U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: June 30, 2000
Commission file no.: 0-25657
DIVERSIFIED PRODUCT INSPECTIONS, INC.
------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Florida 65-0877741
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
3 Main Street
Oakridge, TN 37830
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (865) 482-8480
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None None
----------------------------------- -----------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.0001 par value per share
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(Title of class)
Copies of Communications Sent to:
Donald F. Mintmire
Mintmire & Associates
265 Sunrise Avenue, Suite 204
Palm Beach, FL 33480
Tel: (561) 832-5696 - Fax: (561) 659-5371
<PAGE>
Indicate by 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
---- ----
As of June 30, 2000, there are 11,116,900 shares of voting stock of the
registrant issued and outstanding.
PART I
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................F-2
Consolidated Statements of Operations...................................F-3
Consolidated Statements of Stockholders' Equity (Deficiency)............F-4
Consolidated Statements of Cash Flows...................................F-5
Notes to Consolidated Financial Statements..............................F-6
F-1
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<TABLE>
<CAPTION>
Diversified Product Inspections, Inc.
Consolidated Balance Sheets
December 31, June 30,
1999 2000
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(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 53,335 $ 23,624
Accounts receivable 69,226 79,336
Deferred tax assets 22,556 69,173
------------------- -------------------
Total current assets 145,117 172,133
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PROPERTY AND EQUIPMENT
Equipment 56,639 100,032
Vehicles 45,886 45,886
Less accumulated depreciation (32,722) (48,070)
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Net property and equipment 69,803 97,848
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OTHER ASSETS
Other assets 0 4,400
Deposit on real property 0 247,125
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Total other assets 0 251,525
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Total Assets $ 214,920 $ 521,506
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable $ 15,935 $ 17,194
Accrued expenses
Income taxes 11,401 14,779
Salaries 298,275 393,002
Current portion of long-term debt 10,551 19,025
Line of credit payable 21,585 16,809
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Total current liabilities 357,747 460,809
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LONG-TERM DEBT
Deferred taxes 5,178 5,178
Notes payable, net of current portion 31,915 58,786
Loan from shareholder 4,025 4,025
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Total long-term debt 41,118 67,989
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Total Liabilities 398,865 528,798
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STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $1.00 and $0.0001 par value, authorized
10,000,000 and 50,000,000 shares; 9,000,000 and
11,116,900 issued and outstanding shares 9,000,000 1,112
Additional paid-in capital (8,639,900) 799,801
Accumulated deficit (544,045) (808,205)
------------------- -------------------
Total stockholders' equity (deficiency) (183,945) (7,292)
------------------- -------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 214,920 $ 521,506
=================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
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<TABLE>
<CAPTION>
Diversified Product Inspections, Inc.
Consolidated Statements of Operations
Six Months Ended June 30,
(unaudited)
1999 2000
-------------------- ---------------------
<S> <C> <C>
REVENUES $ 295,075 $ 478,597
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OPERATING EXPENSES
Compensation:
Officers 90,000 90,000
Others 65,180 185,878
Depreciation 7,378 13,424
General and administrative 262,745 494,631
-------------------- ---------------------
Total operating expenses 425,303 783,933
-------------------- ---------------------
Operating Income (Loss) (130,228) (305,336)
-------------------- ---------------------
OTHER INCOME (EXPENSE):
Interest expense (1,523) (5,441)
-------------------- ---------------------
Total other income (expense) (1,523) (5,441)
-------------------- ---------------------
Net loss before income tax (131,751) (310,777)
Income tax expense 0 (46,617)
-------------------- ---------------------
Net income $ (131,751) $ (264,160)
==================== =====================
Net loss per common share $ (0.02) $ (0.02)
==================== =====================
Weighted average number of common shares outstanding 9,000,000 11,116,900
==================== =====================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
Diversified Product Inspections, Inc.
