10QSB 1 form10qsba.txt As filed with the Securities and Exchange Commission on November 19, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2002 OR [ ] 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 000-30095 CTI DIVERSIFIED HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 33-0921967 --------------------- --------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 614 East 21 Ave., Vancouver, B.C V5V 1R7 ----------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (604) 646-6638 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None ------------------------ ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share ----------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Number of shares outstanding of the registrant's class of common stock as of September 30, 2002: 19,182,967. The authorized share capital: 50,000,000 common shares, par value of $0.0001 INDEX TO THE FORM 10-QSB For the quarterly period ended September 30, 2002 PART 1 - FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financials Statements - CTI Diversified Holdings Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation PART 11 - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 5. Other Information FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-QSB contains predictions, projections and other statements about the future that are intended to be "Forward-Looking Statements" within the meaning of section 21E of the Securities Exchange Act of 1934, as amended (collectively, "Forward-Looking Statements"). Forward-looking statements involve risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward -looking statements. These factors include the inability to successfully design, develop and commercialize products, the reliance on third party suppliers for materials, the inability to attract and retain qualified staff, the Company's limited operating history and continuing operating losses, recent and potential development strategic alliances, the outcome of pending litigation, the impact of acquisitions, establishing and maintaining effective distribution channels, impact and timing of large orders, pricing pressures in the market, inability to create and protect intellectual property, inability to raise sufficient funding to sustain negative cash flows, lack of liquidity, systems failures, technological changes, volatility of securities markets, government regulations, and economic conditions and competition in the geographic and the business areas where we conduct our operations. In assessing forward-looking statement contained in this quarterly report on Form 10-QSB, readers are urged to read carefully all cautionary statements - including those contained in other sections of this quarterly report on Form 10-QSB. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Index ----- Consolidated Statements of Operations and Deficit for the nine months ended September 30, 2002 and 2001 Consolidated Balance Sheet at September 30, 2002 and December 31, 2001 Consolidated Statements of Stockholders' Deficiency Consolidated Statement of Cash Flows for the nine months ended September 30, 2002 and 2001 Notes to Consolidated Financial Statements CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Consolidated Balance Sheets (Expressed in U.S. Dollars) ================================================================================ September 30, December 31, 2002 2001 ------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents $ (4,941) $ 949 Accounts receivable 29,441 - Prepaid expenses 5,309 339 ------------------------------------------------------------------------------- Total current assets 29,809 1,288 Fixed assets 23,559 35,758 Goodwill - - ------------------------------------------------------------------------------- Total assets $ 53,368 $ 37,046 ------------------------------------------------------------------------------- LIABILITIES Current Accounts payable and accrued liabilities $ 941,087 $ 346,536 Current portion of notes payable 729,716 94,153 Current portion of amounts due to shareholders 584,924 79,479 ------------------------------------------------------------------------------- Total current liabilities 2,255,727 520,168 Long-term debt 23,043 - Notes payable 50,158 30,030 Due to shareholders 276,347 607,988 ------------------------------------------------------------------------------- Total liabilities 2,605,275 1,158,186 ------------------------------------------------------------------------------- STOCKHOLDER'S EQUITY (DEFICIENCY) Capital stock 1,918 1,781 Contributed Surplus 4,018,200 3,713,131 Deficit accumulated during the development stage (6,572,025) (4,836,052) ------------------------------------------------------------------------------- Total shareholders' equity (deficiency) (2,551,907) (1,121,140) ------------------------------------------------------------------------------- Total liabilities and shareholders' deficiency $ 53,368 $ 37,046 ------------------------------------------------------------------------------- Commitments See accompanying notes to the financial statements CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Consolidated Statements of Operations and Deficit (Expressed in U.S. Dollars) --------------------------------------------------------------------------------
August 11, 1998 (inception) to Nine Months Nine Months Three Months Three Months Sept 30, 2002 ended ended ended ended (cumulative) Sept 30, 2002 Sept 30, 2001 Sept 30, 2002 Sept 30, 2001 ----------------------------------------------------------------------------------------------------------------------------------- Expenses Advertising and promotion $ 52,305 $ 50,373 $ 10,771 $ 48,183 $ 1,557 Depreciation 21,683 7,940 10,382 1,738 2,339 Automotive 2,391 - 2,666 - 675 Consulting 307,397 97,243 172,715 7,520 26,285 Insurance 3,186 3,186 558 1,773 304 Interest and bank charges 84,192 70,094 - 59,366 - Interest paid to shareholders 137,002 39,160 96,061 10,613 15,806 Investor relations and reporting costs 134,605 33,859 75,731 (19,788) 21,508 Legal and accounting 242,761 180,296 131,258 116,012 20,479 Licences, dues and subscriptions 3,035 435 10,958 202 766 Office 46,953 11,766 30,530 (34,865) 9,359 Rent 63,771 48,089 19,439 37,864 (710) Telephone 21,533 12,016 8,427 10,257 2,115 Travel 97,030 0 110,124 (48,141) 11,281 Miscellaneous - 0 2,816 (1,671) 1,344 Wages and benefits 240,954 240,954 - 139,477 - ----------------------------------------------------------------------------------------------------------------------------------- 1,458,798 795,411 682,436 328,540 112,974 ----------------------------------------------------------------------------------------------------------------------------------- Loss from operations (1,458,798) (795,411) (682,436) (328,540) (112,974) Other items Loss on investments (4,191,607) (934,197) (1,923,413) - (1,089,893) Interest and other revenue 12,577 (6,365) 16,381 (6,621) 8.384 ----------------------------------------------------------------------------------------------------------------------------------- (4,179,030) (940,562) (1,907,032) (6,621) (981,509) ----------------------------------------------------------------------------------------------------------------------------------- Net