Zyll as Chairman of the Board, President and Chief Executive Officer; Ann M. Furlong as Secretary; Dean Madden as Chief Financial Officer and Treasurer; and Marvin Stacy as Chief Operating Officer of the Company. The Board and the shareholders of the Company also approved and filed an amendment of the Company's Articles of Incorporation in order to change the name of the Company from Fairfax Group, Inc. to Diversified Product Inspections, Inc.
Business
We specialize in conducting investigations and laboratory analysis of a wide variety of products to determine the cause and origin of product failures. Our primary customers consist of national insurance companies that are interested in subrogating claims to recover losses. Subrogation is a legal principle, which provides that, to the extent an insurer has paid for a loss, the insurer receives the policyholder's right to recover from any third party that caused the loss. We have accumulated a large database of known defective products that includes photos and other documentation that are used in their investigations. Additionally, we provide for the storage of evidence and derive revenues from the secure storage of materials.
We currently provide investigative services for over 2,000 insurance adjusters in more than 40 states. At the present time we do not have any contractual agreements with any particular insurance company. Our services are provided on a case by case per their requests. Assignments are provided to us by the individual insurance adjusters who are directed to use our services by their management.
We employ seven (7) state-licensed private investigators who are trained as "Cause and Origin" investigators, two apprentice private investigators who are not yet state-licensed, six (6) laboratory technicians and one engineer. We also have retained five people who provide us with engineering services on a part-time consulting basis. Also, we offer pre-failure evaluations of structures, building materials and appliances.
Since 1994, we have been concentrating almost exclusively on defective product investigations and we have accumulated a database of known defective products. Our current database has key identifiers for over 300,000 products, a library of over 380,000 35mm photographs, 250,000 digital photographs and other documentation along with hundreds of videos. Generally, we conduct an on-site forensic investigation to identify the products and materials involved in a claim loss and to determine the cause of the failure. For smaller items, we provide insurance adjusters with evidence collection kits and have the items shipped to our laboratories for testing. Also, we provide in-depth indoor air quality analysis to determine airborne contaminants that may be the causes of "sick" buildings.
A crucial element of a subrogation claim is the maintenance of "chain of custody" of the defective item. We maintain secure facilities and our personnel are trained in procedures for the proper handling, storing and cataloging of the evidence so that it is available at time of trial.
Marketing
We market our product by sponsoring seminars to over 140 insurance companies and through our website located at dpi-inc.com. Our website provides information for consumers, the insurance industry and manufacturers. We provide our seminars at the offices of numerous insurance companies located throughout the United States. Our seminar presentations are geared towards insurance claim adjusters and our seminars include information about our company and information teaching the adjusters how to locate and obtain faulty defective items, which have created damage to the insured's residence. Our seminars also teach the adjusters how to best secure a particular item for inspection to be conducted by our company. At the time of the seminar training, the adjusters are equipped with an adjusters use kit. This kit contains an instruction booklet on how to use our services and it also contains the necessary materials for shipping pieces of evidence involved in claims, to our Tennessee location.
In addition to our industry services, for the consumer, we began providing in 2004 a service called HomeCheckSafety.com. This is a way for the consumer to identify and remove recalled products from their home. When a consumer registers, items that are entered are monitored continuously. If at any time one or all of these items are recalled, the consumer is notified. Some consumers will have the added benefit of qualifying for a reduction in their homeowner rates as several major insurance companies are evaluating our service for future implementation.
Also, we publish a monthly newsletter that appears on our website. Each newsletter features a particular hazard or defective product reports or official product recall notices.
Subrogation Claims and Other Investigations
Below are samples of some of the actual cases in which our investigations enabled the client to be successful in their subrogation claim.
* In 2005 we received three requests from clients to identify product parts using our exemplar (sample parts) inventory. The purpose was to use our exemplars to identify severely burned items in connection with determining origins of fires. One of the requests involved a claim estimated to be $10 million dollars. All three parts were successfully identified using our inventory. We believe that such success will promote future opportunities to provide this type of service.
* In 2005 we provided services which assisted our clients in recovering 100% of their subrogation claims. A few examples were: a recovery of $6,000 as a result of a defective braided supply line; a recovery of $47,000 as a result of a defective copper supply line; and a recovery of $19,500 as a result of a defective vinyl supply line.
* Our Customer Service Department conducted a survey in 2005 regarding the outcome of our clients' claims. We surveyed a total of 83 claims in which our clients sought an aggregate of $918,984. The amount recovered by our clients in such cases due, at least in part to our reports, was a total of $641,654 representing a 69.82% recovery rate. The average inspection cost to our clients was $250.00. Therefore, in the claims we surveyed, our clients spent approximately $20,750 for our services and recovered $641,654.
* Masonite Siding Class Action lawsuit. We were an expert witness in this lawsuit. We investigated and took samples from over 2,000 homes in 20 states. The lawsuit covered 13.9 million homes in the United States and resulted in a $4.3 billion class action settlement. (1995)
* Louisiana Pacific Class Action lawsuit regarding defective siding. We inspected 2,000 homes in 19 states. It was the defense's contention that the siding could not be positively identified once installed. We developed a method of positively identifying the product through visual inspection and demonstrated this during deposition. The result was a $750,000 class action settlement. (1997)
* Defective Battery Charger. A battery charger in California caused a fire in a strip mall causing heavy damage. We were able to positively identify the origin, cause and manufacturer. Reliance Insurance was able to subrogate a $1,000,000 claim. (1999)
* Ply-Gen (Hoover) vs. Pulte Home. Defective siding was installed in over 13,000 homes in Florida. Our investigations and lab analysis resulted in a $23.3 million settlement to the homeowners. (1997)
* Auto accident in Orlando. Driver stated that she had applied brakes, but that they did not work. An independent mechanic inspected the brake system and reported that it was properly functioning and that the driver was at fault. The insurance company hired us to inspect the brakes. Our lab was able to determine that the brake pad material had non-uniform wear characteristics that resulted in high and low spots. The braking friction of the pads was only 30% of their design specifications. The insurance company successfully subrogated the claim. The driver was found to be "not at fault", thus saving her from points on her license and an increase in her insurance premium. (1996)
* Lamborghini Automobile in Orlando that burned because of a failure of the rubber fuel lines. Our laboratory was able to determine that the rubber fuel lines were not defective. The owner had installed a high-pressure fuel pump that delivered a hydraulic pressure in excess of the fuel line manufacturer's recommendations. It was determined that the owner was at fault. (1995)
* Home is Kissimmee, Florida that was being consumed by mold. The builder and several engineering firms had been unable to determine the cause. Upon inspecting the home, we determined that there was a hidden water leak in the walls. The builder insisted that this was impossible, as the water to the home was turned off at the main. Our technicians quickly located the leak using ultrasonic equipment. The plumbing contractor had installed an unused icemaker line on the city side of the meter. This line was slightly pierced by a nail during drywall installation, causing saturation inside the walls and the mold growth throughout the home. It was determined that the plumbing contractor was at fault. (1994)
* Chevy Silverado burns in Orlando. We were able to determine that the cause and origin was due to a problem in the manufacturing process of the dipstick for the transmission. The dipstick would eject under pressure, allowing transmission fluid to spray on the exhaust and cause fires. The insurance company was able to successfully subrogate the claim and GM has since corrected the problem. (1997)
* Pedestal fan failures. We assisted a television consumer investigative reporter in a report concerning a line of pedestal fans marketed under the trade name SMC which had caused fires in the Seattle, Washington area. Our research department provided the reporter with information regarding failures of the same product in other areas of the country. (2004)
Financings
In April 2002, we entered into a subscription agreement with an investor to sell up to $300,000 of our 6% convertible debentures. Under the terms of the agreement, subject to the our satisfying certain conditions, the investor agreed to purchase three separate tranches of debentures, each tranche in the principal amount of $100,000 and to be payable three years after the issue date of the debenture. The tranches were purchased in April 2002, June 2002 and October 2002, respectively. The principal amount of each of the debentures was convertible at any time at the option of the investor into the Company's common stock at a conversion rate equal to the lesser of (i) 110% of the average five closing bid prices during the five trading days prior to the issuance date of the debenture or (ii) 75% of the average of the five lowest closing bid prices during the twenty trading days immediately prior to the conversion date. In the event all or any portion of the debentures are outstanding at the end of three years from the date of issuance, the debentures are subject to automatic conversion into the Company's common stock based upon the conversion rate described above.
In connection with the sale of each tranche of the debentures, we issued warrants to purchase 462,963 shares of our common stock at exercise prices of $.2376, $.23 and $.088 per share, respectively. Each of the warrants is exercisable for four years from the date each related debenture was purchased under the agreement. The repayment of the debentures was also secured by a pledge to the investor of an aggregate of 4,000,000 shares of common stock of the Company owned by our majority stockholders.