Consolidated Statements of Stockholders' Equity (Deficiency)
Total
Additional Stockholders'
Number of Common Paid-in Equity
Shares Stock Capital Deficit (Deficiency)
------------ -------------- -------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE,
December 31, 1998 9,000,000 $ 9,000,000 $ (8,639,900)$ (530,576)$ (170,476)
Year ended December 31, 1999:
Net loss 0 0 0 (13,469) (13,469)
------------ -------------- -------------- ------------ ----------------
BALANCE, December 31, 1999 9,000,000 9,000,000 (8,639,900) (544,045) (183,945)
Six months ended June 30, 2000:
-------------------------------
(unaudited)
Shares issued for cash 241,900 241,900 198,760 0 440,660
Reverse merger 1,875,000 (9,240,788) 9,240,941 0 153
Net income (loss) 0 0 0 (264,160) (264,160)
------------ -------------- -------------- ------------ ----------------
BALANCE, June 30, 2000 (unaudited) 11,116,900 $ 1,112 $ 799,801 $ (808,205)$ (7,292)
============ ============== ============== ============ ================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
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<TABLE>
<CAPTION>
Diversified Product Inspections, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30,
(unaudited)
1999 2000
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (131,751) $ (264,160)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 7,378 13,424
Income tax expense 0 (46,617)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 64,798 (10,110)
Increase (decrease) in accounts payable 44,562 1,259
Accrued income taxes 0 3,378
Increase (decrease) accrued salaries 42,150 94,727
------------------ -------------------
Net cash provided (used) by operating activities 27,137 (208,099)
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (37,886) (43,393)
Other assets 0 (4,400)
Deposit on real property 0 (247,125)
------------------ -------------------
Net cash provided (used) by investing activities (37,886) (294,918)
------------------ -------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Shareholder advances 0 0
Shareholder advance repayments (13,500) 0
Common stock sold for cash, net 0 440,660
Proceeds of long-term debt 32,272 42,241
Debt payments (2,308) (9,595)
------------------ -------------------
Net cash provided by financing activities 16,464 473,306
------------------ -------------------
Net increase (decrease) in cash and equivalents 5,715 (29,711)
CASH and equivalents, beginning of period 20,700 53,335
------------------ -------------------
CASH and equivalents, end of period $ 26,415 $ 23,624
================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid in cash $ 1,523 $ 5,441
================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
Diversified Product Inspections, Inc.
Notes to Consolidated Financial Statements
(Information with regard to the six months
ended June 30, 2000 and 1999 is unaudited)
(1) Summary of Significant Accounting Principles
TheCompany Diversified Product Inspections, Inc., (the "Company"), is a
Florida chartered corporation which conducts business from its offices
in Oak Ridge, Tennessee. The Company was incorporated on September 30,
1991. The Company is engaged primarily in the inspection and
investigation of product liability claims. All investigators are
licensed in the state where they practice.
The following summarize the more significant accounting and reporting
policies and practices of the Company:
a) Use of estimates In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statements of
financial condition, and revenues and expenses for the year then ended.
Actual results may differ significantly from those estimates.
b) Net income (loss) per common share Basic net income (loss) per
weighted average common share is computed by dividing the net income
(loss) by the weighted average number of common shares outstanding
during the period.
c) Property and equipment All property and equipment is recorded at
cost and depreciated over their estimated useful lives, generally 3, 5
or 7 years, using the straight-line method. Upon sale or retirement,
the costs and related accumulated depreciation are eliminated from
their respective accounts, and the resulting gain or loss is included
in the results of operations. Repairs and maintenance charges which do
not increase the useful lives of the assets are charged to operations
as incurred. Depreciation expense was $7,378 and $13,424 for the six
months ended June 30, 1999 and 2000, respectively.
d) Cash and equivalents The Company considers investments with an
initial maturity of three months or less as cash equivalents.
e) Principles of consolidated The consolidated financial statements
include the accounts of Diversified Product Inspections, Inc. and its
wholly owned subsidiary. Inter-company balances and transactions have
been eliminated.
f) Significant acquisition In March 2000, Shoe Krazy, Inc. issued
9,241,900 shares of common stock to acquire all the issued and
outstanding shares of the common stock of Diversified Product
Inspections, Inc., a Florida corporation, in a reverse merger, which
was accounted for as a reorganization of Diversified Product
Inspections, Inc.
g) Interim financial information The financial statements for the six
months ended June 30, 2000 and 1999 are unaudited and include all
adjustments which in the opinion of management are necessary for fair
presentation, and such adjustments are of a normal and recurring
nature. The results for the six months are not indicative of a full
year's results.
(2) Stockholders' Equity The Company has authorized 10,000,000 shares of
$1.00 par value common stock. The Company has 9,000,000 and 11,116,900
shares of common stock issued and outstanding at December 31, 1999 and
June 30, 2000.
F-6
<PAGE>
Diversified Product Inspections, Inc.
Notes to Consolidated Financial Statements
(2) Stockholders' Equity (Continued) In September 1991, the Company issued
9,000,000 shares to its founder for cash of $100. Through September
1996, the three principal officers and founders of the Company
contributed their services to the Company, in the amount of $24,000
each per year, totaling $72,000 per year and $360,000 for the five
years. The Company recorded contributed capital and expense for each of
those years.
In January and February 2000, the Company sold 241,900 shares of the
Company's common stock for $440,660 cash, net of offering costs, under
a Regulation D Rule 504 private placement. This offering was completed
through a registered broker/dealer.