loss for the period (6,572,025) (1,735,973) (2,589,468) (335,161) (1,194,483) Deficit, beginning of period - (4,836,052) (2,117,973) (6,236,864) (3,512,958) ----------------------------------------------------------------------------------------------------------------------------------- Deficit, end of period $ (6,572,025) $ (6,572,025) $ (4,707,441) $ (6,572,025) $ (4,707,441) ----------------------------------------------------------------------------------------------------------------------------------- Loss per share (Basic and diluted) $ (0.10) $ (0.14) $ (0.02) $ (0.06) ----------------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding 18,790,009 17,808,744 19,182,967 17,808,744 -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the financial statements CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Consolidated Statements of Stockholders' Deficiency From August 11, 1998 (Date of Inception) to September 30, 2002 (Expressed in U.S. Dollars) --------------------------------------------------------------------------------
Deficit Accumulated During the Contributed Development Common Shares Stock Amount Surplus Stage --------------------------------------------------------------------------------------------------------------------- Shares issued to acquire 19% of New York Bagel Co., Inc. 20,000,000 $ 2,000 $ 4,091 $ - Issuance of 500,000 common shares in August 1998 at $0.01 per share 2,000,000 200 4,800 - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 22,000,000 2,200 8,891 - Net loss for the year ended December 31, 1999 - - - (2,994) Balance, December 31, 1999 22,000,000 2,200 8,891 (2,994) --------------------------------------------------------------------------------------------------------------------- Cancellation of shares June 2000 (15,000,000) (1,500) 1,500 - Issuance of 20,000 common shares on August 11, 2000 in consideration of directors 20,000 2 - - Stock dividend on December 12, 2000: 5.25 for one 29,835,000 2,983 (2,983) - Net loss for the year ended December 31, 2000 - - - (9,474) --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 36,855,000 3,685 7,408 (12,468) Issuance of shares in consideration of legal services performed 5,000 1 9,999 - Cancellation of shares (26,355,000) (2,635) 2,635 - Issuance of shares in exchange for 11,413,700 shares of common stock of Cobratech Industries Inc. 5,999,591 600 1,686,297 - Conversion of promissory notes into common stock, effective June 29, 2001 1,304,153 130 2,006,792 - Net loss for the year ended December 31, 2001 - - - (4,823,584) --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 17,808,744 1,781 3,713,131 (4,836,052) Issuance of shares in consideration for services 100,000 10 22,990 - Issuance of bonus shares (note 7) 181,397 18 (18) - Issuance of shares in exchange for 7,160,000 shares of Sentry Telecom Systems Inc. 500,000 50 109,950 - Conversion of debt into common stock 592,826 59 172,147 - Net loss for the period ended Sept 30, 2002 - - - (1,735,973) --------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2002 19,182,967 $ 1,918 $ 4,018,200 $ (6,572,025) ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to the financial statements CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Consolidated Statement of Cash Flows --------------------------------------------------------------------------------
August 11, 1998 (inception) to Sept 30, 2002 Nine months ended Nine months ended (cumulative) Sept 30, 2002 Sept 30, 2001 ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities Net loss for the period $ (6,572,025) $ (1,735,973) $ (2,589,468) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 21,683 7,940 10,382 Gain on sale of assets (24,637) 27,338 (5,508) Loss on investments and writedown of intangibles 5,313,904 934,197 1,902,969 Other non-cash expenses - - 4,399 ------------------------------------------------------------------------------------------------------------ (1,255,167) (766,498) (681,625) Change in assets and liabilities: Decrease (increase) in accounts receivable 218,371 224,213 3,121 Decrease (increase) in prepaid expenses (166) 261 (659) Increase (decrease) in accounts payable and accrued liabilities 302,743 156,207 131,101 Net liabilities acquired on acquisition of subsidiaries (610,680) - - ------------------------------------------------------------------------------------------------------------ (1,344,899) 380,681 (548,062) ------------------------------------------------------------------------------------------------------------ Cash flows from financing activities Net increase in convertible notes 2,006,922 - - Net increase in notes payable 465,738 341,555 (105,190) Net increase in shareholder advances (repayments) 763,538 76,071 1,919,542 ------------------------------------------------------------------------------------------------------------ 3,236,198 417,626 1,814,352 ------------------------------------------------------------------------------------------------------------ Cash flows from (used in) investing activities Capital expenditures (76,259) (4,473) (26,315) Proceeds on sale of New York Bagel Inc. 6,066 - - Investment in and advances to Subsidiaries. (1,987,561) (33,226) (744,775) Proceeds on sales of assets 24,888 - - Notes Receivable - - (539,393) ------------------------------------------------------------------------------------------------------------ (2,032,866) (37,699) (1,257,853) ------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes 82,330 - - Increase in cash and cash equivalents (9,941) (5,890) 8,437 Cash and cash equivalents, beginning of period 5,000 949 3,229 ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ (4,941) $ (4,941) $ 11,666 ------------------------------------------------------------------------------------------------------------ Supplementary disclosure - non-cash transactions ------------------------------------------------------------------------------------------------------------ Cash flows from financing activities $ 1,829,897 $ 133,000 $ 1,814,352 ------------------------------------------------------------------------------------------------------------ Cash flows from (used in) investing activities (1,806,897) (110,000) (1,257,853) ------------------------------------------------------------------------------------------------------------ Cash flows from (used in) operating activities (380,681) (380,681) (548,062) ------------------------------------------------------------------------------------------------------------