In 2004, the investor converted the entire $300,000 principal amount of the debenture, plus accrued interest, into an aggregate of 4,173,857 shares of the Company's common stock.
During April 2002 we also entered into an equity line of credit investment agreement with the investor which obligated the investor to purchase up to $3,000,000 of our common stock at a price equal to 85% of the average trading price of our common stock, subject to our fulfillment of certain terms and conditions contained in the equity line of credit investment agreement. In connection with the equity line of credit, we issued to the investor a warrant to purchase 1,388,889 shares of our common stock exercisable at $.2376 per share. The warrant is exercisable until April 2006. The equity line of credit expired in April 2004 without being utilized.
Intellectual Property
We currently hold a federal trademark registration from the United States Patent and Trademark Office (Reg. No: 2206610) for our Diversified Products Inspections, Inc. logo. We also maintain a registered domain name for our Internet Web site located at http://www.dpi-inc.com and http://www.homechecksafety.com.
Recent Activities
On December 30, 2004, we entered into a joint venture agreement with two other companies to form Vulnerability Assessment Group ("VAG"). We have a one-third interest in VAG. The purpose of VAG is to provide comprehensive assessment plans to individuals, businesses, industries, organizations and institutions of their vulnerability to terrorism, external or internal sabotage, employee assessment and safety, product safety and chemical and biological safety. As of December 31, 2005, VAG had no significant operations and the Company had incurred no significant costs related to VAG.
Employees
As of March 17, 2006, we have approximately 31 full time employees. We have never experienced a work stoppage and we believe that our employee relations are good. Our success depends to a large extent upon the continued services of our key managerial employees and investigators. The loss of such personnel could have a material adverse effect on our business and our results of operations.
Transfer agent
Our transfer agent is Interwest Transfer Co., 1981 East 4800 South, Salt Lake City, Utah 84117.
Risk Factors
You should carefully consider the following risks and the other information contained in this report. The price of our common stock could decline due to any of these risks, and you could lose all or part of your investment. You also should refer to the other information included in this report, including the financial statements and related notes thereto. In addition, the risks described below are not the only ones facing us. We have described only the risks we consider material. However, there may be additional risks that we view as not material or of which we are not presently aware.
If any of the events described below were to occur, our business, prospects, financial condition or results of operations or cash flow could be materially adversely affected. When we say that something could or will have a material adverse effect on it, we mean that it could or will have one or more of these effects.
The loss of one or more of our key employees may adversely affect our growth objectives.
Our success in achieving our growth objectives depends upon the efforts of our top management team including the efforts of Messrs. John Van Zyll, Marvin Stacy and Ms. Ann M. Furlong. The loss of the services of any of these individuals may have a material adverse effect on our business, financial condition and results of operations. We do not have employment agreements with Messrs. VanZyll, Stacy or Ms. Furlong. We can give no assurance that we will be able to maintain and achieve our growth objectives should we lose one or all of these individuals' services.
Our current and potential competitors, some of whom have greater resources and experience than we do, may develop products and technologies that may cause demand for, and the prices of, our products to decline.
The product investigation industry in regards to subrogation for product failure is a new and growing market. While there may be several companies that offer fire or product investigations which have achieved substantially greater market share than we have, and have longer operating histories, have larger customer bases, have substantially greater financial, development and marketing resources than we do, to our knowledge there are few, if any, companies that offer a full scope of services that are tailored to the insurance industry. Our service includes fire investigation, product failure analysis, engineering and air & mold contamination investigations. Existing or future competitors may develop or offer products that are comparable or superior to ours at a lower price, which could adversely harm our business, results of operations and financial condition.
We may issue additional shares of our common stock which would reduce the percent ownership of existing shareholders and also dilute the share value of our common stock.
Our certificate of incorporation authorizes the issuance of 50,000,000 shares of common stock, par value $.01 per share. Our certificate of incorporation does not authorize us to issue shares of preferred stock. The future issuance of all or part of our remaining authorized common stock may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.
Outstanding shares of our common stock that are restricted from immediate resale, but which may be sold into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.
As of March 27, 2006, we had 19,634,821 shares of our common stock issued and outstanding. Of such shares, 13,962,454 shares of common stock were restricted and 5,672,367 shares were free trading. Rule 144 provides, in essence, that a person holding "restricted securities" for a period of one year may sell only an amount every three months equal to the greater of (a) one percent of a company's issued and outstanding shares, or (b) the average weekly volume of sales during the four calendar weeks preceding the sale. The amount of "restricted securities" which a person who is not an affiliate of our company may sell is not so limited, since non-affiliates may sell without volume limitation their shares held for two years if there is adequate current public information available concerning our company. In such an event, "restricted securities" would be eligible for sale to the public at an earlier date. The sale in the public market of such shares of Common Stock may adversely affect prevailing market prices of our Common Stock.
Our common stock may be affected by limited trading volume and may fluctuate significantly.
There has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders' ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Since we have not paid any dividends on our common stock and do not intend to do so in the foreseeable future, a purchaser of our common stock will only realize an economic gain on his or her investment from an appreciation, if any, in the market price of our common stock.
The application of `penny stock rules" could adversely affect the market price of our common stock.
Our securities are deemed to be penny stock. Penny stocks generally are equity securities with a price of less than $5.00 per share other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Our securities may be subject to "penny stock rules" that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the "penny stock rules" require the delivery, prior to the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. Consequently, the "penny stock rules" may restrict the ability of broker-dealers to sell our securities and may have the effect of reducing the level of trading activity of our common stock in the secondary market. The foregoing required penny stock restrictions will not apply to our securities if such securities maintain a market price of $5.00 or greater. We can give no assurance that the price of our securities will reach or maintain such a level.
Item 2. Properties.
In December 2004 we purchased an approximately 45,000 square foot facility located at 1059 East Tri-County Blvd., Oliver Springs, Tennessee 37840 which we now use as our corporate headquarters and as our warehouse. The facility was purchased for $800,000. The entire purchase price was financed by a mortgage loan from a bank. The loan is repayable in monthly installments of interest only at the rate of 6% per annum through June 2005; thereafter, in monthly installments of $6,751 through May 2010, including interest at 6% per annum, with the remaining balance due June 2010.
Item 3. Legal Proceedings.
On August 23, 2005, Oak Ridge City Center, LLC, the lessor of our former corporate headquarters located at 3 East Main Street, Oak Ridge, Tennessee, commenced a lawsuit against the Company in the General Sessions Court in Anderson County, Tennessee. The basis of the lawsuit is an alleged breach of a commercial lease agreement dated December 19, 2000. The plaintiff is seeking damages in the principal amount of $281,048.04, plus any applicable interest, costs and attorney fees. Management believes the Company has satisfied separate termination arrangements made with the lessor and suspended lease payments beginning in April 2005. The trial in this cause is presently scheduled to be held on April 19, 2006. A reasonable estimate of any possible future liability related to this lawsuit is not presently determinable, and accordingly, the Company has not recorded on its balance sheet as of December 31, 2005 a liability related to this matter.
Except for the foregoing, the Company knows of no legal proceedings to which it is a party or to which any of its property is the subject which are pending, threatened or contemplated or any unsatisfied judgments against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Common Equity, Related Stockholders Matters and Small Business Issuer Purchases of Equity Securities.
Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol "DPRI". The following table sets forth the range of high and low bid quotations of our common stock, as reported on the OTC Bulletin Board, for the periods indicated. The prices represent inter-dealer quotations, which do not include retail markups, markdowns or commissions, and may not represent actual transactions.
Common Stock
High Bid Low Bid
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First Quarter 2004 $ 0.50 $ 0.28
Second Quarter 2004 $ 0.49 $ 0.28
Third Quarter 2004 $ 0.47 $ 0.13
Fourth Quarter 2004 $ 0.28 $ 0.12
First Quarter 2005 $ 0.23 $ 0.13
Second Quarter 2005 $ 0.15 $ 0.11
Third Quarter 2005 $ 0.125 $ 0.09
Fourth Quarter 2005 $ 0.10 $ 0.075
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Security Holders
At March 27, 2006 there were 19,634,821 shares our common stock outstanding which were held by approximately 524 stockholders of record.
Dividend Policy
We have not paid any dividends on our common stock, and it is not anticipated that any dividends will be paid in the foreseeable future. Our Board of Directors intends to follow a policy of using retained earnings, if any, to finance our growth. The declaration and payment of dividends in the future will be determined by our Board of Directors in light of conditions then existing, including our earnings, if any, financial condition, capital requirements and other factors.