(3) Income Taxes Deferred income taxes (benefits) are provided for certain
income and expenses which are recognized in different periods for tax
and financial reporting purposes. The Company had a net deferred income
tax asset of $22,556 and $69,173 at December 31, 1999 and June 30,
2000. The deferred tax asset is composed of accruals not currently
deductible.
(4) Going Concern As shown in the accompanying financial statements, the
Company incurred a net loss totaling $13,500 for the year ended
December 31, 1999, net loss of $264,000 for the six months ended June
30, 2000, and reflects stockholders' equity of approximately $276,000
as of March 31, 2000. The Company has entered into a conditional
contract to purchase certain real estate at a price of $1,800,000.
These conditions raise substantial doubt as to the ability of the
Company to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon increasing sales and
obtaining additional capital and financing. The Company has retained a
registered broker/dealer to raise additional funds for the Company. The
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
(5) Long-Term Debt The Company is committed to two auto loans with
remaining balances of $4,200 and $25,600 at June 30, 2000. The Company
makes monthly loan payments of $200 and $600 on those loans.
(6) Commitments The Company leased two facilities in Florida and North
Carolina. In addition, the Company leases warehouse storage space in
Florida and Tennessee. The Florida office lease is a month-to-month
lease at $920 per month. The Company is responsible for insuring the
premises. The North Carolina office lease was $900 per month and
expired May 1, 2000. The lease is now on a month-to-month basis. The
warehouse storage lease is also month to month, and the storage
facility bills the Company monthly for space utilized.
The Company is obligated under three capitalized equipment leases with
remaining balances of $8,500, $4,300 and $34,900 at June 30, 2000.
Under those leases, the Company is obligated to payments totaling
$10,000, $16,000 and $22,400 for the twelve months ending June 30,
2001, 2002 and 2003, respectively, and none thereafter.
In February, the Company entered into a lease on a building in
Tennessee comprised with a floor area of approximately 30,000 square
feet. The lease expires December 20, 2000 and the fixed minimum rent is
$30,000 per month (based on $12.00 per square foot per annum). The
lessee has also entered into an agreement to purchase the facility.
Lessee and lessor agree that portions of the fixed minimum payments
shall be applied to the purchase price under the agreement of sale that
follows.
F-7
<PAGE>
Diversified Product Inspections, Inc.
Notes to Consolidated Financial Statements
(6) Commitments (Continued: If the closing and the settlement date is set for
any date within the specified periods:
(a) December 20, 1999 and March 31, 2000, then 100%, or
(b) April 1, 2000 and June 30, 2000, then 85%, or
(c) July 1, 2000 and September 3, 2000, then 75%, or
(d) October 1, 2000 and December 31, 2000, then 50% of all fixed
minimum rent payments paid prior to closing shall be applied
toward the purchase price.
The Company is responsible for taxes, maintenance and insurance of the
premises under the terms of the lease.
F-8
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
General
Diversified Products Inspections, Inc., f/k/a/ Shoe Krazy, Inc., a Florida
corporation, (the "Company") was initially a development stage company with
limited assets or capital, with significant initial operations but no operations
or income since approximately 1995. However, in March 2000, the Company was able
to facilitate an acquisition of an operating business. [See: Part II. Item 6.
Exhibits and Reports on Form 8-K - Exhibit No. 2.1]
On March 13, 2000, Shoe Krazy, Inc., (the "Company"), a Florida
corporation, and Diversified Product Inspections, Inc.,("DPI"), a Florida
corporation, and the individual holders of 100%(One Hundred Percent) of the
outstanding capital stock of DPI (the "Holders") consummated a
re-organization(the "Reorganization") pursuant to a certain Agreement and Plan
of Reorganization ("Agreement") of such date. Pursuant to the Agreement, the
Holders tendered to the Company 100% of the issued and outstanding shares of
common stock of DPI in exchange for 10,875,000 plus additional shares to be
issued in connection with financing. Such shares for financing totaled 241,900
making total issued and outstanding shares 11,116,900 of the Company after
completion of the reorganization. Upon closing, DPI became a subsidiary of the
Company. The acquisition is being accounted for as a reorganization of the
Company which subsequently changed its name to Diversified Product Inspections,
Inc.
Simultaneously with the closing of the Reorganization, the then officer and
director of the Company tendered his resignation in accordance with the terms of
the Agreement. John Van Zyll, Ann M. Furlong, Marvin Stacy, Scott Tracy 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 Chief Financial
Officer, Secretary and Treasurer; and Marvin Stacy as Chief Operating Officer of
the Company.