See accompanying notes to the financial statements CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Notes to the Consolidated Financial Statements (Expressed in US Dollars) September 30, 2002 ================================================================================ 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. In the opinion of management, the accompanying financial statements include all adjustments which are normal, recurring and necessary in order to make the interim financial statements not misleading. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year. For further information, refer to the audited financial statements and notes thereto included in the CTI annual report on Form 10-KSB for the fiscal year ended December 31, 2001. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The Company has no current source of revenue and its operations have been temporarily terminated due to a lack of funds. The future of the company as a "going concern" is highly dependent upon the Company's ability to attract new long-term and permanent equity financing, to complete the development and marketing of the Sentry products, to have the continued support of creditors and shareholders, and ultimately to reach a profitable level of operations. Accordingly, they do not give effect to adjustment, if any that would be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and liquidate its liabilities other than in the normal course of business and at amounts which may differ from those shown in the financial statements. 2. Summary of significant accounting policies (a) Principles of Consolidation The consolidated financial statements include the accounts of CTI Diversified Holdings, Inc. and its subsidiaries (collectively the "Company"), Cobratech Industries Inc. ("Cobratech"), and Sentry Telecom Systems Inc. ("Sentry"). All significant intercompany accounts and transactions have been eliminated. Cobratech Industries Limited ("CIL"), Cobratech Industries Japan Limited ("CIJL"), and IT Transit Limited ("IT") ceased operations in 2001. The company is exploring voluntary bankruptcy as a means under which to accommodate this. The Company believes its loss is limited to its investment in and advances made to the foreign subsidiaries. Sentry Telecom Systems Inc. ceased operating in August 2002 when its working capital had been completely depleted. The Company continues to seek funding to re-start Sentry's operations. (b) Loss per share Loss per share is computed using the weighted average number of common shares outstanding during the period. Potential common shares which could dilute earnings in the future are disclosed in (note 7). (c) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from those estimates. CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Notes to the Consolidated Financial Statements (Expressed in US Dollars) September 30, 2002 ================================================================================ 2. Summary of significant accounting policies continued (d) Impairment of Long-term Assets The Company re-evaluates the recoverability of long-term assets, including fixed assets, long term investments, advances receivable, and intangible assets based upon estimates using factors such as future asset utilization, business climate and future discounted cash flows expected to result form the use of the related assets or be realized on sale. The Company's policy is to write down assets to their net recoverable amount in the period when it is determined that the carrying amount of the asset is not likely to be recovered. (e) Cash equivalents The Company considers all highly liquid investments with maturities of three months or less when purchased, to be cash equivalents. There were no cash equivalents at September 30, 2002 and at December 31, 2001. (f) Fixed Assets Fixed assets are recorded at historical costs. Depreciation of fixed assets is calculated using the following methods and rates: Computer equipment - 30% declining balance basis Furniture and fixtures - 20% declining balance basis (g) Comparative figures Certain of the comparative figures have been reclassified to conform to the current period presentation. (h) Goodwill Goodwill arising from the acquisition of subsidiary companies is being amortized to income on the straight-line basis over the expected period of benefit, not to exceed forty years. Management reviews on a regular basis, the carrying amount of the goodwill for possible permanent impairment by evaluating undiscounted expected cash flows. Goodwill is written down to its estimated net recoverable amount when there is a permanent decline in its value. At September 30, 2002, the Company has written down its goodwill arising from the acquisition of Sentry to Nil, its estimated net recoverable amount. CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Notes to the Consolidated Financial Statements (Expressed in US Dollars) September 30, 2002 ================================================================================ 3. Business acquisition Sentry Telecom Systems Inc. --------------------------- On April 15, 2002, the Company completed the acquisition of 90.67% of the outstanding common shares of Sentry. The results of Sentry's operations have been included in the consolidated financing statements since that date. Sentry is a British Columbia private company, involved in the designing and selling of products for the computer telecommunication security industry. The acquisition has been accounted for using the purchase method. The aggregate purchase price was $381,862, including $250,000 of cash, 500,000 shares of common stock valued at $110,000 or $0.22 per share, the market price of the common stock at the date the share purchase agreement was signed, and acquisition related expenses of $21,862. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as at April 15, 2002, the date of acquisition: Current assets $ 271,500 Fixed assets 18,606 Goodwill 1,134,332 ------------- Total assets acquired 1,424,438 ============= Current liabilities 752,480 Long term debt 290,096 ------------- Total liabilities assumed 1,042,576 ------------- Net assets acquired $ 381,862 ============= 4. Fixed assets
Accumulated September 30, 2002 December 31, 2001 Cost depreciation Net book value Net book value -------------------------------------------------------------------------------------------- Furniture & fixtures $ 26,319 $ 26,319 $ Nil $ 25,572 Computer equipment 48,796 22,237 26,559 10,186 -------------------------------------------------------------------------------------------- $ 116,445 $ 48,556 $ 23,559 $ 35,758 --------------------------------------------------------------------------------------------
During the latest quarter, the Furniture and Fixtures were abandoned when the Company moved from its premises at 8525 Commerce Court, Burnaby, B.C. It was determined that the costs of removal and sale would exceed the proceeds of sale. CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Notes to the Consolidated Financial Statements (Expressed in US Dollars) September 30, 2002 ================================================================================ 5. Notes payable The terms of the notes payable are as follows:
----------------------------------------------------------------------------------------------------- Sept 30, 2002 December 31, 2001 ----------------------------------------------------------------------------------------------------- Note payable - Unity Wireless Corporation ("Unity"). The note bears interest at 1% per month and is secured by a general security agreement covering the assets of Cobratech Industries Inc. The balance at Sept 30, 2002 consists of principle plus accrued interest. In August 2002, the Company agreed to issue 428,053 common shares of the Company as payment in full for this note and all accrued interest thereon. $ 102,354 $ 94,153 Notes payable - The notes bear interest at the Bank of Montreal prime rate plus 5% per annum, compounded monthly. The holder of the note has agreed not to demand repayment prior to June 2003. 51,371 30,030 Notes payable - The notes bear interest at 9% per annum, compounded monthly and are due on demand. 290,998 - Notes payable - The notes bear interest at the Bank of Montreal prime rate plus 5% per annum, compounded monthly and are due on demand. The notes hold as security all of the assets of Sentry. 335,151 - --------------------------------------------------------------------------------------------------- Total notes payable 779,874 124,183 Less: current portion due within one year 729,716 94,153 --------------------------------------------------------------------------------------------------- Long term portion $ 50,158 $ 30,030 ---------------------------------------------------------------------------------------------------
CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Notes to the Consolidated Financial Statements (Expressed in US Dollars) September 30, 2002 ================================================================================ 6. Due to shareholders The terms of the amounts due to shareholders are as follows:
----------------------------------------------------------------------------------------------------- Sept 30, 2002 December 31, 2001 ----------------------------------------------------------------------------------------------------- Notes payable - The notes payable are due to shareholders and bear interest at the Bank of Montreal prime rate plus 5% per annum, compounded monthly. $ 568,182 $ 522,097 Notes payable - The notes are due to a shareholder and director of CTI. The notes bear interest at the Bank of Montreal prime rate plus 5% per annum, compounded monthly. 94,766 85,891 Advances from shareholders, bearing interest at 6% per annum, compounded monthly, with no set terms of repayment. 104,860 - Advances from shareholders, non-interest bearing with no set terms of repayment. 93,463 79,479 --------------------------------------------------------------------------------------------------- 861,271 687,467 Less: current portion due within one year 276,347 79,479 --------------------------------------------------------------------------------------------------- $ 584,924 $ 607,988 ---------------------------------------------------------------------------------------------------
(a) The minimum principal repayments on the notes payable to shareholders during the next two years are as follows: ------------------------------------------------------ 2002 $ 276,347 2003 584,924 ------------------------------------------------------ Total $ 861,271 ------------------------------------------------------ 7. Capital Stock (a) Authorized: 50,000,000 common shares with a par value of $0.0001 per share (b) Issued: 19,182,967 common shares (c) Warrants In February 2002, the Company issued 300,000 share purchase warrants, with an exercise price of $0.25 per share and an expiry date of December 2006, to two directors of the company. The warrants also have a cashless exercise price. In lieu of exercising this warrant, the holder may elect to receive shares of common stock equal to the "value" of the warrant, calculated based on the fair market value of the shares in excess of the market price. As of September 30, 2002, the Company has the following warrants outstanding: Number of warrants Exercise price Expiry date ------------------ -------------- ----------- 702,770 $ 2.20 June 2003 601,380 $ 1.50 June 2003 300,000 $ 0.25 December 2006 ----------- 1,604,150 =========== CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Notes to the Consolidated Financial Statements (Expressed in US Dollars) September 30, 2002 ================================================================================ 7. Capital Stock, continued (d) Share issuances during the period In April 2002, the Company issued 100,000 shares of common stock in exchange for financial consulting and corporate public relations services performed during the period April 2001 to April 2002. The shares have been valued at $0.23 per share, the market price of the shares at the date of issuance. In April 2002, the Company issued 181,397 shares of common stock to seed capital investors of Cobratech as a bonus for non-filing of a registration statement, valued at $0.0001 (par value) per share. In April 2002, the Company issued 500,000 shares of common stock in exchange for 7,160,000 common shares of Sentry. The shares have been valued at $0.22 per share, the market price of the shares at the date the share purchase agreement was signed. 150,000 of the shares were released on the acquisition closing date of April 15, 2002. The remaining 350,000 shares are held in trust by the Company's solicitors and will only be released as certain performance milestones are achieved. To the extent that these performance milestones are not met, some or all of these unreleased shares will be surrendered and returned to the Company for cancellation. In May 2002, the Company agreed to convert certain amounts owing by Sentry to British Columbia Advanced Systems Institute ("ASI") into shares of common stock of CTI. ASI advanced Sentry $172,206 ($270,000 Canadian) to assist in performing certain specified research and development work. In May, ASI agreed to convert the outstanding balance into 592,826 common shares of CTI. The shares issued on the conversion were valued at $0.29 per share, the average closing price for CTI shares for the 20 days prior to April 30, 2002. There were no shares issued during the three months ended September 30, 2002. 8. Commitments (a) The Company has entered into operating leases for certain office equipment. Minimum rental payments under these leases are as follows: ------------------------------------------------ 2003 $ 3,897 2004 1,948 ------------------------------------------------ Total $ 5,845 ------------------------------------------------ (b) The Company's office premises lease expired at the end of August 2002 and was extended for one month. At the end of September 2002, the Company moved its offices temporarily into premises owned by a Director of the Company, at no compensation. 