Recent Sales of Unregistered Securities
On October 19, 2005 the Company issued an aggregate of 144,227 shares of its Common Stock to an employee for services performed during the quarter ended September 30, 2005. On January 17, 2006 the Company issued an aggregate of 243,633 shares of its Common Stock to the same employee for services performed during the quarter ended December 31, 2006. The issuances were exempt from the registration requirements under the Securities Act of 1933, as amended (the "Act") by virtue of an exemption provided under Section 4(2) of the Act for transactions not involving a public offering. No other equity securities were issued by the Company during the quarter ended December 31, 2005.
Item 6. Management's Discussion and Analysis or Plan of Operation
General
We specialize in conducting investigations and laboratory analysis of a wide variety of products to determine the cause and origin of product failures. Our primary customers consist of national insurance companies that are interested in pursuing claims to which they have become subrogated. Subrogation
is a legal principle, which provides that, to the extent an insurer has paid for a loss, the insurer receives the policyholder`s right to recover from any third party that caused the loss. We have accumulated a large database of known defective products that includes photos and other documentation that are used in our clients' investigations. Additionally, we provide for the storage of evidence collected during an investigation, until our customer requests that it be disposed.
Critical Accounting Policies
Our significant accounting policies are discussed in Note 1 to the financial statements. We consider the following accounting policies to be the most critical:
o Revenue Recognition - We recognize inspection report revenue when the earnings process is completed. This typically occurs after our final written report has been reviewed, approved and submitted. Once the final report has been approved by management and submitted to the customer, we have no further obligation to the customer in regards to this matter. We recognize our storage fee revenue on a pro-rata basis as earned.
o Stock Options - We account for our stock options under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. We have adopted the disclosure-only provisions of the Financial Accounting Standards Board ("FASB") Statement No.123, "Accounting for Stock Based Compensation" as amended by FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure".
o Property and Equipment - Our property and equipment is recorded at cost and depreciation is computed using the straight-line method over the estimated useful lives of the assets. We charge repairs and maintenance to expense as it is incurred.
o Estimates - The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurances that actual results will not differ from those estimates. On an ongoing basis, we evaluate our accounting policies and disclosure practices. In our opinion, the critical accounting estimates which are more complex in nature and require a higher degree of judgment include the estimation of deferred revenue, the determination of the reserve for doubtful accounts and any valuation allowance that might be needed related to our deferred income tax assets.
Results of Operations for the Fiscal Year Ended December 31, 2005 as Compared to the Fiscal Year Ended December 31, 2004
Our revenues for 2005 decreased $166,485 or 8.0% to $1,927,598 from $2,094,083 in 2004. This decrease is primarily due to our move to a new office and warehouse location during the first quarter that caused us to miss inspection services during the location transition and created inspection backlogs as we orientated to our new facilities. During the second quarter we saw a temporary decrease in the overall number of inspection referrals. However, a third quarter price increase and increased referrals yielded a 31% increase in comparable sales for the fourth quarter. In addition, we had $96,412 of use agreement revenues in 2004 that were not recognized in 2005 due to disagreements with our customer over contractual terms.
Our total operating expenses for 2005 were $1,995,684, a decrease of $32,550 or 1.6% compared to the same period in 2004. Our salary expense increased by $59,857, or 5.3%, primarily due to moving certain contracted services in-house during 2005 as evidenced by the offsetting decrease of $50,677 or 29.7% in professional fees. Rent expense for 2005 decreased by $157,500 or 75.0% as a result of the elimination of rent associated with our previous office and warehouse facilities at the beginning of the second quarter, partially offset by increases in depreciation and general and administrative costs associated with our move to a new location totaling $118,806 or 34.4% compared to same period in 2004.
Interest expense for 2005 increased $39,187 or 196.9% to $59,087 from $19,900 in 2004 mainly due to the new debt associated with the purchase of our new office and warehouse facility.
Net loss for 2005 was $95,188 or $0.00 per share compared to a 2004 net income of $27,777 or $0.00 mainly reflecting the temporary decline in revenues during the first two quarters of 2005, as previously discussed.
Results of Operations for the Fiscal Year Ended December 31, 2004 as Compared to the Fiscal Year Ended December 31, 2003
Our revenues for 2004 decreased $338,313 or 13.9% to $2,094,083 from $2,432,396 in 2003. This decrease is primarily due to a significant spike in revenues during the third quarter of 2003, followed by a 2004 trend of insurers having less subrogated claims as a result of homeowners filing fewer insurance claims due to fears of increased insurance rates or policy cancellation. We offset this decrease somewhat during the periods with our use agreement revenues. Under the terms of our use agreement, the user was allowed exclusive use of certain of our research data on product failure or failure patterns and quarterly updates of such data in exchange for an annual fee of $100,000; however, this use agreement was terminated effective December 2004.
Our total operating expenses for 2004 were $2,028,234, a decrease of $35,278, or approximately 1.7% compared to the same period in 2003. Salary expense decreased by $17,919, or approximately 1.6%, primarily due to our efforts to reduce personnel to a level more appropriate for 2004 revenues. In total, other operating expenses for 2004 remained relatively consistent with 2003 with an increase in professional fees of $44,203, mainly due to higher legal costs, offset somewhat by reductions in other operating expense classifications.
Interest expense for 2004 decreased $9,850 or 33.1% to $19,900 from $29,750 in 2003 mainly due to the retirement of higher interest lines of credit in 2003 and early payoff of notes payable in 2004.
During 2002, the Company incurred $191,393 in deferred stock issuance costs associated with the establishment of an equity line of credit. This amount was reported as a component of our stockholders deficit at December 31, 2002, pending future funding under this agreement. During 2003 our financial condition improved significantly and we determined we would not utilize this equity line of credit. Accordingly, we expensed these deferred stock issuance costs in 2003. No such cost existed in 2004.
During 2003, mainly due to the significant improvement in earnings trend, the Company reversed its valuation allowance for deferred tax assets and recognized a deferred tax benefit of $420,574. Deferred tax expense recognized in 2004 approximated the federal and state statutory rates.
Net income for 2004 was $27,777 or $0.00 per share compared to a 2003 net income of $568,315 or $0.04 reflecting the 2004 decline in revenues and operating results, and the 2003 recognition of the deferred tax benefit partially offset by the write-off of deferred stock issuance costs as previously discussed.
Liquidity and Capital Resources
During 2005, our cash decreased by $131,155 mainly due to funding of operating losses previously discussed. We believe the losses incurred during the first two quarters of 2005 are temporary and that we should have sufficient cash provided by ongoing operating activities to meet our on future operating needs. During 2004, our operations provided positive cash flow that allowed us to pay off previously existing lines of credit and notes payable, purchase property and equipment and increase our cash on hand by $31,639.
Investing and financing activities for 2005 reflect borrowings of $52,094 on our line of credit and purchases of $90,156 of building improvements and equipment. Additionally, during 2004, our investing and financing activities reflect new borrowings of $800,000 to purchase our new office and warehouse space.
Impact of Inflation
Inflationary factors have not had a significant effect on our operations.
Other
Except for historical information contained herein, the matters set forth above are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ from those in the forward-looking statements. Potential risks and uncertainties include such factors as the level of business and consumer spending, the amount of sales of the Company's products, the competitive environment within the investigative services industry, the ability of the Company to continue to expand its operations, the level of costs incurred in connection with the Company's expansion efforts, economic conditions and the financial strength of the Company's customers and suppliers. Investors are directed to consider other risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission.
Item 7. Financial Statements. Index to Financial Statements
Years ended December 31, 2005 and 2004
Page Number
Report of Independent Registered Public Accounting Firm..................F-1
Audited Financial Statements
Balance Sheets...........................................................F-2
Statements of Operations.................................................F-4
Statements of Stockholders' Equity.......................................F-5
Statements of Cash Flows.................................................F-6
Notes to Financial Statements............................................F-7
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Diversified Product Inspections, Inc.
We have audited the accompanying balance sheets of Diversified Product Inspections, Inc. (the "Company"), as of December 31, 2005 and 2004, and the related statements of operation, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Diversified Product Inspections, Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Knoxville, Tennessee
January 26, 2006
Diversified Product Inspections, Inc.
