10QSB 1 q.txt United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to ___________ Commission file number 0-19049 Fortune Diversified Industries, Inc. ----------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 74-2504501 ------------------------------- ------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6809 Corporate Drive, Indianapolis, Indiana 46278 ---------------------------------------------------------------- (Address of principal executive offices) (317) 532-1374 ------------------------- (Issuer's telephone number, including area code) ----------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 --- --- On April 11, 2002 there were 69,496,629 shares of the Company's Common Stock outstanding. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements. FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES (FORMERLY WOW ENTERTAINMENT, INC. AND SUBSIDIARY) CONSOLIDATED BALANCE SHEETS ASSETS
Unaudited Audited February 28, August 31, 2002 2001 CURRENT ASSETS Cash and equivalents $ 135,000 $ 2,538,000 Accounts receivable 454,000 -- Other current assets 101,000 107,000 ----------- ----------- Total Current Assets 690,000 2,645,000 ----------- ----------- OTHER ASSETS Notes receivable-Note 2 630,000 630,000 Investment in land development 6,000 6,000 Investment in marketable securities 931,000 -- Office equipment 244,000 35,000 ----------- ----------- Total Other Assets 1,811,000 671,000 ----------- ----------- TOTAL ASSETS $ 2,501,000 $ 3,316,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 114,000 $ 73,000 Accrued payroll and related expenses 64,000 28,000 Accrued expenses 66,000 50,000 ----------- ----------- Total Current Liabilities 244,000 151,000 ----------- ----------- STOCKHOLDERS' EQUITY-Notes 2 and 3 Common stock 695,000 695,000 Additional paid-in capital and warrants outstanding 7,001,000 7,001,000 Accumulated deficit, since July 21, 2000, when a deficit of $60,099,000 was eliminated-Note 5 (5,173,000) (4,531,000) Accumulated other comprehensive income (loss) (266,000) -- ----------- ----------- 2,257,000 3,165,000 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,501,000 $ 3,316,000 =========== ===========
See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Consolidated Financial Statements. 1 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES (FORMERLY WOW ENTERTAINMENT, INC. AND SUBSIDIARY) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended February 28, February 28, 2002 2001 REVENUES $ 71,000 $ 216,000 COST OF REVENUES 197,000 2,245,000 ----------- ----------- GROSS PROFIT (LOSS) (126,000) (2,029,000) SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 432,000 750,000 ----------- ----------- Operating Loss (558,000) (2,779,000) ----------- ----------- OTHER INCOME (EXPENSE) Interest income 16,000 12,000 Interest expense -- (58,000) Gains on investments in marketable securities, net 95,000 -- Net loss on sale of assets (4,000) -- ----------- ----------- Total Other Income (Expense) 107,000 (46,000) ----------- ----------- Net Loss before Provision for Income Taxes (451,000) (2,825,000) PROVISION FOR INCOME TAXES -- -- ----------- ----------- NET LOSS $ (451,000) $(2,825,000) =========== =========== BASIC LOSS PER SHARE-Note 4 $ (0.01) $ (0.05) =========== =========== DILUTED LOSS PER SHARE-Note 4 $ (0.01) $ (0.05) =========== ===========
See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Consolidated Financial Statements. 2 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES (FORMERLY WOW ENTERTAINMENT, INC. AND SUBSIDIARY) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended February 28, February 28, 2002 2001 REVENUE $ 91,000 $ 308,000 COST OF REVENUE 282,000 4,886,000 ----------- ----------- GROSS PROFIT (LOSS) (191,000) (4,578,000) SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 696,000 1,116,000 ----------- ----------- Operating Loss (887,000) (5,694,000) OTHER INCOME (EXPENSE) Interest income 42,000 14,000 Interest expense -- (66,000) Gains on investments in marketable securities, net 208,000 -- Net loss on sale of assets (4,000) -- ----------- ----------- Total Other Income (Expense) 246,000 (52,000) ----------- ----------- Net Loss before Provision for Income Taxes (641,000) (5,746,000) PROVISION FOR INCOME TAXES -- -- ----------- ----------- NET LOSS $ (641,000) $(5,746,000) =========== =========== BASIC LOSS PER SHARE-Note 4 $ (0.01) $ (0.09) =========== =========== DILUTED LOSS PER SHARE-Note 4 $ (0.01) $ (0.09) =========== ===========
See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Consolidated Financial Statements. 3 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES (FORMERLY WOW ENTERTAINMENT, INC. AND SUBSIDIARY) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended February 28, February 28, 2002 2001 OPERATING ACTIVITIES Net loss $ (451,000) $(2,825,000) Adjustments to reconcile net loss to net cash used by operating activities: Accrued interest (10,000) -- Depreciation and amortization 5,000 20,000 Net loss on sale of assets 4,000 -- Net realized gain from sale of available for sale securities (95,000) -- Stock options granted for service -- 48,000 Stock options granted for compensation -- 62,000 Changes in certain operating assets and liabilities: Accounts receivable (436,000) (185,000) Merchandise inventories -- 16,000 Production costs -- 44,000 Other current assets 10,000 241,000 Accounts payable, accrued expenses and other current liabilities (84,000) 329,000 ----------- ----------- Net Cash Used by Operating Activities (1,057,000) (2,250,000) ----------- ----------- INVESTING ACTIVITIES Purchases of property and equipment (205,000) -- Purchases of available for sale securities (1,723,000) -- Proceeds from sale of available for sale securities 1,345,000 -- ----------- ----------- Net Cash Used by Investing Activities (583,000) -- ----------- ----------- FINANCING ACTIVITIES Dividends paid to preferred stockholders -- (72,000) Borrowings on line of credit -- 2,250,000 ----------- ----------- Net Cash Provided by Financing Activities -- 2,178,000 ----------- ----------- NET DECREASE IN CASH (1,640,000) (72,000) CASH Beginning of Period 1,775,000 148,000 ----------- ----------- End of Period $ 135,000 $ 76,000 =========== =========== SUPPLEMENTAL DISCLOSURES Noncash investing and financing activities: Unrealized net loss on marketable securities $ (398,000) $ --