Plan of Operation
Over the next twelve months the Company will focus its efforts on marketing
its newly acquired primary business, Subrogation Recovery. This business entails
the determination of the "Origin and Cause" of property damages and the
identification of the defective product which caused such loss. The Company's
proprietary Origin and Cause data on over 300,000 products enables it to quickly
identify a manufacturer of a defective product which it can sell to market
participants in the Insurance Industry at cost-effective levels. [See: Item 5.
Other Information. Description of Company]
The Company changed its fiscal year end to December 31 to conform with the
fiscal year end for its subsidiary.
<PAGE>
Results of Operations for the Six Months Ended June 30, 2000 and 1999
Financial Condition, Capital Resources and Liquidity
At June 30, 2000, the Company had assets totaling $521,506 and $528,798
in liabilities. The Company has $23,624 in working capital on hand as of June
30, 2000. A discussion of the Company's financial condition, capital resources
and liquidity as of June 30, 1999 would not be material due to its developmental
stage status and recent reorganization.
It is the Company's intention to raise up to $5,000,000 in cash through
the sale of additional equity capital pursuant to a Regulation D, 506 Private
Placement Offering, however, the can be no assurance that they will be
successful in their efforts. The ability of the Company to continue as a going
concern is dependent upon the availability of obtaining additional capital.
Net Operating Losses
The Company has incurred a net operating loss of $264,000 for the six
months ended June 30, 2000.
Year 2000 Compliance
The Company did not experience any material negative impact to its
operations as a result of the Year 2000 calendar change. The Company did not
experience any material impact to its financial condition as a result of
becoming Year 2000 compliant. The Company does not anticipate any material
disruption in its operations in the future as a result of the Year 2000 calendar
change.
Forward-Looking Statements
This Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, included or incorporated by reference in
this Form 10-QSB which address activities, events or developments which the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
finding suitable merger or acquisition candidates, expansion and growth of the
Company's business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results or developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, general economic
market and business conditions; the business opportunities (or lack thereof)
that may be presented to and pursued by the Company; changes in laws or
regulation; and other factors, most of which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in this Form
10-QSB are qualified by these cautionary statements and there can be no
<PAGE>
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected consequence to or effects on the Company or its business or operations.
The Company assumes no obligations to update any such forward-looking
statements.
PART II
Item 1. Legal Proceedings.
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 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults in Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
On May 19, 2000, the Company's security holders approved the Amendment
to its Articles changing the Company name to Diversified Product Inspections,
Inc., from Shoe Krazy, Inc. filed May 19, 2000.
On May 19, 2000, the Company's security holders approved the Amendment
to the Articles of its newly acquired subsidiary changing the subsidiary's name
to Diversified Product Investigations, Inc., from Diversified Products
Inspections, Inc.
Item 5. Other Information
Description of the Company's Subsidiary
The Company maintains a web page at: http://www.dpi-inc.com.
Diversified Product Inspection, Inc. specializes in conducting investigations
and laboratory analysis of a wide variety of products to determine the "cause
and origin" of failures. The Company's primary customers are insurance companies
that are interested in subrogating claims to recover losses.
<PAGE>
The insurance industry is one of the largest business enterprises in
the United States. Insurance claims paid by the industry in 1998 were
approximately $150 billion and estimated to be $180 billion in 1999. In 1998,
depending upon the insurance company, only 1% to 5% of claims were subrogated.
It is estimated that the subrogation potential could be $10-15 billion annually,
based on the industry internal goals of 7-10%. DPI's clients have been able to
subrogate as high as 68% of submitted claims.
Diversified Product Inspections, Inc. is the inspiration of
entrepreneur John Van Zyll. After many years of experience in home construction,
and employment as a Customer Service Manager for several large developers and
homebuilders, Mr. Van Zyll recognized the opportunity and need for a service
that would help protect consumers and assist them in making informed decisions
regarding home or appliance purchases.
During the course of home investigations, the Company noted a large
number of defective products not necessarily related to home construction.
Because the home inspection industry is saturated and highly competitive, DPI
sought to differentiate itself from its competitors by adding product failure
investigations, as an additional service. The Company quickly realized that
there was tremendous demand for this type of service by the insurance industry
and has since been able /to establish itself as a specialist in this rapidly
growing field. DPI has developed a sustainable competitive advantage in this
lucrative niche market through the creation of a proprietary database.
DPI began to accumulate a database of known defective products, and in
1994 began concentrating, almost exclusively, on defective product
investigations for the insurance subrogation field. DPI now has a computerized
database with key identifiers of over 300,000 products, a library of over
100,000 photos and documentation, plus hundreds of videos. To the Company's
knowledge, there is no other company in the US that possesses such an extensive
database, or is capable of providing the cost-effective range of services and
experience that DPI can offer its clients.