Balance Sheets
December 31
2005 2004
----------- -----------
(Restated)
Assets
Current assets:
Cash $ 196,893 $ 328,048
Accounts receivable, net of reserve for doubtful accounts
of $25,000 in 2005 and 2004 279,085 146,272
Current portion of deferred income taxes 59,433 58,288
Prepaid expenses and other current assets 940 13,007
----------- -----------
Total current assets 536,351 545,615
Property and equipment:
Land 150,000 --
Building and building improvements 735,318 --
Equipment, furniture and fixtures 402,771 336,208
Vehicles 71,512 88,200
Leasehold improvements -- 22,727
----------- -----------
1,359,601 447,135
Less accumulated depreciation and amortization 325,108 278,030
----------- -----------
Net property and equipment presently used in operations
1,034,493 169,105
Land, building and improvements not presently used
in operations -- 836,318
----------- -----------
Net property and equipment 1,034,493 1,005,423
Other assets 5,000 --
Deferred income taxes, less current portion 405,586 374,746
----------- -----------
Total assets $ 1,981,430 $ 1,925,784
=========== ===========
|
December 31
2005 2004
----------- -----------
(Restated)
Liabilities and stockholders' equity:
Current liabilities:
Line of credit $ 52,094 $ --
Accounts payable and accrued expenses 67,174 44,026
Accrued salaries 21,103 29,019
Deferred revenue 130,000 80,000
Current portion of long-term debt 42,496 25,248
Current portion of capital lease obligations 3,094 --
----------- -----------
Total current liabilities 315,961 178,293
Long-term debt, less current portion 763,097 804,021
Capital lease obligations, less current portion 5,653 --
----------- -----------
Total liabilities 1,084,711 982,314
Stockholders' equity:
Common stock:
Par value--$0.01 per share
Authorized shares--50,000,000
Issued and outstanding shares--19,634,821 in 2005
and 19,135,314 in 2004 196,348 191,353
Additional paid-in capital 1,958,578 1,915,136
Accumulated deficit (1,258,207) (1,163,019)
----------- -----------
Net stockholders' equity 896,719 943,470
----------- -----------
Total liabilities and stockholders' equity $ 1,981,430 $ 1,925,784
=========== ===========
|
See accompanying Notes to Financial Statements.
Diversified Product Inspections, Inc.
Statements of Operations
Year ended December 31
2005 2004
----------- -----------
Revenues:
Inspections $ 1,672,848 $ 1,790,473
Storage fees 254,750 207,198
Use agreement -- 96,412
----------- -----------
Total revenues 1,927,598 2,094,083
Operating expenses:
Salaries and related benefits 1,195,818 1,135,961
Professional fees 119,699 170,376
Rent 52,500 210,000
Shipping and handling costs 164,182 167,218
Depreciation and amortization 70,345 55,977
Other general and administrative 393,140 288,702
----------- -----------
Total operating expenses 1,995,684 2,028,234
----------- -----------
Operating (loss) income (68,086) 65,849
Interest expense 59,087 19,900
----------- -----------
(Loss) income before income taxes (127,173) 45,949
Deferred income tax benefit (expense) 31,985 (18,172)
----------- -----------
Net (loss) income $ (95,188) $ 27,777
=========== ===========
(Loss) earnings per share:
Basic $ (0.00) $ 0.00
=========== ===========
Diluted $ (0.00) $ 0.00
=========== ===========
|
See accompanying Notes to Financial Statements.
Diversified Product Inspections, Inc.
Statements of Stockholders' Equity
Number of
Shares Additional Net
Issued and Common Paid-in Accumulated Stockholders'
Outstanding Stock Capital Deficit Equity
---------- ----------- ----------- ----------- -----------
Balance at January 1, 2004, as
previously reported 14,961,457 $ 149,615 $ 1,620,328 $(1,141,428) $ 628,515
Prior period adjustment -- -- -- (49,368) (49,368)
---------- ----------- ----------- ----------- -----------
Balance at January 1, 2004, as restated 14,961,457 149,615 1,620,328 (1,190,796) 579,147
Stock issued for convertible debt 4,173,857 41,738 294,808 -- 336,546
Net income for 2004 -- -- -- 27,777 27,777
---------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 19,135,314 191,353 1,915,136 (1,163,019) 943,470
Stock issued for services 499,507 4,995 43,442 -- 48,437
Net loss for 2005 -- -- -- (95,188) (95,188)
---------- ----------- ----------- ----------- -----------
Balance at December 31, 2005 19,634,821 $ 196,348 $ 1,958,578 $(1,258,207) $ 896,719
========== =========== =========== =========== ===========
|
See accompanying Notes to Financial Statements.
Diversified Product Inspections, Inc.
Statements of Cash Flows
Year ended December 31
2005 2004
--------- ---------
Operating activities
Net (loss) income $ (95,188) $ 27,777
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Deferred income tax (benefit) expense (31,985) 18,172
Provision for bad debt -- (10,000)
Stock issued for services 48,437 --
Depreciation 68,569 54,141
Amortization 1,776 1,836
Gain on sale of vehicles (654) (1,601)
Changes in operating assets and liabilities:
Accounts and other receivables (132,813) 179,821
Prepaid expenses and other assets 7,067 (7,266)
Accounts payable and accrued expenses 23,148 (62,391)
Accrued salaries (7,916) 14,574
Deferred revenue 50,000 (91,667)
--------- ---------
Net cash (used in) provided by operating activities (69,559) 123,396
Investing activities
Proceeds from disposal of assets 2,050 20,973
Purchases of property and equipment (90,156) (880,427)
--------- ---------
Net cash used in investing activities (88,106) (859,454)
Financing activities
Proceeds from line of credit 52,094 --
Proceeds from long-term debt -- 800,000
Principal payments on notes payable and capital lease
obligations (25,584) (32,303)
--------- ---------
Net cash provided by financing activities 26,510 767,697
--------- ---------
Net (decrease) increase in cash (131,155) 31,639
Cash at beginning of year 328,048 296,409
--------- ---------
Cash at end of year $ 196,893 $ 328,048
========= =========
Supplemental disclosures of cash flow information
Cash paid for interest $ 59,087 $ 5,855
Supplemental disclosures of noncash activity
Equipment purchases financed by capital lease $ 10,655 $ --
Convertible debt and related accrued interest
converted to stock -- 336,546
|
See accompanying Notes to Financial Statements.
Diversified Product Inspections, Inc.
Notes to Financial Statements
December 31, 2005
1. Significant Accounting Policies
Description of Business
Diversified Product Inspections, Inc. (the "Company") specializes in conducting investigations and laboratory analysis of a wide variety of products to determine the "cause and origin" of product failures. The Company's primary customers consist of national insurance companies that are interested in subrogating claims to recover losses. Subrogation is a legal principle which provides that, to the extent an insurer has paid for a loss, the insurer receives the policyholder's right to recover from any third party that caused the loss. The Company has accumulated a large database of known defective products that includes photos and other documentation that are used in their investigations. After an investigation is complete, the Company issues an inspection report related to the product failure. The Company also provides storage of the evidence collected during the investigation, until it is requested by the customer to be disposed.
Major Customers and Credit Concentration
The Company's largest customers are national insurance customers. Revenues from the Company's largest individual customers accounted for approximately 18%, 18% and 10% in 2005 and 25%, 13% and 10% in 2004 of total revenues.
Revenue Recognition
The Company recognizes inspection report revenue when the earnings process is complete, which is typically after an investigation has been completed and the final written report has been reviewed and approved by management and submitted to the customer. Once the final report has been approved by management and submitted to the customer, the Company has no further obligation to the customer in regards to this matter.
The Company recognizes storage fee revenue on a pro-rata basis as earned.
Advertising Costs
Advertising costs are expensed as incurred and totaled $9,701 in 2005 and $28,321 in 2004.
Accounts Receivable
One customer accounts for 22% of total accounts receivable at December 31, 2005 and 44% of total accounts receivable at December 31, 2004. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support customer receivables. The Company charges accounts to bad debt expense as they are determined to be uncollectible based upon a review of aging and collections. Credit losses, when realized, have been within the range of the Company's expectations and, historically, have not been significant.
Diversified Product Inspections, Inc.
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment is carried at cost. Repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Building 39 years Equipment, furniture and fixtures 3-7 years Vehicles 5 years Leasehold improvements 3 years |
During December 2004, the Company purchased land and a building to serve as the Company's office and warehouse. At December 31, 2004, this property was not yet being used in the Company's operations. During 2005, the Company moved its office and warehouse to this new location.
Stock Options
The Company accounts for its stock options under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25") and related interpretations. The Company has adopted the disclosure-only provisions of the Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123") as amended by FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure ("FAS 148"). Had the Company elected to adopt the fair value recognition provisions of FAS 123, pro forma net income and earnings per share would be as follows for the years ended December 31:
2005 2004
---------- ----------
Net (loss) income, as reported $ (95,188) $ 27,777
Employee compensation, net of tax 25,861 25,861
---------- ----------
Pro forma net (loss) income $ (121,049) $ 1,916
========== ==========
(Loss) earnings per share:
Basic, as reported $ (0.00) $ 0.00
========== ==========
Diluted, as reported $ (0.00) $ 0.00
========== ==========
Basic, pro forma $ (0.00) $ 0.00
========== ==========
Diluted, pro forma $ (0.00) $ 0.00
========== ==========
|
Diversified Product Inspections, Inc.