See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Consolidated Financial Statements. 4 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES (FORMERLY WOW ENTERTAINMENT, INC. AND SUBSIDIARY) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended February 28, February 28, 2002 2001 OPERATING ACTIVITIES Net loss $ (641,000) $(5,746,000) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 10,000 21,000 Accrued interest (10,000) -- Net loss on sale of assets 4,000 -- Net realized gain from sale of available for sale securities (208,000) -- Stock options granted for services -- 48,000 Stock options granted for compensation -- 62,000 Changes in certain operating assets and liabilities: Accounts receivable (454,000) (282,000) Merchandise inventories -- (22,000) Production costs -- 60,000 Other current assets 5,000 279,000 Accounts payable, accrued expenses and other current liabilities (76,000) 532,000 ----------- ----------- Net Cash Used by Operating Activities (1,370,000) (5,048,000) ----------- ----------- INVESTING ACTIVITIES Purchases of office equipment (223,000) (5,000) Purchases of available for sale securities (2,818,000) -- Proceeds from sale of available for sale securities 2,008,000 -- Web-site development costs incurred -- (49,000) ----------- ----------- Net Cash Used by Investing Activities (1,033,000) (54,000) ----------- ----------- FINANCING ACTIVITIES Issuance of common stock -- 34,000 Dividends paid to preferred stockholders -- (100,000) Proceeds from issuance of preferred stock -- 700,000 Borrowings on line of credit -- 4,250,000 ----------- ----------- Net Cash Provided by Financing Activities -- 4,884,000 ----------- ----------- NET DECREASE IN CASH (2,403,000) (218,000) CASH Beginning of Period 2,538,000 294,000 ----------- ----------- End of Period $ 135,000 $ 76,000 =========== =========== SUPPLEMENTAL DISCLOSURES Noncash investing and financing activities: Unrealized net loss on marketable securities $ (266,000) $ --
See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Consolidated Financial Statements. 5 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES (FORMERLY WOW ENTERTAINMENT, INC. AND SUBSIDIARY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business: Fortune Diversified Industries, Inc. (the Company), formerly known as WOW Entertainment, Inc. and American Gaming & Entertainment, Ltd., is a Delaware corporation organized in 1988. The Company is the parent company of five wholly-owned subsidiaries: PDH, Inc., Cornerstone Wireless Services, Inc., Cornerstone Wireless Construction Services, Inc., Women of Wrestling, Inc., and Murphy Development, Ltd. Through July 2001, the Company's main area of emphasis was in entertainment, primarily, WOW - Women of Wrestling(R). However, the Company's primary operating focus has shifted from the entertainment industry to the wireless telecommunications industry. Because of the Company's change in operating focus and its expanded current and future anticipated holdings, the Company amended its certificate of incorporation to change its name from WOW Entertainment, Inc. to Fortune Diversified Industries, Inc. and changed its stock symbol from WOWI to FDVI, effective August 16, 2001. The Company's current operating focus is achieved though its PDH, Inc. (PDH), Cornerstone Wireless Services, Inc. and Cornerstone Wireless Construction Services, Inc. subsidiaries and their affiliates (Cornerstone). The Company can assist its customers with the telecom site development process from visualization to completion including: o Site acquisition (i.e., raw land along and interstate or a building rooftop for co-location of an antenna); o Architectural and engineering analysis and drawings (i.e., analysis of existing cell tower or construction drawings of cell towers and switches); o Site construction, and; o Existing site maintenance and upgrades. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Estimates: Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates that were used. 6 NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues: The Company enters into contracts principally on the basis of competitive bids, the final terms and prices of which are frequently negotiated with the customer. Although the terms of its contracts vary considerably, most are made on either a unit price or fixed price basis in which the Company agrees to do the work for units of work performed (unit price) or for a fixed amount for the entire project (fixed price). The Company also performs services on a cost-plus or time and materials basis. The Company completes most projects within one year. The Company generally recognizes revenue utilizing output measures, such as when services are performed, units are delivered or when contract milestones are reached. The Company will, at times, record revenues from longer term, fixed price contracts on a percentage-of-completion basis , using input measures such as the cost-to-cost method based on the percentage of total costs incurred to date in proportion to total estimated costs to complete the contract. The Company recognizes revenue from the direct distribution, exploitation and licensing of film and television programs before deduction for any of the Company's direct costs of distribution. For markets and territories in which the Company's fully or jointly-owned films and television programs are distributed by third parties, revenue is the net amounts payable to the Company by third party distributors. Revenue is reduced by appropriate allowances, estimated returns, price concessions, and similar adjustments, as applicable. Cost of revenues consist primarily of salaries, wages and benefits to employees, depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted services, insurance, facilities expenses, materials and parts and supplies. Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, office rent and utilities, communications and professional fees. Cash and Equivalents may include money market fund shares, bank time deposits and certificates of deposits, and other instruments with original maturities of three months or less. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has never experienced any losses in such accounts. Marketable Securities include common stocks classified as "available for sale". The securities are carried at fair value based on current market quotations. Unrealized holding gains and losses are not included in "net income", but are accounted for as "other comprehensive income" and reflected as a separate component of the change in stockholders' equity. At February 28, 2002, the accumulated other comprehensive losses on marketable equity securities were comprised entirely of gross unrealized losses of $266,000. The cost of securities used to compute realized gains and losses is based on specifically-identified securities. Office Equipment is recorded at cost. Depreciation is provided by the straight-line method over the estimated useful lives (3 to 10 years) of the respective assets. February 28, August 31, 2002 2001 Office equipment $257,000 $40,000 Less: Accumulated depreciation (13,000) (5,000) -------- ------- Office Equipment, Net $244,000 $35,000 ======== ======= Leases: The Company's facilities are leased pursuant to a three-year lease agreement which expires in August 2004. 7 NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value of Financial Instruments is estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, prepayments, and other factors. Changes in assumptions or market conditions could significantly affect these estimates. The amounts reported in the consolidated balance sheets for cash and equivalents, marketable securities, receivables, and payables approximate fair value. Stock-based Compensation: The Company accounts for all stock based compensation under the provision of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which uses the term "compensation" in its broadest sense to refer to consideration paid for goods and services, regardless of whether the supplier is an employee or not. The Company values stock options and warrants issued based upon an option-pricing model and recognizes this value as an expense over the period in which the option vests. Income Per Common Share: Income per share has been computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Under SFAS No. 128, basic income per share is computed based on income applicable to common stock divided by the weighted average number of common shares outstanding for the period. Diluted income per share is computed based on income applicable to common stock divided by the weighted average number of shares of common stock outstanding during the period after giving effect to securities considered to be dilutive common stock equivalents. Income Taxes: The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Accordingly, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. NOTE 2 - STOCKHOLDERS' EQUITY The following are the details of the Company's common stock as of February 28, 2002 and August 31, 2001:
Number of Shares Authorized Issued Outstanding Amount February 28, 2002 Common stock, $0.01 par value (1)(2) 500,000,000 69,496,629 69,496,629 $695,000 ======== August 31, 2001 Common stock, $0.01 par value (1)(2) 500,000,000 69,496,629 69,496,629 $695,000 ========
(1) As of May 22, 2001, the Company and its subsidiary, Women of Wrestling, Inc. (WOW), executed an Amendment to its Distribution Agreement with M/G Perin, Inc. and Richard Perin (collectively "Perin") in which they agreed to terminate their Distribution Agreement dated January 18, 2000 and enter into a new agreement covering only WOW's free television programs created through May 22, 2001. Also as part of the agreement, Mr. Perin returned for cancellation by the Company 1,839,556 restricted shares which represented all of his common stock in the Company. All rights to warrants issuable under the Distribution Agreement were also voided. Perin also received funding from WOW sufficient to pay certain payables incurred in connection with its representation of WOW. The funds used to pay Perin were loaned to WOW by Carter Fortune, a major stockholder of the Company. 8 NOTE 2 - STOCKHOLDERS' EQUITY (CONTINUED) (2) As of June 26, 2001, the Company redeemed 19,007,585 shares of common stock of the Company from David B. McLane, which represented all the shares owned by Mr. McLane, and cancelled the outstanding warrant. Concurrently with the redemption, Mr. McLane resigned from the Board of Directors of the Company and as President of the Company and its subsidiaries. The Company authorized 5,000,000 shares of cumulative voting Series A preferred stock. Dividends are payable quarterly at the rate of Libor plus 1%. Preferred stockholders have preference over common stockholders in dividends and liquidation rights. The preferred stock has voting rights similar to those of the common stockholders. At the Company's option, the Series A preferred stock may be redeemed at a purchase price of $100 per share plus any unpaid dividends. On June 29, 2001, the Company announced a major capital restructuring, which was effective July 2, 2001. The restructuring, which was part of several agreements and commitments between the Company and Carter Fortune, the Company's largest shareholder and the holder of certain debt and preferred stock of the Company, allowed the Company to eliminate its existing debt, acquire Murphy Development, Ltd. ("Murphy Development"), a commercial and retail real estate development company 50% owned by Mr. Fortune, and issue new convertible debt to be used to purchase and operate the Company's existing and future businesses. As part of the restructuring, Mr. Fortune received $3,250,000 of the Company's common stock at the June 28, 2001 closing price of $0.20 a share, or 16,250,000 restricted shares, in exchange for his $2,000,000 of WOW preferred stock and in full satisfaction of his approximately $5,424,000 of WOW debt. In addition, Mr. Fortune and Julie Fisbeck, who is the sister of John Fisbeck, a major stockholder, also exchanged their respective 50% ownership interests in Murphy Development, in exchange for $120,000 of the Company's common stock at the June 28, 2001 closing price of $0.20 a share. Fortune and Julie Fisbeck each received 300,000 restricted shares. Mr. Fortune also agreed to loan $500,000 to Murphy Development. The loan was secured by all of the assets of Murphy Development and was convertible at Mr. Fortune's option into shares of the Company's common stock at $0.407401 a share. Mr. Fortune exercised the option on August 27, 2001, and received 1,227,292 restricted shares. Mr. Fortune also agreed to make available to Murphy Development an operating line of credit of up to $2,250,000, if and as needed. The line of credit was secured by all of the assets of Murphy Development and is convertible at Fortune's option into shares of the Company's common stock at $0.407401 a share. On August 27, 2001, the Company borrowed $2,250,000 under the line of credit, and Mr. Fortune exercised the option and received 5,522,814 restricted shares. In July 