DPI has enjoyed steady growth in customer base over its nine year
history. The Company currently provides investigative services for over 1,900
insurance adjusters in more than 40 states. The Company employs eight
state-licensed Private Investigators who are trained and certified as "Cause and
Origin" investigators, and six lab technicians. DPI also offers pre-failure
evaluations of structures, building materials and appliances.
Since its formation, DPI has also experienced steady growth in revenues
and profits. This growth has been realized without any outside funding and only
a limited marketing campaign. The Company also operates a rapidly growing "Small
Item Mail-in Program" and "Large Item Ship-In Program" to extend its services
throughout the country.
Until December 1999, the Company was expanding using its own resources.
In June 1999, the Company established a satellite office in Salisbury, North
Carolina. In August 1999, the Company signed a lease for land and building for a
new headquarters and laboratory to be located in Oakridge, TN.
<PAGE>
Customers
DPI's primary clients are insurance companies:
Allstate Insurance Amica Insurance
Appalachian Claim Services Bankers Insurance
Bankers Security Bausley & Associates
C.J.W. Associates Claim Solutions Services, Inc.
C.N.A. Insurance C.S.A.A
Crawford and Company Curley & Associates
Elliot Claims Service, Inc. Farmers Insurance
Fire & Arson Investigation Consultants, Inc. Fire Service Restoration
Fireman's Fund Insurant First Floridian (Travelers)
Florida Farm Bureau Frontier Adjusters
Grotefeld & Denenberg, L.L.C. Hartford Insurance
Inspire Insurance Solutions Kentucky National Insurance
Langham & Associates Liberty Mutual
McDonald, Tinker, Skaer Morrison, Mahoney & Miller
Nationwide Insurance Nationwide Mutual
Northfield Associates Post & Schell, P.C.
Professional Public Adjuster, Inc. Property JUA Services
Prudential Insurance Purofirst Midsouth Insurance
Reliance Insurance Rebublic Insurance
Residential Warranty Rimkus Consulting
Safeco Insurance Schaeffer Engineering
Scottsdale Insurance SCS & Associates
Selective Insurance Servpro, Inc.
Shepard, Filburn & Goodblatt, PA Southern Family Insurance
State Farm Insurance T.I.G. Insurance
The Johnson Group Totura & Company
Travelers Insurance United Pacific Insurance
USAA Insurance Westfield Companies
Zurich American
Overview
Insurance claims in the United States are hundreds of millions of
dollars every year. A vast majority of these claims are the result of product
failures caused by defective products. Until DPI entered this market, depending
upon the insurance company, only 1% to 5% of claims were successfully
subrogated. Through the use of DPI's proprietary database, the Company is able
to investigate the "cause and origin" of losses and provide their clients with
information enabling them to cost-effectively subrogate almost 70% of their
claims.
<PAGE>
Subrogation is a legal principle, which provides that, to the extent an
insurer has paid for a loss, theinsurer receives the policyholder's right to
recover from any third party that caused the loss.
Until recently, Insurance companies have not aggressively pursued
subrogation. There are many reasons for this lack of effort in this area.
Liability can be difficult to prove. Product failure investigations can be
expensive, especially if conducted by an engineering lab. Proximate cause must
be demonstrated through a preponderance of the evidence. The product and its
manufacturer must be positively identified. Because of the high cost and other
factors, many insurance companies only pursue subrogation claims over a certain
amount.
Competitive Advantage: DPI provides the Insurance Industry with the
industry's first cost- effective investigative service. DPI has a staff of
professional investigators and laboratory analysts, who are supported by an
extensive proprietary product database. DPI's database is unique to the industry
and enables DPI to quickly identify the manufacturer of a defective product and
offer its investigative services at cost-effective levels. DPI enjoys a clear
and sustainable competitive advantage as a result of this proprietary database.
Proprietary Database: The Company's Proprietary Database contains an
extensive listing of product identifiers, and known defects and failures. This
computerized database contains key identifiers of over 300,000 products. In
addition, DPI possesses a library of over 100,000 photos and documentation, plus
hundreds of videos. This database is the result of 9 years of research and is
frequently updated. Any competitor entering the field would have to create its
own database from scratch, an undertaking of great time and cost.
Products and Services for the Insurance Industry
The primary business of DPI is the determination of the "Origin and
Cause" of property damages and the identification of the defective product that
caused the loss. DPI finds itself in a unique position of being a pioneer in
what is a growing and increasingly important field - Subrogation Recovery.