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Stock Options (continued)
During December 2004, the FASB revised FAS 123. This revision eliminates the alternative to use APB 25's intrinsic value method that was previously provided under FAS 123 and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the grant-date fair value of those awards. This revision is effective for the Company as of January 1, 2006.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments approximates their carrying value based upon the type and nature of the financial instruments.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
2. Convertible Debt and Equity Line of Credit Agreement
During April 2002, the Company entered into a subscription agreement with a company (the "Investor") in which the Company ultimately received $300,000 (in $100,000 tranches) from the Investor in return for a corresponding amount of convertible debentures and related warrants. The debentures accrued 6% cumulative interest. During April, June and October 2002, the Company received each of its $100,000 tranches under the terms of the agreement. In 2004, the Investor exercised its right and converted this $300,000 of debt, plus accrued interest, into 4,173,857 shares of the Company's common stock in accordance with the terms of the related agreement.
Upon funding of the first tranche in April 2002, the Company issued to the Investor warrants to purchase the resulting number of shares of the Company's stock that equals the total amount being funded in all three tranches, divided by the share price (five day average closing bid price prior to closing). The warrants are exercisable for four years from the corresponding closing date of that tranche being funded, at 110% of the five day average closing bid price for the five trading days prior to the closing date of each funding tranche and carry a cashless provision only at the option of the Company. As such, the Company issued warrants to the Investor to purchase an additional 462,963 shares of stock at an exercise price of $0.2376, 462,963 shares of stock at an exercise price of $0.23, and 462,963 shares of stock at an exercise price of $0.088, on each of the tranche dates. These warrants expire in April, June and October of 2006, respectfully.
Diversified Product Inspections, Inc.
Notes to Financial Statements (continued)
2. Convertible Debt and Equity Line of Credit Agreement (continued)
Also during April 2002, the Company entered into an equity line of credit investment agreement with the Investor that provided for the purchase of shares of the Company's common stock. The effective date of this equity line of credit investment agreement was October 2002 and it expired in April 2004. Under the terms of the equity line of credit investment agreement, the Company issued warrants enabling the Investor to purchase 1,388,889 shares of stock at an exercise price of $0.2376 per share, which was above the trading value of the stock at the date the warrants were issued. These warrants expire in April 2006.
As a result of the warrants related to the convertible debt and equity line of credit discussed above and the employee stock options discussed in Note 7, the Company has reserved 10,779,778 shares of common stock for future issuance.
3. Line of Credit and Long-Term Debt
The Company borrows funds under a $100,000 revolving line of credit agreement entered into during 2005 with a financial institution. Under the terms of this agreement, any borrowings bear interest at the financial institution's prime rate (7.25% at December 31, 2005) and is secured by the Company's land and building. This line of credit is due on demand.
Long-term debt is summarized as follows as of December 31:
2005 2004
-------- --------
Note payable, secured by land and a building, due in
monthly installments of $6,751 through May 2010,
including interest at 6%, with the remaining balance
due June 2010
$785,331 $800,000
Note payable, secured by a vehicle, due in monthly
installments of $665, including interest at 11.21%,
through February 2009
20,262 25,643
Notes payable repaid in 2005 -- 3,626
-------- --------
805,593 829,269
Less portion classified as current 42,496 25,248
-------- --------
Long-term portion $763,097 $804,021
======== ========
|
Land and building securing the line of credit and note payable has a carrying amount of $868,035 at December 31, 2005. Vehicle securing note payable has a carrying amount of $18,195.
Aggregate maturities of the Company's long-term debt as of December 31, 2005, are as follows:
2006 $ 42,496
2007 43,784
2008 46,861
2009 42,500
2010 629,952
---------
$ 805,593
=========
|
Diversified Product Inspections, Inc.
Notes to Financial Statements (continued)
4. Lease Obligations
During 2005, the Company relocated its office and warehouse from a leased facility to its new facility. Concurrently, the Company began negotiating for an early termination of its lease agreement, which originally expired on December 31, 2005 and provided for monthly payments of $18,125. Management believes the Company has satisfied separate termination arrangements made with the lessor and suspended lease payments beginning in April 2005. Subsequently, the lessor filed a lawsuit against the Company claiming breach of contract. A reasonable estimate of any possible future liability related to this lawsuit is not presently determinable, and accordingly, the Company has not recorded a liability related to this matter.
During 2005, the Company purchased $10,655 of equipment under an agreement classified as a capital lease. Also, certain equipment is leased under agreements classified as operating leases. Future minimum payments for these leases, by year and in the aggregate, consist of the following as of December 31, 2005:
Capital Operating
-------- --------
2006 $ 4,954 $ 11,312
2007 4,954 11,312
2008 2,065 5,656
-------- --------
Total minimum lease payments 11,973 $ 28,280
========
Amount representing interest 3,226
--------
Present value of minimum lease payments
(including $3,094 classified as current) $ 8,747
========
|
Property and equipment includes the following amounts for capital leases as of December 31, 2005:
Equipment $ 10,655
Less accumulated depreciation 1,776
--------
Net equipment under capital lease $ 8,879
========
|
Amortization of this asset, computed by the straight-line method over the term of the lease, is included in depreciation and amortization expense.
5. Concentration of Risk
Periodically, the Company has cash on deposits with financial institutions which exceed Federal Deposit Insurance Corporation ("FDIC") limits. Balances in excess of the insurance limits are subject to the risk the financial institution will not pay upon demand. At December 31, 2005, the Company's balances on hand with financial institutions exceed the FDIC coverage by approximately $34,000.
Diversified Product Inspections, Inc.
Notes to Financial Statements (continued)
6. Income Taxes
For tax purposes the Company has net operating loss ("NOL") carryovers which are available to offset future taxable income. These NOL carryovers expire as follows:
Year Year of NOL
Generated Expiration Carryover
----------- ----------------------- ------------------
1995 2010 10,943
1996 2011 1,704
1997 2012 1,979
1998 2018 99,100
1999 2019 109,805
2000 2020 108,786
2001 2021 88,508
2002 2022 114,597
2004 2024 53,238
2005 2025 58,028
---------
$ 646,688
=========
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are as follows as of December 31:
2005 2004
----------- -----------
(Restated)
Deferred tax assets:
NOL carryovers $ 247,617 $ 228,697
Deferred revenue 49,777 30,632
Expenses not currently deductible 172,817 172,817
Reserve for doubtful accounts 9,573 9,573
Other 523 523
----------- -----------
Net deferred tax assets 480,307 442,242
Deferred tax liability - tax over book depreciation (15,288) (9,208)
----------- -----------
Net deferred tax assets (including $59,433 in 2005
and $58,288 in 2004 classified as current) $ 465,019 $ 433,034
=========== ===========
|
The ultimate realization of these assets is dependent upon the generation of future taxable income sufficient to offset the related deductions and NOL carryovers within the applicable carryover periods as previously described. Management has determined that generation of such income is more likely than not. Accordingly, there is no valuation allowance as of December 31, 2005 or 2004.
Diversified Product Inspections, Inc.
Notes to Financial Statements (continued)
6. Income Taxes (continued)
The reconciliation of income tax (benefit) expense attributable to continuing operations computed at the U.S. federal statutory tax rates to the income tax benefit recorded is as follows for the years ended December 31:
2005 2004
---------- ----------
Income tax (benefit) expense at U.S.
statutory rates of 34% $ (43,239) $ 15,622
Effect of permanent differences 3,117 2,237
Other 8,137 313
========== ==========
$ (31,985) $ 18,172
========== ==========
|
7. Employee Stock Options
The Company follows APB 25 and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is equal to or greater than the market price of the underlying stock on the grant date, no compensation expense is generally recognized.
Pro forma information regarding net income, as presented in Note 1, is required by FAS 123, as amended by FAS 148, and has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123. The fair value for these options, which were issued in 2002, was estimated using a Black-Scholes option pricing model with the following assumptions: risk-free interest rates of 3.05%, expected lives of 5 years, expected volatility of 43.9% and no expected dividends.
The Company has no formal stock option plan, however in November 2002, the Company issued to employees options to acquire 8,028,000 shares of the Company's common stock (8,000,000 of which were issued to five employees who are also board members). These options vest at the rate of 20% annually beginning at the grant date and expire upon termination of employment. A summary of the Company's stock option activity, and related information for the years ended December 31 is as follows:
2005 2004
-------------------------------- ---------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------------- ------------- ------------- -------------
Outstanding at beginning of year 8,015,000 $ 0.11 8,028,000 $ 0.11
Forfeited (13,000) -- (13,000) --
------------- ------------- ------------- -------------
Outstanding at end of year 8,002,000 $ 0.11 8,015,000 $ 0.11
============= ============= ============= =============
Exercisable at end of year 6,402,000 4,815,000
|
Diversified Product Inspections, Inc.