2001, the Company entered into several restricted stock agreements with key employees. Pursuant to these agreements, the Company advanced $630,000 to purchase 4,200,000 shares of restricted stock. The restrictions are pursuant to the respective stock purchase agreements. The loans are repayable in 2006. NOTE 3 - STOCK OPTIONS, WARRANTS AND OTHER COMPENSATION The Company periodically issues warrants on a one-for-one basis for the purchase of shares of its common stock. The exercise prices of the warrants are no less than the fair market value of the common stock on the dates of grant. The estimated fair market value of the warrants is measured on the date of grant (measurement date), and accounted for as part of the related transaction. The Company agreed to grant 50,000 new warrants to the Company's former CEO on September 1, 2000. Each new warrant is convertible into one share of common stock at an exercise price of $1.00 per share exercisable from June 30, 2002 through June 30, 2008. In connection with a certain distribution agreement, the Company's distributor was granted a warrant to 9 NOTE 3 - STOCK OPTIONS, WARRANTS AND OTHER COMPENSATION (CONTINUED) purchase 1% of the common stock owned by the Control Group at an aggregate exercise price of $1,000,000. That agreement was terminated in May 2001, the warrant rights were voided and the Company redeemed the distributor's 1,839,556 shares of common stock. Transactions related to the stock option plan were as follows:
Weighted Weighted Six Average Average Months Ended Exercise Year Ended Exercise February 28, Price August 31, Price 2002 Per Share 2001 Per Share Options outstanding at beginning of period 350,000 $0.46 83,334 $0.42 Options exercised -- (83,334) 0.42 Options issued -- 1,350,000 (1)(3) 0.12 Options canceled -- (1,000,000)(2) 0.01 ------- ---------- Options outstanding at end of period 350,000 $0.46 350,000 $0.46 ======= ==========
(1) On January 12, 2001, the Company hired Jeffrey Lewis. In connection with this hiring, he was granted an option to purchase 1,200,000 shares of common stock of an aggregate purchase price of $12,000. The options vest at a rate of 200,000 shares every six months beginning July 12, 2001. (2) The Company and Mr. Lewis entered into an agreement on November 15, 2001 to cancel the options to purchase 1,000,000 of the 1,200,000 shares of common stock previously granted to Mr. Lewis. (3) In connection with a certain consulting agreement, the Company's investment banker was granted an option to purchase 150,000 shares of common stock at an aggregate exercise price of approximately $143,000. The options are exercisable immediately and expire in 2005. The Company accounts for employee stock-based transactions under Accounting Principles Board Opinion No. 25. Accordingly, no compensation cost has been recognized for options issued with an exercise price equal to the market value of the common stock at the date of grant. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Management believes that had compensation cost been determined based on the fair value at the grant dates consistent with the provisions of SFAS No. 123, there would have been no material effect on the Company's net loss and its loss per common share for the eight months ended August 31, 2000. 10 NOTE 4 - PER SHARE DATA The following presents the computation of basic earnings per share and diluted earnings per share: Three Months Three Months Ended Ended February 28, February 28, 2002 2001 Net Loss $ (451,000) $ (2,825,000) Dividends and accretion on preferred stock -- (28,000) ------------ ------------ Net Loss Available for Common Stockholders $ (451,000) $ (2,853,000) ============ ============ Basic Loss Per Share $ (0.01) $ (0.05) ============ ============ Diluted Loss Per Share $ (0.01) $ (0.05) ============ ============ Shares Outstanding Basic weighted average number of common shares outstanding 69,496,629 62,543,664 ============ ============ Six Months Six Months Ended Ended February 28, February 28, 2002 2001 Net Loss $ (641,000) $ (5,746,000) Dividends and accretion on preferred stock -- (100,000) ------------ ------------ Net Loss Available for Common Stockholders $ (641,000) $ (5,846,000) ============ ============ Basic Loss Per Share $ (0.01) $ (0.09) ============ ============ Diluted Loss Per Share $ (0.01) $ (0.09) ============ ============ At February 28, 2002 and 2001, all outstanding options and warrants were anti-dilutive. NOTE 5 - QUASI-REORGANIZATION Effective July 21, 2000, the Company's Board of Directors approved a quasi-reorganization. The effect of the quasi-reorganization was to eliminate the accumulated deficit of $60,099,000 by application of the Company's paid-in capital. The quasi-reorganization had no impact on the Company's cash flows, total stockholders' equity or the tax basis of its assets, but resulted in a consolidated balance sheet that better reflects the Company's current financial position. NOTE 6 - SEGMENT INFORMATION The Company has decided to focus its efforts in areas other than gaming projects. Future operations of the Company will be organized around three primary segments: o Telecom Site Development o Entertainment o Holding Company 11 NOTE 6 - SEGMENT INFORMATION (CONTINUED)
Telecom Site Holding Segment Development Entertainment Company Totals Three Months Ended February 28, 2002 Revenues $ 71,000 $ -- $ -- $ 71,000 Cost of revenues (197,000) -- -- (197,000) Selling, general and administrative expenses (290,000) -- (142,000) (432,000) ----------- ----------- ----------- ----------- Segment Operating Loss $ (416,000) $ -- $ (142,000) $ (558,000) =========== =========== =========== =========== Six Months Ended February 28, 2002 Revenues $ 91,000 $ -- $ -- $ 91,000 Cost of revenues (282,000) -- -- (282,000) Selling, general and administrative expenses (448,000) (5,000) (243,000) (696,000) ----------- ----------- ----------- ----------- Segment Operating Loss $ (639,000) $ (5,000) $ (243,000) $ (887,000) =========== =========== =========== =========== As of February 28, 2002 Cash $ 97,000 $ 2,000 $ 36,000 $ 135,000 Accounts receivable 452,000 2,000 -- 454,000 Other current assets 24,000 -- 77,000 101,000 Office equipment, net 225,000 -- 19,000 244,000 Investments in available-for-sale securities -- -- 931,000 931,000 Notes receivable -- -- 630,000 630,000 Other assets 6,000 -- -- 6,000 ----------- ----------- ----------- ----------- Total Segment Assets $ 804,000 $ 4,000 $ 1,693,000 $ 2,501,000 =========== =========== =========== =========== Three Months Ended February 28, 2001 Revenues $ -- $ 216,000 $ -- $ 216,000 Cost of revenues -- (2,245,000) -- (2,245,000) Selling, general and administrative expenses -- (727,000) (23,000) (750,000) ----------- ----------- ----------- ----------- Segment Operating Loss $ -- $(2,756,000) $ (23,000) $(2,779,000) =========== =========== =========== =========== Six Months Ended February 28, 2001 Revenues $ -- $ 308,000 $ -- $ 308,000 Cost of revenues -- (4,886,000) -- (4,886,000) Selling, general and administrative expenses -- (1,060,000) (56,000) (1,116,000) ----------- ----------- ----------- ----------- Segment Operating Loss $ -- $(5,638,000) $ (56,000) $(5,694,000) =========== =========== =========== =========== As of August 31, 2001 Cash $ 305,000 $ 30,000 $ 2,203,000 $ 2,538,000 Other current assets 10,000 5,000 92,000 107,000 Other assets 29,000 -- 642,000 671,000 ----------- ----------- ----------- ----------- Total segment assets $ 344,000 $ 35,000 $ 2,937,000 $ 3,316,000 =========== =========== =========== ===========
12 Item 2. Management's Discussion And Analysis Or Plan Of Operations. This document contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "expect," "estimate," "anticipate," "predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this document and include statements regarding the intent, belief or current expectations of Fortune Diversified Industries, Inc. (the "Company"), its directors or its officers with respect to, among other things, trends affecting the Company's financial condition or results of operations. The readers of this document are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, those risks and uncertainties are discussed under the headings "Risk Factors" and "Management's Discussion and Analysis Or Plan of Operations," in the Company's Form 10-KSB40 for the fiscal year ended August 31, 2001 as well as the information set forth below. The Company does not ordinarily make projections of its future operating results and undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should carefully review other documents filed by the Company with the Securities and Exchange Commission. This section should be read in conjunction with the unaudited financial statements of the Company and related notes set forth elsewhere herein. Fortune Diversified Industries, Inc. (formerly known as WOW Entertainment, Inc. and prior to that American Gaming & Entertainment, Ltd.), is a Delaware corporation incorporated in 1988. The Company has conducted its business directly and through wholly-owned subsidiaries. The term "Company" as used herein refers to Fortune Diversified Industries, Inc. and such subsidiaries unless the context otherwise requires. The Company is the parent company of PDH, Inc.; Cornerstone Wireless Services, Incorporated; Cornerstone Wireless Construction Services, Inc.; Women of Wrestling, Inc.; and Murphy Development, Ltd. Prior to 2000, the Company owned equity interests in various properties that were utilized in casino gaming projects. The Company is no longer seeking to develop gaming projects. The Company's primary operating focus shifted in the past year from the entertainment industry to the telecommunications industry. Because of the Company's change in operating focus and expanded current and future anticipated holdings, the Company changed its name from "WOW Entertainment, Inc." to "Fortune Diversified Industries, Inc." and stock Symbol from WOWI to FDVI effective August 16, 2001. The Company's current operating focus is achieved through its PDH, Inc. ("PDH"), Cornerstone Wireless Services, Incorporated and Cornerstone Wireless Construction Services, Inc. subsidiaries and their affiliates ("Cornerstone"). The Company has the capability to assist its customers with the telecom site development process from visualization to completion, as well as site maintenance and upgrades. Through its subsidiaries and affiliates, the Company can assist its clients with any and all of the following: 1) telecom site acquisition (e.g., raw-land property along an interstate or a building rooftop for co-location of an antenna); 2) architectural and engineering analysis and drawings (e.g., analysis of an existing cell tower or construction drawings of cell towers and switches); 3) site construction; and 4) existing site maintenance and upgrades. 13 PDH acquired certain assets of DicksonHughes Group, LLC, ("DHG") a real estate development company established in 1989, through an Asset Purchase Agreement dated January 18, 2002. The assets acquired included certain of DHG's accounts receivable, work-in-process, prepaid expenses, software, computer hardware and fixtures, and backlog. PDH intends to devote the physical assets to its existing telecommunications business. PDH also hired eighteen employees of DHG, including S. David Dickson who will lead the PDH subsidiary. PDH's business strategy is to offer a full range of real estate development services to the telecommunications industry. PDH intends to provide its clients with the most experienced personnel and deliver the highest level of services, systems and support necessary to achieve its clients' goals and objectives on a local, regional or national basis. PDH's focus is to meet the demanding timelines associated with commissioning a telecommunications network by ensuring that each individual site reaches the construction phase as quickly as possible. This is achieved by avoiding costly delays up front through effective management of the site acquisition process with its telecommunications real estate professionals. PDH's full service list of telecom real estate development services includes program management, site acquisition, zoning and permitting, architectural & engineering design, construction management, co-location facilitation, environmental services, lease capitalization, lease renegotiation, and cable, broadband and wireless telecommunications building (switch/node/ReGen/ POP) acquisition and development. Cornerstone Wireless Services, Incorporated was acquired by the Company in July, 2001. William A. Shoemake serves as its President and Chief Executive Officer. Cornerstone Wireless Construction Services, Inc. was incorporated in October, 2001 and began operations shortly thereafter. Cornerstone specializes in engineering and architectural services for the telecommunications industry including cellular, personal communication services (PCS), specialized mobile radio (SMR), enhanced