Demand for these services should grow as the percentage of successfully
subrogated claims increases. Currently, the insurance industry's internal goals
are to successfully subrogate 7% of claims. Product identification after a
failure (especially fire) has been one of the main reasons for the lack of
successful subrogation. DPI's laboratory has a 97% success rate in product
identification. Insurance companies and adjusters using DPI's service have
consistently been able to successfully subrogate in excess of 68% of
investigated claims. This is an improvement of 66% over the industry average and
at a fraction of the cost of conventional engineering firms. After the deduction
of DPI's reasonable fees, these subrogation recoveries are pure profit to the
insurance company.
Defective Product Investigations
DPI performs professional forensic investigations to identify the
products and materials involved in a claim loss and determine the cause of the
failure. DPI employs state-licensed Private Investigators who have been
certified in "Origin and Cause" analysis. It is the determination of "Origin and
Cause" that is the basis for successful subrogation of a claim. The client mails
small items to DPI, or investigations can be carried out on site, as in the case
of fire and arson investigations. DPI or insurance company personnel recover
shippable items from the site. The items are appropriately packaged and shipped
to the DPI Laboratory. Crucial to the legal process of subrogation is
maintenance of the "chain of evidence." DPI maintains secure facilities and has
<PAGE>
personnel who are trained in the procedures for properly handling, storing and
cataloging of evidence.
Small Item Mail-In Program
The "Small Item Mail-In Program" is a benchmark result of the great
success that DPI has been able to achieve in the state of California. In just
one Allstate Insurance Company claims offices near Bakersfield, the client was
able to successfully recover over $4 million in subrogated claims. As a result
of this overwhelming success, Allstate Insurance Company. has instructed all its
adjusters in Northern California to submit all of their defective products to
DPI. Items are placed in the pre-addressed, pre-paid Fed-Ex box or envelope and
submitted to DPI for identification and analysis. DPI performs this task at
their lab and submits a report to the insurance adjuster. The item is retained
in secure storage as evidence until the claim is closed.
The minimum fee for these services is $175.00. Fire damaged items
(accounting for 30-40% of the items submitted) incur a minimum additional charge
of 1 log hour @ $75.00 per hour. Currently, DPI is receiving approximately 100
items per week at an average of $200 for each item submitted. This has grown
from 40 items per week in January. With growth of 15% per month, the Small Item
Mail-In Program is projected to produce approximately $3.3 million in revenue in
Year 2000 and gross profits of approximately $2.7 million. (These projections
include storage revenue for the 8,565 items currently in storage)
Large Item Ship-In Program
DPI also has a program to handle large items, including refrigerators,
air conditioning units, stoves, dishwashers, etc. These larger items are either
picked up by DPI, within a range of 150 miles of one of their offices, or
shipped directly by the client. Items picked up by DPI are billed for log hours
for the driving, handling and laboratory analysis. Items shipped by the client
are shipped prepaid and billed for the inspection fee and monthly storage.
Revenue streams are generated from the log hours billed and from the
secure storage of the items until the case is settled. Storage is typically $60
per year per item. The average investigation is $255.00 plus 1 log hour @
$75.00, not including the travel time. DPI is currently receiving 10 items per
week under this program. Growth has been averaging 5% increase per month.
Revenues for the year 2000 are projected at $217,270 with gross profits
projected at $182,400 for the 12 month period.
Satellite Office/Outsource Program
As part of DPI's future expansion plans, the Company intends to open 4
additional satellite Office/Labs in New York, Texas and North and South
California. This will give DPI 6 satellite locations and a main
headquarter/laboratory in Oakridge, TN. The company is also training outsource
personnel to service any location where the insurance industry needs the service
and is capable of generating a minimum of 10 inspection/evidence collections per
week. These individuals will be paid on a per investigation basis and be
responsible for their own offices and expenses. The Company plans to train 30
outsource personnel during Year 2000.
The Outsource scenario was used for the financial projections for the
Satellite/Outsource program. When the number of inspections per week exceed 80
per week, it may be more profitable
<PAGE>
to operate an Office/Lab. The Company intends to revue the break-even scenarios
in order to determine whether to expand beyond the 7 physical locations.
DPI also provides for the storage of evidence and derives income from
the safe storage of materials. DPI is practiced in the maintenance of the "Chain
of Custody" of evidence, which is critical to successfully bringing a
subrogation case to court. The statute of limitations for filing litigation is 3
years. Due to the crowded court dockets, the average item remains in storage for
2 years.
Storage is an additional revenue stream for DPI as the Company can
perform this service more securely and efficiently than the insurance companies
can themselves. Currently, DPI has over 8,600 items in secure storage at an
average rate of $40.00 per annum.