9. Related party transactions The aggregate amount of expenditures made to parties not at arm's length to the Company for the nine month period ended September 30, consist of the following: -------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------- Consulting fees paid or accrued to a director of the Company $ 32,576 $ - Interest paid to shareholders 48,754 96,061 --------------------------------------------------------------------------- Management is of the opinion that the terms and conditions are consistent with standard business practice. CTI DIVERSIFIED HOLDINGS, INC. (A Development Stage Enterprise) (Unaudited) Notes to the Consolidated Financial Statements (Expressed in US Dollars) September 30, 2002 ================================================================================ 10. Contingency The Company is a defendant in an outstanding legal proceeding. The Company has disputed the claim and management has advised that the outcome of the claim is not determinable at this time. 11. New authoritative pronouncements (a) In July 2001, the FASB issued SFAS No. 141 "Business Combinations". SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes AFS Opinion No. 16 "Business Combinations" and SFAS No. 38 "Accounting for Preacquisition Contingencies of Purchased Enterprises". This standard eliminates the pooling-of-interests method of accounting for business combinations, requiring the purchase method of accounting. This standard also revises the measures for accounting for negative goodwill and establishing whether an intangible asset is a part of acquired goodwill. The provisions of this statement apply to all business combinations initiated after June 30, 2001. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The adoption of this standard has not had a material impact on our financial position or results of operations. (b) In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 142 provides guidance on accounting for goodwill and intangible assets. This statement requires that goodwill not be amortized. A reduction in goodwill will only result from an impairment test if the test reveals that the fair value of goodwill is below its carrying value. An acquired intangible assets (other than goodwill) with an indefinite useful life should not be amortized unit its useful economic life is determined to be finite. These assets should be annually tested for impairment (at a minimum). An acquired intangible asset (other than goodwill) with a limited useful life should be amortized over its useful economic life and reviewed for impairment. The provisions of this statement are required to be applied starting with fiscal years beginning after December 31, 2001. Goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization and amortization provisions of this statement. We do not believe that the adoption of this standard will have a material impact on our financial position or results of operations. (c) In September 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long Term Assets", SFAS supersedes SFAS 121 "Accounting for Impairment of Long Term Assets and Long-Lived Assets to be disposed of:, but retains the basic requirements regarding when and how to measure an impairment loss, SFAS applies to long-lived assets to be held or disposed of but specifically excludes certain classes or assets such as goodwill and intangible not being amortized. We do not believe that the adoption of this standard will have a material impact on our financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The following discussion of the financial condition, results of operations, cash flows and changes in financial position of CTI Diversified Holdings, Inc. (the "Company") should be read in conjunction with the Company's most recent financial statements and notes appearing elsewhere in this Form 10-QSB; and in the Company's 10-KSB filed on April 15, 2002. Overview We, CTI Diversified Holdings, Inc., intend to design, develop and manufacture telecommunication security products for a broad range of corporate, government, military and institutional (collectively referred to as "enterprise") applications. We are in the start-up phase of our operations, having not yet completed development of our initial product and having not yet booked any sales of our initial product. Upon the completion of a purchase and sale agreement in April 2002 to acquire 90% of the outstanding shares of Sentry Telecom Systems Inc. ("Sentry") from the founding shareholders of Sentry, the Company adopted the Business plan of Sentry. Sentry is a private company incorporated in British Columbia, Canada. Sentry has a limited history of operations, and has not been profitable to date. Sentry has focused its efforts on developing security and detection products for corporate and public telecommunications systems since 1998. Telecommunications security and detection products encompass the hardware and software tools, policies and procedures needed to ensure that only authorized persons may access telecommunications resources. Our goal is to become a significant supplier of security products to corporate customers and communications service providers through the continuing development and introduction of security and telecommunications network products that are compatible with other manufacturers product offerings used in telecommunications. Our initial and primary product at present, the "Phonewall", is a telecommunications security product, or a product that restricts or blocks access to all or part of a telecommunications network. It has been designed to protect communications or telephone networks that carry information or data stored in an electronic form from the threat of unauthorized modem access and to protect communications or telephone networks that carry primarily voice traffic from the theft of unauthorized services. The Phonewall is a combination of hardware and software that is installed on telephone lines between the user of the product and a telephone service provider and that blocks access to computer networks from intruders and/or unauthorized persons attempting to enter through telephone lines and telephone networks. It monitors calls on the telephone lines and classifies their content as voice, fax or data using our own proprietary signal processing capabilities. The Phonewall can be configured to allow or disallow particular types of traffic, such as data calls via modems, over an entire organization, or configured to define limits for access to designated telephone numbers within an organization. The Phonewall has the capability to distinguish phone calls carrying modem signals from other types of phone calls, including voice, and the ability to terminate the call if it violates security policy. Extensive reporting capabilities, including reporting on the duration of calls, the type of traffic including data, fax and voice calls, the number dialed, and the originating number are included with the product. In the future, we intend to research, develop, and market a family of network security monitoring and warning systems and associated peripheral control devices for both domestic and international markets. The encompassing design is planned to be capable of integration with converging broadband wireless and wireline infrastructures, wireless computing, domestic electronic equipment, and the Internet. We intend to focus on advancing our patented technologies with an emphasis on addressing open global wireline/wireless standards that enable electronic devices within personal and business networks to securely "talk" with one another. We intend to strive to develop the next generation of security gatekeepers, which will use our proprietary application algorithms and protocols to