specialized mobile radio (ESMR), microwave systems, fixed wireless, broadband and fiber optics technologies for carriers, consolidators and utilities. Detailed services include site surveys, site layout drawings, architectural aesthetic designs, foundation designs, antenna mount designs, geo-technical investigation and reports, structural analysis and environmental assessments. Cornerstone also offers construction management of telecommunications infrastructure. Cornerstone is pursuing assignments and projects anywhere within the United States. Cornerstone plans to open additional branches as market opportunities arise. Management believes that the need for its telecom services in the coming years will be significant, and expects that cell site density will need to increase four to eight fold in the coming years in order to meet the bandwidth and usage requirements of consumers for second generation to third generation wireless data applications (commonly referred to as 2G, 2.5G and 3G). In addition to the build-out of additional sites, as usage changes occur, existing tower and base station configurations will also need to change. Wired broadband needs also require increasing infrastructure build-out, particularly with fiber optics technologies. The Company is positioned to and believes it will be able to provide the real estate development, engineering and design services necessary to meet the evolving needs of the industry. 14 The past year has seen a significant downturn in the economy, and management witnessed many companies in the telecommunications industry significantly curtailing their operations. Management observed capital expenditures for infrastructure within the industry decline in conjunction with the economy. This slowdown in capital expenditures was particularly noticeable in the Company's second quarter as it observed the number of projects awarded in comparison to prior years down substantially and many existing projects reduced or postponed. While the capital expenditures within the telecommunications industry declined in conjunction with the economy, the infrastructure capacity needs did not. When the industry resumes the infrastructure build out for 2G to 2.5G to 3G and beyond, management believes that the Company will be positioned as a recognized provider with the capacity to meet and exceed the industry's needs. Murphy Development, Ltd., is a commercial and retail real estate development company. On July 2, 2001, the Company purchased Murphy Development, Ltd. from Carter Fortune, the Company's largest shareholder, and Julie Fisbeck, who is the sister of John Fisbeck, one of the members of the Control Group. The primary assets of Murphy Development, Ltd the past fiscal year were pre-acquisition development costs of a northeast, Ohio commercial development, to include several options to purchase real estate. In August, 2001, Murphy Development, Ltd. exercised the options. However, it did not close on the real estate due to the unavailability of financing and the lack of a commitment from a major anchor tenant. The options expired at the end of 2001. Due to the lack of activity, starting with the reporting period ended February 28, 2002, the company consolidated its Murphy Development financial information in with its telecom site development segments. WOW was organized in May, 2000, began production of its weekly syndicated television series, WOW - Women of Wrestling(R) in September, 2000 and began airing the programs in the United States and marketing them internationally in October, 2000. In February 2001, WOW completed production of its first season of over-the-air syndicated shows and began re-airs of its original episodes in March 2001. After assessing the syndication, cable and network television markets for the 2001 season, WOW decided as of June, 2001 not to produce future episodes of its WOW-Women of Wrestling(R) program and discontinued related activities. In July 2001, WOW agreed in principle to general terms for licensing the WOW - Women of Wrestling(R) property to David McLane Enterprises, Inc. ("DME") for a minimum monthly dollar amount plus a percentage of certain revenues for three and one half years. DME is owned by David McLane, who was until June, 2001, the president, a director and one of the controlling shareholders of the Company. When a licensing agreement is concluded, the Company also plans to grant an option to DME to purchase the WOW - Women of Wrestling(R) property at the end of the license. As of the date of this report, a licensing agreement with DME has not been finalized and it is uncertain whether any licensing agreement will be entered into with DME. 15 The Company enters into contracts principally on the basis of competitive bids, the final terms and prices of which are frequently negotiated with the customer. Although the terms of its contracts vary considerably, most are made on either a unit price or fixed price basis in which the Company agrees to do the work for units of work performed (unit price) or for a fixed amount for the entire project (fixed price). The Company also performs services on a cost-plus or time and materials basis. The Company completes most projects within one year. The Company generally recognizes revenue utilizing output measures, such as when services are performed, units are delivered, or contract milestones are reached, which also typically are billing points. The Company will at times record revenues from longer term, fixed price contracts on a percentage-of-completion basis, using input measures such as the cost-to-cost method based on the percentage of total costs incurred to date in proportion to total estimated costs to complete the contract. During the period covered by this report, WOW received license fees for its production of television programming through its distribution agreement with its distributor. Revenue was recognized by the Company from its direct distribution, exploitation, or licensing of its films and television programs, before deduction for any of the Company's direct costs of distribution. For markets and territories in which the Company's fully or jointly-owned films and television programs were distributed by third parties, revenue was the net amounts payable to the entity by third party distributors. Revenue was reduced by appropriate allowances, estimated returns, price concessions, and similar adjustments, as applicable. Cost of revenues consist primarily of salaries, wages and benefits to employees, depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted services, insurance, facilities expenses, materials and parts and supplies. Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, office rent and utilities, communications and professional fees. The Company has implemented Statement of Position (SOP) 00-2, "Accounting by Producers or Distributors of Films", which requires special accounting for production costs relating to episodic television series. Specifically, SOP 00-2 requires a company to demonstrate through its experience and industry norms that the number of episodes already produced, plus those for which a firm commitment exists and the entity expects to deliver, can be licensed in the secondary market before an episodic television series can implement the individual-film-forecast-computation method to amortize production costs. SOP 00-2 further stipulates that until an entity can establish estimates of secondary market revenue, capitalized costs for each episode produced should not exceed an amount equal to the amount of revenue contracted for that episode, the entity should expense as incurred production costs in excess of this limitation on an episode-by-episode basis, and the entity should expense all capitalized costs for each episode as it recognizes the related revenue for each episode. The Company follows the more conservative episode-by-episode basis versus the individual-film-forecast-computation method. As the Company had effectively recognized revenues from the initial airing of all of the episodes produced through the periods ended February 28, 2001, August 31, 2001 and February 28, 2002, all production costs as of those dates were expensed, and the Company did not have any capitalized production costs as of those dates. Advertising and exploitation costs, which include marketing, advertising, publicity, promotion, and other distribution expenses incurred in connection with the distribution of a film or television program, were expensed as incurred. The Company accounts for all stock based compensation under the provision of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which uses the term "compensation" in its broadest sense to refer to consideration paid for goods and services, regardless of whether the supplier is an employee or not. On January 12, 2001, the Company hired Jeffrey J. Lewis as its CEO. In connection with his hiring, he was granted an option to purchase 1,200,000 shares of common stock at an aggregate purchase price of $12,000. The options vest at the rate of 200,000 shares every six months beginning July 12, 2001. Effective July 13, 2001, after Mr. Lewis had vested options on 200,000 shares of the Company's stock, the Company and Mr. Lewis agreed to terminate the option program. In connection with the change in control of the Company in September, 2000, the Company issued 50,000 new warrants to the Company's former CEO. Each new warrant is convertible into one share of common stock at an exercise price of $1.00 per share exercisable from June 30, 2002 through June 30, 2008. In connection with a certain distribution agreement, the Company's former distributor was granted a warrant to purchase 1% of the common stock owned by the Control Group at an aggregate exercise price of $1,000,000. This agreement was terminated in May 2001 and the warrant rights were voided. In connection with a certain consulting agreement, the Company's investment banker was granted an option to purchase 150,000 shares of common stock at an aggregate exercise price of approximately $143,000. The option is exercisable immediately and expires in 2005. The Company values stock options and warrants issued based upon an option-pricing model and recognizes this value as an expense over the period in which the option vests. 16 RESULTS OF OPERATIONS: COMPARISON OF THE THREE MONTH PERIODS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28, 2001 Summarized financial information concerning the Company's reportable segments is shown in the following table:
Telecom Site Holding Segment Three months ended February 28, 2002 Development Entertainment Company Totals Revenues 71,000 -0- -0- 71,000 Cost of revenues (197,000) -0- -0- (197,000) Selling, general and administrative (290,000) -0- (142,000) (432,000) -------- ========== ---------- ---------- Operating income (loss) (416,000) -0- (142,000) (558,000) ======== ========== ========== ========== As of February 28, 2002 Total segment assets 804,000 4,000 1,693,000 2,501,000 Three-months ended February 28, 2001 Revenues -0- 216,000 -0- 216,000 Cost of revenues -0- (2,245,000) -0- (2,245,000) Selling, general and administrative -0- (727,000) (23,000) (750,000) -------- ---------- ---------- ---------- Operating income (loss) -0- (2,756,000) (23,000) (2,779,000) ======== ========== ========== ========== As of August 31, 2001 Total segment assets 344,000 35,000 2,937,000 3,316,000
Revenues Revenues for the three months ended February 28, 2002 were $71,000, compared to $216,000 for the three months ended February 28, 2001, a decrease of $145,000. The decrease in revenues were primarily due to a decrease in revenues in the Women of Wrestling segment of $216,000, which was a result of the Company not producing and distributing the television show WOW Women of Wrestling and related pay-per-view events for the 2001 and 2002 season. The Company had an increase in revenues from the prior fiscal year in its Telecom Site Development segment of $71,000. This increase was primarily the result of the Company beginning operations in the segment subsequent to last year. The revenue in the Telecom Site Development segment for the three months ended February 28, 2002 is net of approximately $137,000 of work-in-process purchased from DHG. The Company did not recognize operating revenue in its Holding Company for either the quarter ended February 28, 2002 or for the same period in the previous fiscal year. Costs and Expenses The Company began additional operations, primarily the operation of its Telecom Site Development segment and scaled back significantly other operations, primarily the Entertainment segment for the comparable periods. Cost of revenues were $197,000 for the three months ended February 28, 2002 compared to $2,245,000 for the three months ended February 28, 2001, a decrease of $2,048,000. This decrease was primarily due to a decrease of $2,245,000 in the Company's Entertainment segment, which was a result of the Company not producing