Revenue from storage is included in the financial projections for the
Small Item Mail-in Program, Satellite/Outsource Program and Large Item Ship-in
Programs. The mark-up on storage is substantial.
Indoor Air Quality Analysis
DPI provides in-depth indoor air quality analysis and is a pioneer in
identifying airborne contamination and determining the causes of sick buildings.
DPI has designed proprietary measuring instruments capable of detecting airborne
chemical contaminants in structures. DPI also utilizes state laboratories to
supplement their own lab.
These contaminants are potential health threats and come from a variety
of sources within modern buildings including air conditioners, heaters,
refrigerators and materials used in the construction of the building. DPI is one
of a handful of companies in the country that is capable of identifying the
contaminants involved and the origin and cause within the structure.
The most dangerous and most common cause of indoor air contamination
comes from leaking refrigerants contacting a heat source that can convert the
freon into deadly phosgene gas (mustard gas). The presence of this reaction is
frequently evidenced by carbon sooting. Almost all air conditioners and many
refrigerators leak freon. There are many sources of heat in the home (heat
strips, pilot lights, electric range and oven, toasters, etc.) which are capable
of converting the freon into phosgene gas.
DPI has conducted a nationwide study on the prevalence of phosgene in
the home. The Company has identified phosgene as the cause of numerous severe
health and respiratory problems that have even resulted in death. The Geneva
Convention outlaws the production of phosgene, and its presence can only occur
through the accidental conversion of freon. DPI has been able to conclusively
identify phosgene from freon leaks as the origin and cause of contamination and
subsequent health problems of the occupants.
Due to the high frequency and potentially deadly effects of phosgene,
DPI has developed and is seeking to patent a device that neutralizes the freon
before it can be converted to phosgene. DPI is planning to market this device as
an inexpensive retrofit to existing systems and is seeking an appropriate
licensing agreement.
<PAGE>
Structure Evaluations and Consumer Product Evaluations
Home Evaluations and Consumer Product are not to be confused with a
home inspection. Home inspections are typically performed as a pre-purchase
inspection that concentrates on the current functionality of items in the home.
The Consumer Product and Home Evaluation reports on the failure rates and
recalls of the products used in the home. The difference is significant.
Structure Evaluations are performed on-site by a qualified DPI
investigator. In addition to reporting on the current functionality of the
structure and appliances (roof, siding, heating and cooling system, etc), DPI
goes further and identifies the manufacturers of the various building materials
and appliances. The client is also informed of known failure rates, defects and
hazards, recalls and current or pending legal proceedings. As an example, a home
inspection would report that the siding on the home is in good condition if it
is painted and shows no obvious signs of decay. DPI's inspection would report on
the type of siding and whether or not that siding was the subject of high rates
of failure, or the subject of a recall. DPI would also report to the client
whether the siding was the subject of a class action settlement and the
procedures for making a claim. (i.e.
Louisiana Pacific siding case)
Consumer Product Evaluations are a survey of common items in the home
for the purpose of identifying products that are the subject of a recall or are
known to have a history of failure. DPI's evaluation informs the consumer of
current working status of the product, the risks and failure rates of various
products, recalls, current legal proceeding and remedies.
DPI is planning to offer the Consumer Products Evaluation, on the
Company website. Consumers will be offered an opportunity to evaluate a single
product or an entire household. Package deals will be available which will
include a 1-year subscription to the company newsletter, the "Investigator." The
"Investigator" keeps consumers informed of current product recalls and safety
tips for the home. The Company intends to provide this services for a nominal
fee or no- charge. The Company believes that revenue can be derived from the
database that is being accumulated under this program.
Database Marketability - The Consumer Product Evaluation database may
be marketable to several different clients. The database will include consumer
buying habits, which is of value to manufactures and retailers. The database
will also contain the location of products that may present potential liability
for manufacturers, which is valuable to manufacturers and insurance companies.
Additional Services
Full Engineering Services - DPI is able to provide clients with full engineering
services including mechanical and electrical engineering
1. Metallurgist Services - the DPI lab is equipped to perform a full range of
metallurgical services capable of analyzing submitted items for design
load, metal fatigue, hairline cracking, etc.
2. Training Seminars - DPI investigators are also trained as instructors and
are licensed in most states due to reciprocity agreements. DPI has been
approached by the states of California, Texas, Virginia, N. Carolina and S.
Carolina to conduct licensing seminars for insurance adjusters. Each of
these states has a requirement that adjusters receive additional training
each year.
<PAGE>
Manufacturer Defective Product Notifications
DPI provides manufacturers with a service that assists those companies
in locating products that are subject to recall. It is inevitable that a certain
number of defective products will slip through the manufacturer's quality
control inspections and make their way into the marketplace. These defective
products, once identified, are a source of potential liability for the
manufacturer.