facilitate and enable diverse communication devices to access and transfer data without sacrificing security in the process. Sentry's plan over the next twelve months is to have the Phonewall commercially available for sale. Achievement of this goal is dependent on the Company accessing adequate financing, successfully completing its planned personnel hires, developing and executing a solid marketing plan, successfully establishing strategic alliances and effective distribution channels, successfully designing, developing and commercializing its products, successfully creating and protecting its intellectual property, and its ability to sustain volatility in markets, systems failures, technological changes, and government regulations. Our negotiations to acquire Sentry commenced in February 2001, when we entered into a Letter of Intent with Sentry. Sentry agreed to deal exclusively with us for potential acquisition and we agreed to commence funding their operational requirements on a monthly basis by way of unsecured loans. In May 2001 we entered into a Purchase and Sale Agreement (the "Sentry Purchase") with Sentry to purchase a 34% equity interest, or 4,400,000 units, each unit comprised of one common share plus one purchase warrant, for $1,100,000. The Agreement was to close by August 15, 2001. We paid $250,000 as a non-refundable, convertible deposit to Sentry and, between May 15 and August 15, advanced by way of promissory notes approximately $224,000 to Sentry. The non-refundable deposit was converted into units of Sentry at $0.25 per unit, each unit comprising one common share and one warrant to purchase an additional common share. On August 15, 2001, the Sentry Purchase agreement between Sentry and CTI expired. Due to our inability to generate revenues as planned in our Asian operations, the need to fund those offices longer than planned and eventually the need to expend additional money to wind down these operations, we had experienced difficulties in advancing sufficient monies to Sentry for them to meet their own business plan objectives. We commenced negotiating an extension to the Sentry closing to December 31, but the extension negotiations were never completed. In September, the capital markets were rocked by the events of 9/11 and it became even more difficult for us to continue to raise funds. Accordingly, we reduced significantly the amount of funding being provided to Sentry, and commenced negotiating a new agreement with the founding shareholders of Sentry whereby we would acquire only their shares. As a result of the cessation of funding from us, Sentry ceased its operations in late September and dismissed all of its employees. During the period October 2001 through March 2002, we advanced approximately $43,000 to Sentry, to cover only absolutely essential expenditures, in order to keep Sentry alive during this period. In January 2002, we entered into an agreement to acquire an additional 7,160,000 common shares (80%) of Sentry, directly from the founding shareholders of Sentry, in exchange for 500,000 shares of common stock of CTI. This agreement closed on April 15, 2002 with the release of 150,000 shares. The remaining 350,000 shares are held in trust by the Company's solicitors and will only be released as certain performance milestones are achieved. To the extent that these performance milestones are not met, some or all of these unreleased shares will be surrendered and returned to the Company for cancellation. Including the 1,000,000 shares of Sentry that were received pursuant to the non-refundable, but convertible deposit on the May 2001 Sentry Purchase Agreement, CTI now owns 90.7% of the outstanding common stock of Sentry. It is our intent that Sentry's minority stockholders, currently holding the balance of 839,200 shares of Sentry, will receive an offer to exchange their Sentry shares for shares in our company on a basis yet to be determined. We received $277,654 in the first four months of 2002 in financing from an outside party, which allowed us to commence re-starting Sentry's operations in late March. We advanced $24,800 to Sentry during the period January 1, 2002 to March 31, 2002, and advanced a further $110,000 in April 2002. These funds were augmented by approximately $275,000 that Sentry received from Canadian income tax authorities as a refund of the previous year's scientific research and development expenditures. The aggregate of these funds allowed us to re-commence Sentry's operations in April, 2002. In late March 2002, after completion of the new Sentry agreement, Donald Farnell, resigned his positions at Sentry and was re-appointed a director, President & CEO of our company and Marlene Gaudry was re-appointed our Chief Financial Officer. Concurrently, Mark Godsy, who had become a significant shareholder of our company, was appointed a director and agreed to serve as Chairman of the Board. These management changes were augmented in early April by the nomination of Douglas A. Mazur as a director and President and CEO of Sentry and appointment of Mark Godsy as a director and Chairman of Sentry. By June, 2002, it was becoming obvious that CTI was not succeeding in its attempts to raise additional funding through private placements in spite of the assistance of Mr. Godsy in this initiative. Accordingly, CTI was unable to advance promised additional funding to Sentry that would allow Sentry to hire additional development and marketing personnel. As a direct consequence of this funding shortfall, in June 2002, Mr. Mazur resigned as a director and President & CEO of Sentry, Ms. Gaudry resigned as Chief Financial Officer of CTI and Mr. Godsy resigned as a director and Chairman of both CTI and Sentry. Mr. Farnell re-assumed the positions of President & CEO of Sentry and Chairman of CTI on an interim basis. In August 2002, the working capital of both Sentry Telecom Systems Inc. and CTI Diversified Holdings Inc. had been totally depleted. As a consequence, the operations of Sentry ceased in August and the offices of the Company were temporarily relocated to premises owned by a director of the Company. Fixed assets comprising the furniture and some office equipment of the Company were abandoned by the Company as it was determined that the proceeds of sale would be less than the cost of removal, moving to an auction site and costs of sale. The write off of asset carrying values required to give effect to this specific change are reflected in the financial statements of the Company as at September 30, 2002. The Company is seeking funding to enable it to re-start the operations of Sentry. Although there can be no assurance that the Company will be successful in raising new funds, investors should be aware that significant dilution of their investment is likely to occur if the Company succeeds in raising new funds. Additionally, the Company intends to make an offer to settle all outstanding liabilities by issuance of equity. Management believes that this debt conversion is necessary in order to make the Company's balance sheet more attractive to potential investors. If the Company succeeds in converting all or some