Notes to Financial Statements (continued)
7. Employee Stock Options (continued)
Exercise prices for options outstanding as of December 31, 2005, range from $0.11 (8,000,000 shares) to $0.18 (2,000 shares).
8. Earnings Per Share Data
Basic (loss) earnings per share assumes no dilution and is computed by dividing net (loss) income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted (loss) earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants, using the treasury stock method of computing such effects and contingent shares related to potential conversion of convertible debt.
The following table sets forth the computation of basic (loss) earnings per share for the years ended December 31:
2005 2004
------------ ------------
Basic:
Net (loss) income $ (95,188) $ 27,777
Average shares outstanding 19,258,550 15,953,692
------------ ------------
Basic (loss) earnings per share $ (0.00) $ 0.00
============ ============
Diluted:
Net (loss) income $ (95,188) $ 27,777
============ ============
Average shares outstanding 19,258,550 15,953,692
Effect of dilutive stock options and warrants -
based on treasury stock method 813,866 2,935,962
------------ ------------
Diluted shares outstanding 20,072,416 18,889,654
============ ============
Diluted (loss) earnings per share $ (0.00) $ 0.00
============ ============
|
9. Deferred Revenue
The Company records deferred revenue for the portion of storage fees billed but not yet earned. Based on an analysis of storage fees, the Company has recorded a prior period adjustment of $49,368 effective January 1, 2004 for the deferred revenue, net of taxes, not previously recognized. While the December 31, 2004 balance sheet has been restated to reflect this adjustment, the effect on the 2004 operating results was not considered significant and the accompanying 2004 statements of operations and cash flows were not restated.
Diversified Product Inspections, Inc.
Notes to Financial Statements (continued)
10. Use Agreement
In December 2003, the Company entered into a use agreement whereby the user was allowed exclusive use of certain research data of the Company on product failure or failure patterns and quarterly updates of such data. The use agreement called for $100,000 annual payments starting at the date of the agreement. Either party could terminate the use agreement with 30 days written notice. This agreement was subsequently terminated; however, the Company had revenues of $96,412 in 2004 related to this use agreement.
11. Joint Venture
On December 30, 2004, the Company entered into a joint venture agreement with two other companies to form Vulnerability Assessment Group ("VAG"). The Company has a one-third interest in VAG. The purpose of VAG is to provide comprehensive assessment plans to individuals, businesses, industries, organizations and institutions of their vulnerability to terrorism, external or internal sabotage, employee assessment and safety, product safety and chemical and biological safety. As of December 31, 2005, VAG had no significant operations and the Company had incurred no significant costs related to VAG.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There were no changes in or disagreements with accountants on accounting and financial disclosure for the period covered by this report.
Item 8A. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives.
In connection with this report, John Van Zyll, our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation he concluded that our disclosure controls and procedures were effective in alerting him in a timely manner to information relating to the Company required to be disclosed in this report.
Item 8B. Other Information
Reports on Form 8-K.
During the period commencing the last quarter of the period covered by this Report until the date of filing of this Report, the Company did not file any Current Reports on Form 8-K.
PART III
Item 9. Directors and Executive Officers of the Registrant.
(a) Identity of our current directors and executive officers.
Name Age Positions with the Company ------- --- -------------------------- John Van Zyll 65 Chairman of the Board, Chief Executive Officer Marvin Stacy 72 Chief Operating Officer and Director Ann M. Furlong 53 Secretary and Director Warren Wankelman 62 Director Matt Walters 34 Director |
John Van Zyll currently serves as the Chairman of the Board and Chief Executive Officer. Mr. Van Zyll has served in this capacity since March 2001 and previously served in similar capacities with Diversified Product Investigations, Inc., the Company's subsidiary since its formation in 1991. Mr. Van Zyll has over 10 years of construction and investigation experience. He is a member of the Southern Building Code Congress International and the National Fire Protection Association and is a licensed Private Investigator. He holds certificates from the National Association of Investigative Specialists with specialties in Insurance Claim Investigation and Advanced Fire Investigation Techniques. Mr. Van Zyll is considered an expert in the field of investigation and subrogation by the insurance industry and has conducted over 100 training seminars and trained over 1900 insurance adjusters.
Marvin Stacy currently serves as a Director and the Company's Chief Operating Officer. Mr. Stacy has served in these capacities since March 2001 and previously served in similar capacities with Diversified Product Investigations, Inc., the Company's subsidiary since 1991. Mr. Stacy has over 40 years of experience in all aspects of electrical and mechanical engineering and design. As a licensed private investigator he assists with the operation of the laboratory and has designed custom testing equipment. Mr. Stacy assists Engineers with design solutions for manufacturers. Mr. Stacy is a member of IAMPO, the International Association of Mechanical and Plumbing Officials. Mr. Stacy assists in the Human Resource Dept., with regards to hiring qualified-professional personnel.
Ann M. Furlong currently serves as a Director and the Company's Secretary. Ms. Furlong has served in these capacities since March 2001 and previously served in similar capacities with Diversified Product Investigations, Inc., the Company's subsidiary since 1991. With over 29-years of management experience Ms. Furlong has provided administrative and organizations expertise. As a licensed private investigator she assists with research projects. She has traveled to assist with stock promotional shows for the Company along with seminar presentations to the Insurance Industry. Ms. Furlong focuses on special projects and assists in the operations of the Company.
Warren Wankelman currently serves as a Director and as the Vice President of Marketing for the Company. Mr. Wankelman has served in these capacities since March 2001 and previously served in similar capacities with Diversified Product Investigations, Inc., the Company's subsidiary since 2001. Mr. Wankelman has over 25 years of experience in Sales/Marketing and Operations Management. A graduate of Northwestern University, Mr. Wankelman has consistently demonstrated effective marketing and management ability in a career of leadership positions, including Executive Vice President of Punta Gorda Isles, Inc., President and owner of Wankelman- Swen & Associates, Inc. and Director of Marketing for Saddlebrook, Inc. of Knoxville, Tennessee.
Matt Walters currently serves as a Director and Chief Information Officer of the Company. Mr. Walters has served in this capacity since May 2001. Mr. Walters has over 10 years experience in IT (Information Technology) and Facilities Management. He is a graduate of Tusculum College with a BS in Organizational Management and has attended New Horizons Computer Learning Center. As a Microsoft Certified Professional, his client list includes TVA, SAIC, Lockheed-Martin, Pfizer Pharmaceuticals, Philips Magnavox, and BellSouth.Net.
Mr. Walters has implemented various IT quality controls and security measures for the company and is responsible for implementation of a new company service, the HomeCheckSafety.com. He also assisted with designing a custom database and instituting digital photography and he has enhanced the Company's investigation reports.
Executive Officers
All of our executive officers also serve as our directors. The executive officers serve at the pleasure of our board of directors and our chief executive officer.
Section 16 Reporting
No person who, during the year ended December 31, 2004, was a director,
officer or beneficial owner of more than ten percent of the Company's Common
Stock (which is the only class of securities of the Company registered under
Section 12 of the Securities Exchange Act of 1934 (the "Act") (a "Reporting
Person") failed to file on a timely basis, reports required by Section 16 of the
Act during the most recent fiscal year or prior years. The foregoing is based
solely upon a review by the Company of Forms 3 and 4 during such fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to such fiscal year,
and any representation received by the Company from any reporting person that no
Form 5 is required.
Code of Ethics
In April 2005 the Company adopted a Code of Ethics applying to its executive officers. Such Code of Ethics is being filed herewith as Exhibit 14.1 to this Annual report on Form 10-KSB.
Item 10. Executive Compensation.
The following Summary Compensation Table sets forth summary information as to compensation received by the Company's Executive Officers as executive officers of the Company during the fiscal years ended December 31, 2003 through December 31, 2005 (collectively, the "named executive officers") for services rendered to the Company in all capacities during the three fiscal years ended December 31, 2005.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
Awards Payouts
Name Other Restricted Securities
and Annual Stock Underlying All
Principal Year Compen- Awards Options/ LTIP Other
Position Position Ended Salary($) Bonus($) sation($) $ SARS Payouts Compensation
-------- --------- ----- --------- -------- --------- - ---- ------- ------------
John Van Chief 12/31/2005 $58,614 0 0 0 0 0 0
Zyll Executive 12/31/2004 $57,538 0 0 0 0 0 0
Officer 12/31/2003 $49,000 0 0 0 0 0 0
Marvin Stacy Chief 12/31/2005 $53,414 0 0 0 0 0 0
Operating 12/31/2004 $53,479 0 0 0 0 0 0
Officer 12/31/2003 $49,000 0 0 0 0 0 0
Ann Furlong Secretary 12/31/2005 $53,414 0 0 0 0 0 0
12/31/2004 $52,309 0 0 0 0 0 0
12/31/2003 $49,000 0 0 0 0 0 0
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Compensation of Directors
During the fiscal year ended December 31, 2005, no officer or director received any type of compensation from our Company for serving as a director. No arrangements are presently in place regarding compensation to directors for their services as directors or for committee participation or special assignments.