Manufactures are often eager to locate and replace defective products
before the product fails and causes high damages. If the average damages are
relatively high, the manufacture, in many cases, is willing to pay a reward or
bounty for information that will assist them in locating the product prior to
failure.
This is where DPI's database of consumer profiles will come into play.
(See: Consumer Product Evaluations). DPI plans to maintain a website where
consumers can receive a home evaluation online. The consumer may pay a nominal
fee to enter all household appliances, mechanical devices, lawn equipment and
materials of and around the house into the computer. The computer will then
compare the profile to the database of known defective products. DPI will then
inform the consumer and the manufacturer of the location of the product so that
a replacement can be scheduled.
The Nature and Extent of the Company's Facilities
The Issuer conducts its business in approximately 30,000 square feet of
office and warehouse space located at 3 Main Street, Oakridge, Tennessee.
Names of the Chief Executive Officers and Members of the Board of Directors
Directors and Executive Officers
The following table includes the names, positions held and ages of our
executive officers and directors. All directors serve for one year and until
their successors are elected and qualify. Officers are elected by the Board and
their terms of office are, except as otherwise stated in employment contracts,
at the discretion of the Board.
NAME POSITION
------------- ---------------------------
John Van Zyll President, Chairman, Chief Executive Officer and Director
Marvin Stacy Chief Operating Officer and Director
Dean Madden Chief Financial Officer, Treasurer and Director
Ann Furlong Secretary, Director
David Dowell Director
John Van Zyll, President Chairman of the Board, Chief Executive Officer and
Director. Entrepreneur and founder of Diversified Product Inspections, 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.
<PAGE>
Marvin Stacy, Chief Operating Officer, Director,. Mr. Stacy has over 40 years of
experience in all aspects of electrical and mechanical engineering and design.
Mr. Stacy is also gifted as an investigator and is responsible for the operation
of the laboratory. He has designed custom testing equipment and designs
solutions for manufacturers to correct design flaws and shortcomings.
Dean Madden, Chief Financial Officer, Treasurer and Director. Mr. Madden is
serving as the Company's interim CFO. Mr. Madden has over 33 years of experience
in all aspects of accounting. Mr. Madden served as CFO and Director of GMAC of
Canada from 1983-1988. Mr. Madden has worked in various accounting positions
throughout his career, specializing in auditing, taxes, and preparation of
financial statements.
Ann M. Furlong, Secretary and Director. Ms. Furlong has over 29 years of
experience as a professional manager and the owner and founder of several
successful businesses. Ms. Furlong has provided the administrative and
organizational expertise that has greatly contributed to DPI's success since its
founding in 1991, including the compilation of the company's proprietary
database.
David Dowell, Esquire, Director. Mr. Dowell was awarded a B.S. degree in
Business from Indiana University in 1985 and a degree in Juris Prudence from
Indiana University School of Law in 1988. Upon graduation, Mr. Dowell was
admitted to the Indiana Bar and was retained by Coopers and Lybrand as a tax
associate. He moved to Florida in 1990 and became law clerk for the Fifth
Circuit Court in Lake County. In 1992, Mr. Dowell opened a private practice and
specializes in Corporate Law and Bankruptcy
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits required to be filed herewith by Item 601 of Regulation S-B,
as described in the following index of exhibits, are incorporated herein by
reference, as follows:
<TABLE>
<S> <C>
Exhibit No. Description
----------- -------------------------------------------------------
2.1 *
3(i).1 Articles of Incorporation filed October 17, 1994(1)
3(i).2 Articles of Amendment (filed with original 10SB)(1)
3(i).3 Articles of Amendment changing the Company name to Diversified
Product Inspections, Inc., from Shoe Krazy, Inc. filed May 19, 2000.
3(i).4 Articles of Amendment changing the Company's newly acquired
subsidiary's name to Diversified Product Investigations, Inc., from
Diversified Product Inspections, Inc. filed May 19, 2000.
3(ii).1 By-laws (1)
10.1 Conditional Lease/Purchase Agreement(2)
27 * Financial Data Schedule
</TABLE>
-----------------------------------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form 10-SB.
(2) Incorporated herein by reference to the Company's
* Filed herewith
(b) See Form 8-KA filed on or about May 22, 2000 and attached hereto as Exhibit
No. 2.1.
<PAGE>
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.
Shoe Krazy, Inc.
Date: August 14, 2000 BY: /s/ John Van Zyll
-------------------------------
John Van Zyll, President
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.
Date Signature Title
Date: August 14, 2000 BY: /s/ John Van Zyll
------------------------------
John Van Zyll President