of these liabilities into equity of the Company, existing shareholders will incur significant dilution of their investment as a result thereof. Results of Operations (All amounts are in US dollars unless otherwise stated) The results for the period ended September 30, 2002 reflect the operating results of CTI, Cobratech Industries Inc., for the period January 1 to September 30, 2002 and Sentry for the period from the date of acquisition (April 15, 2002) until September 30, 2002. The results for the period ended September 30, 2001 reflect the operating results of CTI and Cobratech Industries Inc. on a consolidated basis, and the Asian subsidiaries; Cobratech Industries Limited, Cobratech Industries Japan Limited, and IT Transit Limited (collectively "Asian Operations"), on an equity basis. For the 3 months ended September 30, 2002 ------------------------------------ The total expenses for the 3 months ended September 30, 2002 was $328,540 compared to $112,974 for the three months ended September 30, 2001. Operating expenses for Sentry for the period April 15 to September 30, 2002 are included in the results of operation for the third quarter of 2002. Sentry's operating results for the periods prior to April 15, 2002 are not included in the consolidated operating results of CTI. The majority of the increase of expenses for the three months ended Sep 30, 2002 are attributable to the operations of Sentry. Wages and benefits, totally attributable to Sentry, amounted to $139,477 while legal and accounting expenses were $116,012, reflecting the increased accounting expenses of conducting an audit of Sentry and the legal costs of the transaction. Rent was $37,864 for the three months, which represents the cost of the Sentry premises. These premises were abandoned in September. The company had a loss from operations of $328,540 for the three months ended September 30, 2002, compared to $1,194,483 for the 3 months ended September 30, 2001 and a loss per share of $0.02 for the three months ended September 30, 2002 and $0.06 for the three month period ended September 30, 2001. The Company incurred a loss on its investments in its foreign subsidiaries of $1,359,177 and a loss of $539,393 on its investment in Sentry for the period ended September 30, 2001. The Company wrote down its goodwill resulting from the acquisition of Sentry to nil at June 30, 2002, representing the estimated net realizable of the goodwill at June 30, 2002. Sentry will not be able to re- commence operating as a going concern unless sufficient new funding is secured. The Company estimates that this new funding would have to be finalized before the end on 2002 in order for Sentry to be re-started. After that date, it is unlikely that the Company could re-hire the key Sentry personnel that would be required to successfully re-start the operations. For the 9 months ended September 30, 2002 ----------------------------------------- For the first nine months of 2002, the Company had limited operations and did not generate any revenue from operations. Total expenses for the 9 months of 2002 were $795,411 compared to $682,436 for the nine months ended September 30, 2001 The majority of expenses incurred in the first nine months of 2002 consisted of wages and benefits, legal and accounting costs, investor relations and regulatory costs, consulting fees and advertising and promotion. Legal and accounting costs and consulting fees are primarily costs associated with the preparation of our 10-KSB and general financial and executive consulting services incurred in the first three quarters of 2002. For the nine months of 2001, we recorded a loss on our investments of $1,898,570, which includes a write down of goodwill recorded on the acquisition of Cobratech, a write down of our equity investment in our Asian operations and a provision for impairment in value of our investment in Sentry. In 2002, we recorded a loss on investments of $934,197, which was solely related to our write down of the carrying value of our investment in Sentry. As a result of the above transactions noted above, we incurred a loss of $1,735,973 or $0.10 per share for the first nine months of 2002 compared to a loss of $2,589,468 or $0.14 per share for the first nine months of 2001. Liquidity and Capital Resources At September 30, 2002, our current assets totalled $29,809 compared to $1,288 at December 31, 2001. Our current assets at September 30, 2002 consisted of ($4,941) in cash, $5,309 in prepaid expenses, and $29,441 in miscellaneous amounts receivable. During the first 9 months of 2002, we used $766,498 of cash in operating activities, generated $417,626 in cash from financing activities, and used $37,699 of cash in investing activities. Our cash generated from financing activities relating to promissory notes issued during the period which bear interest at 9% per annum, are unsecured, and have no set terms of repayment, amounted to $341,555. At September 30, 2002, we had total liabilities of $2,605,275 compared to $1,158,186 at December 31, 2001. The increase in liabilities reflects the shareholder advances and promissory notes issued during this period as well as an increase in accounts payable and accrued liabilities, which amounted to $169,234 during the quarter ended Sep 30, 2002. Our existing cash balances are not sufficient to carry our normal operations. In order to re-establish research and development expenditures of Sentry at minimum required staffing levels, we will need to raise approximately $500 thousand before re-hiring personnel and approximately $1.5 million in total during the next 12 months. To the extent that we require additional funds to support our operations or the expansion of our business, we may sell additional equity or issue debt. Any sale of additional equity securities will result in dilution of our stockholders. There can be no assurance that additional financing, will be available to our company or on acceptable terms. We also intend to ask creditors and shareholders to convert amounts owing to them (see notes 5 and 6 to the financial statements) into equity in order to eliminate the need to raise additional funding to retire these liabilities. To the extent that we are successful in converting these liabilities into equity, we will issue additional shares, which will result in dilution to our existing stockholders. There can be no assurance that we will be successful in converting these liabilities to equity. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS CTI, along with Cobratech, has been sued in the Supreme Court of British Columbia, Canada by Rajesh Taneja, an ex-contractor of Cobratech. The action is dated December 20, 2001. Mr. Taneja is suing the Company for unspecified damages for wrongful dismissal. The Company disputes the Claim and has filed a Statement of Defence denying the allegations of wrongful dismissal. The company is vigorously defending the claim. No trial date has been set, and no Examinations for Discovery have been conducted. Cobratech, along with various alleged guarantors, has been sued in the Supreme Court of British Columbia, by Unity Wireless Corp. for repayment of certain funds advanced to Cobratech. In November 2000, Unity advanced $200,000 to Cobratech, evidenced by a promissory note and secured by a general security agreement covering the assets of Cobratech. The loan bears interest at 1% per month. The action is dated October 24, 2001. The principal balance owing at December 31, 2001 under the loan agreement was approximately $78,000. The action Was stayed until May 2002 on the condition that Cobratech agreed to pay 10 percent of all funds received from financing in excess of $100,000 from May 2002, until the outstanding amount has been paid. Two of our directors were also directors of Unity. The company is currently in default of this agreement. In August, 2002, CTI reached a verbal agreement with Unity Wireless Corp. wherein Unity agreed to convert its outstanding indebtedness into 428,053 common sharers of CTI. To the extent that we are successful in completing the conversion of this indebtedness into equity, the issuance of these shares will result in dilution to our existing stockholders. There can be no assurance that we will be successful in completing the conversion of this indebtedness into equity. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS We issued the following securities during the period, January 1, 2002 to September 30, 2002: April 2002 - 100,000 shares of common stock issued to two shareholders in exchange for financial consulting and corporate public relations services, under Regulation S. April 2002 - 181,397 shares of common stock issued to approximately 35 seed capital investors of Cobratech as a bonus for non-filing of a registration statement, under Regulation S April 2002 - 500,000 shares of common stock issued to two persons in exchange for shares of Sentry, under Regulation S. May 2002 - 592,826 shares of common stock to a Canadian company issued on conversion of debts of Sentry, under Regulation S ITEM 3. DEFAULTS UPON SENIOR SECURITIES Note payable - Unity Wireless Corporation ("Unity"). The note bears interest at 1% per month and is secured by a general security agreement covering the assets of Cobratech Industries Inc. The entire balance of $102,354, at Sept 30, 2002 is overdue and legal action has been commenced by Unity Wireless Corporation. In August 2002, the Company agreed to issue 428,053 common shares of the Company as payment in full for this note and all accrued interest thereon and Unity Wireless agreed, in writing, to accept these shares as settlement in full. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We submitted no matters to a vote of security holders during the quarter ended September 30, 2002. ITEM 5. OTHER INFORMATION In March 2002, after completion of the new Sentry agreement, Donald Farnell, resigned his positions at Sentry and was re-appointed a director, President & CEO of our company and Marlene Gaudry was re-appointed our Chief Financial Officer. Ms. Gaudry resigned her position as CFO of CTI effective June 28, 2002. Mr. Mark Godsy, who became a significant shareholder of our company in the first quarter of 2002, was appointed a director and agreed to serve as Chairman of the Board in March 2002. In April 2002, Mr. Douglas A. Mazur was appointed a Director, President and CEO of Sentry. Mr. Douglas A. Mazur resigned from his position as Director, President and CEO of Sentry effective June 28, 2002. In April 2002, Mr. Mark Godsy was appointed a Director and Chairman of Sentry. Mr. Godsy resigned from his position as Director and Chairman of Sentry and CTI effective June 26, 2002. Mr. Godsy will be returning the shares he acquired from other shareholders to those other shareholders and, on completion, will cease being a significant shareholder of our company. In August 2002, the Company shut down the operations of Sentry when funds ran out. The Company moved out of its premises at 8525 Commerce Court, Burnaby and abandoned most of its fixed assets that were comprised of furniture, fixtures and some office equipment. The intellectual property of Sentry, comprised of computer software, has been placed in storage with a director of the Company. The offices of the Company have been temporarily moved, without compensation, to premises owned by a director of the Company. At present, the Company has no employees other that the President & CEO. The Company's operations will be re-commenced only upon sufficient new funding being obtained. In September 2002, as a result of the need to shut down the operations of Sentry when the Company's funds were depleted, Mr. Rene Palsenbarg resigned as a Director of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed as part of this Quarterly Report on Form 10-Q. 3.1.1 Articles of Incorporation of Unique Bagel Co., Inc. a Delaware corporation (now CTI Diversified Holdings, Inc.) dated August 11, 1998. Incorporated by reference to Exhibit 2.2 of the Company's Form 10SB12G, filed with the SEC on March 24, 2000 3.1.2 Certificate of Amendment of the Certificate of Incorporation of Unique Bagel Co., Inc., a Delaware corporation dated January 10, 2001, changing the name Unique Bagel to CTI Diversified Holdings, Inc. (incorporated by reference to Exhibit 3.1.2 to the Company's form 10-KSB filed on April 17, 2001 3.1.3 Bylaws of Unique Bagel Co., Inc. (now CTI Diversified Holdings, Inc., a Delaware corporation), dated August 11, 1998. Incorporated by reference to Exhibit 3.1 of the company's Form 10SB12G, filed with the SEC on March 24, 2000) 10.1 Warrant to Purchase Common Stock of CTI Diversified Holdings, Inc. (incorporated by reference to Exhibit 10.1 of the Company's 10QSB, filed with the Sec on May 15, 2002). 21.1 Schedule of Subsidiaries of CTI Diversified Holdings, Inc. (incorporated by reference to Exhibit 21.1 to the Company's Form 10-KSB filed with the SEC on April 17, 2001) (b) The following Current Reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report: Nil SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 18 day of November 2002. CTI DIVERSIFIED HOLDINGS INC. Date: November 18, 2002 By: /s/ Donald Farnell --------------------------------- Director, Chief Executive Officer 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 Quarterly Report of CTI Diversified Holdings, Inc., (the "Company") on Form 10-QSB for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald Farnell, Chief Executive Officer and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The financial information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Donald Farnell ----------------------------------- Donald Farnell Chief Executive Officer and Acting Chief Financial Officer November 18, 2002 CERTIFICATIONS I, Donald Farnell certify that: 1. I have reviewed this quarterly report on Form 10-QSB/A of CTI Diversified Holdings, 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 quarterly 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 registrant 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-14 and 15d-14) for the registrant and I have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 18, 2002 /s/ Donald Farnell ---------------------------------- Donald Farnell, CEO and Acting CFO