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information as of March 27, 2006 regarding the beneficial ownership of our common stock held by each of our executive officers and directors, individually and as a group and by each person known to us which beneficially owns in excess of five percent of the common stock. Unless otherwise indicated, each of the persons listed has sole voting and dispositive power with respect to the shares shown as beneficially owned.
Number of Shares of Percent of
Common Stock Common Stock
Name and Address Beneficially Beneficially
of Beneficial Owner (1) Owned (2) Owned
----------------------- ----------------- ------------------
Jan Telander 8,159,475(3) 36.4%
John Van Zyll 7,154,011(4) 36.4%
EIG Capital, Ltd. 4,445,815(5) 22.6%
EIG Venture
Capital Ltd. 4,125,815 21.0%
Ann M. Furlong 4,225,811(6) 19.5%
Marvin Stacy 4,119,055(4) 19.0%
Sofcon Ltd. 3,542,360(6) 15.8%
Warren Wankelman 200,000(7) *
Matt Walters 205,000(7) *
All Executive Officers and
Directors as a Group
(five (5) persons) 15,903,877(8) 63.5%
----------------
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* Represents less than one percent (1%) of the outstanding shares of our common stock.
(1) Based upon 19,634,821 shares of our common stock issued and outstanding as of March 27, 2006. The number of shares of common stock beneficially owned by each person or entity is determined under the rules promulgated by the SEC. Under such rules, beneficial ownership includes any shares as to which the person or entity has sole or shared voting power or investment power and shares which such person or entity has the right to acquire within sixty days after March 27, 2006. The inclusion herein of any shares deemed beneficially owned does not constitute an admission by such person of beneficial ownership of such shares.
(2) The business address of each of Jan Telander, EIG Capital, Ltd., EIG Venture Capital, Ltd. and Sofcon, Ltd. is 60 Market Square, Belize City, Belize. The business address of each of the other person listed in the table is 1059 East Tri-County Blvd., Oliver Springs, Tennessee 37840.
(3) Includes all shares beneficially owned by EIG Capital Investments, Ltd., EIG Venture Capital, Ltd. and Sofcon, Ltd., including an aggregate of 2,777,778 shares issuable to Sofcon, Ltd. upon exercise of currently exercisable warrants. Mr. Telander is President and a director of each of EIG Capital Investments, Ltd., EIG Venture Capital, Ltd. and Sofcon, Ltd.
(4) Includes options to purchase 2,000,000 shares of common stock currently exercisable at $.108 per share.
(5) Includes an aggregate of 320,100 shares owned directly by EIG Capital Investments Ltd. and an aggregate of 4,125,815 shares beneficially owned by EIG Venture Capital Ltd. EIG Capital Ltd. owns all of the outstanding capital stock of each of such entities.
(6) Includes warrants to purchase an aggregate of 2,777,778 shares of our common stock.
(7) Includes options to purchase 200,000 shares of our common stock currently exercisable at $.108 per share.
(8) Includes options to purchase an aggregate of 6,400,000 shares of our common stock currently exercisable at $.108 per share.
Item 12. Certain Relationships and Related Transactions.
Not Applicable.
Item 13. Exhibits.
Exhibit Number Description
-------------- ---------------------
2.1 Share Exchange Agreement between with Diversified Product
Inspections, Inc., a Florida corporation filed with the
Commission on Form 8-K on March 6, 2001 and incorporated
herein by reference.
3.1 Articles of Incorporation and Amendment to Articles of
Incorporation are incorporated herein by reference to the
Company's Registration Statement on Form 10-SB filed with the
Commission on February 23, 1999.
3.2 Bylaws of the Company are incorporated herein by reference to
the Company's Registration Statement on Form 10-SB filed with
the Commission on February 23, 1999.
3.3 Articles of Incorporation and Amendment to Articles of
Incorporation are incorporated herein by reference to the
Company's Registration Statement on Form 10-SB filed with the
Commission on February 23, 1999.
3.4 Bylaws of the Company are incorporated herein by reference to
the Company's Registration Statement on Form 10-SB filed with
the Commission on February 23, 1999.
10.1 Articles of Merger and Agreement and Plan of Merger are
incorporated herein by reference to the Company's Registration
Statement on Form 10-SB filed with the Commission on February
23, 1999.
10.2 Diversified Product Inspections, Inc. Year 2001
Employee/Consultant Stock Compensation Plan filed as an
Exhibit to the Company's registration statement on Form S-8
filed with the Commission on March 6, 2001 and incorporated
herein by reference.
10.3 Purchase and Sale Agreement and Escrow Instructions dated as
of December 21, 2004 between TN-801 Tri-County, LLC and the
Company. Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004 (the "2004 10-KSB").
10.4 Note for Business and Commercial Loans (Non-Revolving) in the
principal amount of $800,000 dated December 21, 2004 from the
Company to AmSouth Bank. Incorporated by reference to Exhibit
10.4 to the 2004 10-KSB.
10.5 Note for Business and Commercial Loans (Revolving), dated
April 22, 2005 in the principal amount of $100,000 from the
Company to AmSouth Bank.*
14.1 Code of Ethics.*
31.1 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
32.1 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
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*Filed herewith
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees billed to us for the fiscal years ended December 31, 2005 and December 31, 2004 by Coulter & Justus, P.C. ("C&J"):
Fiscal Year Fiscal Year
Ended Ended
December 31, 2005 December 31, 2004
Audit Fees (1) $ 32,765 $ 32,615
Audit Related Fees (2) $ 0 $ 0
Tax Fees (3) $ 4,605 $ 5,837
All Other Fees $ 897 (4) $ 1,087 (5)
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(1) Consists of fees billed for professional services rendered for the audit of the financial statements of the Company as of December 31, 2005 and December 31, 2004 and reviews of the financial statements included in the Company's Quarterly Reports on Form 10-QSB for the quarters during such fiscal years.
(2) Consists of fees for services relating to accounting consultation related to the performance of the audit that are not reported as audit fees.
(3) Consists of tax filing and tax related compliance and other advisory services.
(4) Consists of fees for meeting with an investor at request of the Company and annual renewal fee for software provided to the Company.
(5) Represents the sale price of a fixed asset software package sold to the Company.
Our Board of Directors determined that the provision of the above non-audit services was compatible with C&J maintaining its independence.
Pre-Approval of Services by the Independent Auditor
The Board of Directors has established policies and procedures for the approval and pre-approval of audit services and permitted non-audit services. The Board has the responsibility to engage and terminate the Company's independent registered public accountants, to pre-approve their performance of audit services and permitted non-audit services and to review with the Company's independent registered public accountants their fees and plans for all auditing services. All services provided by and fees paid to C&J in 2004 and 2005 were pre-approved by the Board of Directors.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized
Dated: March 31, 2006
Diversified Product Inspections, Inc.
By: /s/ John Van Zyll ---------------------- John Van Zyll Chief Executive Officer (Principal Executive Officer and Principal Accounting Officer) |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ John Van Zyll -------------------- John Van Zyll Chairman of the Board March 31, 2006 /s/ Marvin Stacy -------------------- Marvin Stacy Chief Operating Officer and Director March 31, 2006 /s/ Ann M. Furlong -------------------- Ann M. Furlong Secretary and Director March 31, 2006 /s/ Warren Wankelman -------------------- Warren Wankelman Director March 31, 2006 /s/ Matt Walters -------------------- Matt Walters Director March 31, 2006 |
DIVERSIFIED PRODUCT INSPECTIONS, INC.
CODE OF ETHICS
April 2005
Our Standards
As an employee or director of Diversified Product Inspections, Inc. (the "Company") you share the privilege and responsibility of upholding our Company's ethical reputation. You do this each time you act honestly, ethically and legally. While many, if not most, of the situations you encounter in the conduct of your own or the Company's business or other dealings present clear choices as to proper conduct, there are also many situations where making the right choice can be challenging.
We have prepared this Code of Ethics (the "Code") to summarize certain key policies and procedures that we believe govern doing business in an ethical and legal manner. This Code does not describe all of the details or all of the applicable laws, regulations or Company policies. Rather, we have attempted to discuss those you are most likely to encounter. You are expected to understand how our policies apply to you and to follow them. We encourage you to discuss any questions or concerns you may have with your supervisor or to request advice from our General Counsel, Lisa Temple, Esq.
Responsibilities of All Employees and Directors
All employees and directors of the Company are responsible for complying with this Code. Any employee or director having information concerning any prohibited or unlawful act shall promptly report such matter to the General Counsel. While this is the preferred reporting procedure, employees should also feel free to report to anyone in management, including the Board of Directors, the Chief Financial Officer or a Vice President.
Employees and directors should be advised of this reporting obligation and encouraged to report any prohibited or unlawful activities of which they are aware. There will be no reprisals for reporting such information in good faith, even if it later turns out that all or some the report is incorrect..
Conflicts of Interest
Every director and employee has a duty to avoid business, financial or other direct or indirect interests or relationships which conflict with the interests of the Company or which divide his or her loyalty to the Company. Any activity which even appears to present such a conflict must be avoided or terminated unless, after disclosure to the General Counsel, it is determined and communicated in writing to the employee or director that the activity is not harmful to the Company or otherwise improper.
A conflict or the appearance of a conflict of interest may arise in many ways. For example, depending on the circumstances, the following may constitute an improper conflict of interest:
o Ownership of or an interest in a competitor or in a business with which the Company has or is contemplating a relationship (such as a supplier, customer, landlord, distributor, licensee/ licensor, etc.) either directly or indirectly, such as through family members.
o Profiting, or assisting others to profit, from confidential information or business opportunities that are available because of employment by the Company or being a director of the Company.
o Providing service to a competitor or a proposed or present supplier or customer as an employee, director, officer, partner, agent or consultant.
o Soliciting or accepting gifts, payments, loans, services or any form of compensation from suppliers, customers, competitors or others seeking to do business with the Company. Social amenities customarily associated with legitimate business relationships are permissible. These include the usual forms of entertainment such as lunches or dinners as well as occasional gifts of modest value. While it is difficult to define "& customary," "modest," or "usual" by stating a specific dollar amount, common sense should dictate what would be considered extravagant or excessive. If a disinterested third party would be likely to infer that it affected your judgment, then it is too much. All of our business dealings must be on arm's-length terms and free of any favorable treatment resulting from the personal interest of our employees. Loans to employees from financial institutions which do business with the Company are permissible as long as the loans are made on prevailing terms and conditions.
o Influencing or attempting to influence any business transaction between the Company and another entity in which an employee or director has a direct or indirect financial interest or acts as a director, officer, employee, partner, agent or consultant.
o Buying or selling securities of any other company using non-public information obtained in the performance of an employee's duties, or providing such information so obtained to others.
Disclosure is the key. Any employee or director who has a question about whether any situation in which he or she is involved amounts to a conflict of interest or the appearance of one should disclose the pertinent details, preferably in writing, to the Company's General Counsel and should not act until advised in writing that the action is not harmful to the Company or otherwise improper.
To summarize, each employee and director is obligated to disclose his or her own conflict or any appearance of a conflict of interest. The end result of the process of disclosure, discussion and consultation may well be approval of certain relationships or transactions on the grounds that, despite appearances, they are not harmful to the Company. But all relationships or transactions that are actual conflicts of interest or may appear to be conflicts of interest are prohibited, even if they do not harm the Company, unless they have gone through this approval process.
Compliance with Laws and Regulations
It is company policy to comply with the laws of each state and country in which we do business. It is the responsibility of our Company's directors, management and employees to be familiar with the laws and regulations that relate to our business responsibilities and to comply with them.
The General Counsel is always available for consultation on the laws which relate to our businesses. However, it is the responsibility of management to ensure compliance with applicable laws.
If an employee or director has any question whether a transaction or course of conduct complies with applicable statutes or regulations, it is the responsibility of that employee or director to obtain legal advice from the General Counsel and act in accordance with that advice. It is the responsibility of management to ensure that employees are aware of their responsibilities in this regard.
Set forth below are several areas of regulated business activity that require particular attention.
Environmental Laws and Regulations
The Company is committed to conducting its business in an environmentally sound manner. Management and employees are required to be familiar with environmental laws and regulations which relate to their employment responsibilities and to comply with them.
Workplace Safety Laws and Regulations
In the interest of maintaining a safe and healthy workplace, the Company requires full compliance with applicable workplace safety and industrial hygiene standards mandated by law.
Compliance with Securities Laws
The Company is often required by the securities laws of the United States to disclose to the public important information regarding the Company.
An employee or director who knows important information about the Company that has not been disclosed to the public must keep such information confidential. It is a violation of United States law to purchase or sell the Company's stock on the basis of such important non-public information. Employees and directors may not do so and may not provide such information to others for that or any other purpose.
Directors and employees may not buy or sell securities of any other company using important non-public information obtained in the performance of their duties. Directors and employees may not provide such information so obtained to others.
You should understand that securities laws are taken very seriously and government agencies have developed extensive ways to monitor securities trading activities. Violations of securities laws can result in large civil and criminal penalties against companies and individuals.
Political Activities and Contributions
The Company encourages directors and employees to be involved personally in political affairs. However, no director or employee shall directly or indirectly use or contribute funds or assets of the Company for or to any political party, candidate or campaign unless such a use or contribution is lawful and is approved in writing by the General Counsel.
Respect for Trade Secrets
It is the policy of the Company to respect the trade secrets and proprietary information of others. Although information obtained from the public domain is a legitimate source of competitive information, a trade secret obtained through improper means is not. The unauthorized use of trade secrets or other proprietary information could subject both the Company and you to substantial civil liability.
If a competitor's trade secrets or proprietary information are offered to you in a suspicious manner, or if you have any question about the legitimacy of the use or acquisition of competitive information, you should contact the General Counsel immediately. No action regarding such information should be taken before consultation with the General Counsel.
Confidentiality of Personal Information
Confidentiality applies not only to business information, but to the personal information of the Company's employees, former employees, job applicants and other persons. The Company requires that personal information be collected, processed, stored and transferred with adequate precautions to ensure confidentiality and be accessible only to those individuals with legitimate reasons to know about or have access to the information. When appropriate, the Company will ask individuals for their consent to the collection, processing, storage and transfer of personal information and employees will be given the opportunity to review their personal data held by the Company and correct any errors found.
Use of Funds and Assets and Complete and Accurate Books and Records; Second-Country Payments
Sales of the Company's products and services, and purchases of products and services of suppliers, shall be made solely on the basis of quality, price and service, and never on the basis of giving or receiving payments, gifts, entertainment or favors.
No Company funds or assets shall be used for any unlawful purpose. No director or employee shall purchase privileges or special benefits through payment of bribes, illegal political contributions, or other illicit payments.
No undisclosed or unrecorded fund or asset shall be established for any purpose.
No false or artificial entries shall be made in the books and records of the Company for any reason, and no employee shall engage in any arrangement that results in such prohibited act, even if directed to do so by a supervisor.
No payment shall be approved or made with the agreement or understanding that any part of such payment is to be used for any purpose other than that described by documents supporting the payment.
No payments of any kind (whether commissions, promotional expenses, personal expenses, free goods or whatever) shall be made to an unaffiliated distributor or sales agent (or employee or agent thereof) in any country other than that in which the sales were made or in which the distributor or sales agent has a substantial place of business. Such payments (sometimes referred to as "second-country" payments) may be made to other entities such as suppliers of goods and services provided under certain circumstances about which counsel should be consulted.
Equal Opportunity
The Company's policy is to provide equal employment opportunities and to treat all employees and applicants without regard to personal characteristics such as race, color, religion, sexual orientation, gender, age, national origin, marital status, pregnancy, disability or veteran status. Managers are responsible for implementing this policy.
Discrimination or Harassment
The Company strives to maintain a work environment free of verbal or physical harassment regarding racial, ethnic, religious, physical or sexual characteristics or any other prohibited factor. This policy applies to conduct that is made a condition of employment, is used as a basis for making employment or promotion decisions, creates an intimidating, hostile or offensive working environment or otherwise unreasonably interferes with an individual's work performance.
The Company may be held responsible for the harassment of or discrimination against employees by managers or other employees or even non-employees if the Company knows or should have known about the behavior and fails to take corrective action. Employees should be aware that they are subject to dismissal if they engage in harassment or discrimination of others.
Abuse of Drugs and Alcohol
Substance abuse presents serious health and safety hazards in the workplace. Our policy is to eliminate substance abuse by our employees. Applicants are subject to pre-employment drug testing. The Company also reserves the right to test employees who display unusual behavior or where there is reasonable suspicion of drug or alcohol abuse. Where permitted, employees may also be tested on a random, universal basis.
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, John Van Zyll, certify that:
1. I have reviewed this annual report on Form 10-KSB of Diversified Product Inspections, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and I have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls which could adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: March 31, 2006 /s/ John Van Zyll ----------------------------------------------- John Van Zyll Chairman of the Board, Chief Executive Officer, and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Diversified Product Inspections, Inc. (the "Company") on Form 10-KSB for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Van Zyll, Chairman of the Board, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 31, 2006 By: /s/ John Van Zyll
-----------------
John Van Zyll
Chief Executive Officer, Chairman of the
Board and Chief Financial Officer
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