and distributing the television show WOW Women of Wrestling and related pay-per-view events for the 2001 and 2002 season. In the Telecom Site Development segment, the Company had an increase of $197,000 in cost of revenues for the quarter ended February 28, 2002 compared to the same period in the previous fiscal year. This increase was primarily related to salaries and benefits and the fact that the Company did not commence operations in the segment until subsequent to the previous fiscal year. The Company did not incur any cost of revenues in its Holding Company for either the quarter ended February 28, 2002 or for the same period in the previous fiscal year. 17 Selling, general and administrative expenses were $432,000 for the three months ended February 28, 2002, compared to $750,000 for the three months ended February 28, 2001, a decrease of $318,000. This decrease was primarily due to a decrease of $727,000 in the Company's Entertainment segment. This decrease was primarily the result of the Company significantly scaling back operations in the Entertainment segment for the comparable periods. In the Telecom Site Development segment, the Company had an increase of $290,000 in selling, general and administrative expenses for the three months ended February 28, 2002 compared to the same period in the previous fiscal year. This increase was primarily attributable to an increase in employee compensation and benefits, legal, accounting and consulting fees and the fact that the Company did not commence operations in the segment until July 2001. In the Holding Company, there was an increase of $119,000 in selling, general and administrative expenses for the three months ended February 28, 2002 compared to the same period in the previous fiscal year. This increase was primarily related to an increase in employee compensation and benefits, legal, accounting and consulting fees. Interest income for the three months ended February 28, 2002 was approximately $16,000, compared to $12,000 for the three months ended February 28, 2001, an increase of $4,000. This increase was primarily due to an increase in funds held in money market accounts and accrued interest income from employee held recourse promissory notes. Interest expense for the three months ended February 28, 2002 was zero. Interest expense for the three months ended February 28, 2001 was approximately $58,000 from a line of credit. There were no outstanding borrowings at February 28, 2002, and the line of credit expired during the year ended August 31, 2001. Gain on investments in marketable securities, net for the three months ended February 28, 2002 was approximately $95,000. No such gain was recorded for the three months ended February 28, 2001. Net loss on sale of assets for the three months ended February 28, 2002 was approximately $4,000 from the sale of fixed assets. No such loss was recorded for the three months ended February 28, 2001. 18 RESULTS OF OPERATIONS: COMPARISON OF THE SIX MONTH PERIODS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28, 2001 Summarized financial information concerning the Company's reportable segments is shown in the following table:
Telecom Site Holding Segment Six months ended February 28, 2002 Development Entertainment Company Totals Revenues 91,000 -0- -0- 91,000 Cost of revenues (282,000) -0- -0- (282,000) Selling, general and administrative (448,000) (5,000) (243,000) (696,000) -------- ---------- ---------- ---------- Operating income (loss) (639,000) (5,000) (243,000) (887,000) ======== ========== ========== ========== As of February 28, 2002 Total segment assets 804,000 4,000 1,693,000 2,501,000 Six-months ended February 28, 2001 Revenues -0- 308,000 -0- 308,000 Cost of revenues -0- (4,886,000) -0- (4,886,000) Selling, general and administrative -0- (1,060,000) (56,000) (1,116,000) -------- ---------- ---------- ---------- Operating income (loss) -0- (5,638,000) (56,000) (5,694,000) ======== ========== ========== ========== As of August 31, 2001 Total segment assets 344,000 35,000 2,937,000 3,316,000
Revenues Revenues for the six months ended February 28, 2002 were $91,000, compared to $308,000 for the six months ended February 28, 2001, a decrease of $217,000. The decrease in revenues were primarily due to a decrease in revenues in the Women of Wrestling segment of $308,000, which was a result of the Company not producing and distributing the television show WOW Women of Wrestling and related pay-per-view events for the 2001 and 2002 season. The Company had an increase in revenues from the prior fiscal year in its Telecom Site Development segment of $91,000. This increase was primarily the result of the Company beginning operations in the segment subsequent to last year. The revenue in the Telecom Site Development segment for the six months ended February 28, 2002 is net of approximately $137,000 of work-in-process purchased from DHG. The Company did not recognize operating revenue in its Holding Company for either the six months ended February 28, 2002 or for the same period in the previous fiscal year. Costs and Expenses The Company began additional operations, primarily the operation of its Telecom Site Development segment and scaled back significantly other operations, primarily the Entertainment segment for the comparable periods. Cost of revenues were $282,000 for the six months ended February 28, 2002 compared to $4,886,000 for the six months ended February 28, 2001, a decrease of $4,604,000. This decrease was primarily due to a decrease of $4,886,000 in the Company's Entertainment segment, which was a result of the Company not producing and distributing the television show WOW Women of Wrestling and related pay-per-view events for the 2001 and 2002 season. In the Telecom Site Development segment, the Company had an increase of $282,000 in cost of revenues for the six months ended February 28, 2002 compared to the same period in the previous fiscal year. This increase was primarily related to salaries and benefits and the fact that the Company did not commence operations in the segment until subsequent to the previous fiscal year. The Company did not incur any cost of revenues in its Holding Company for either the six months ended February 28, 2002 or for the same period in the previous fiscal year. 19 Selling, general and administrative expenses were $696,000 for the six months ended February 28, 2002, compared to $1,116,000 for the six months ended February 28, 2001, a decrease of $420,000. This decrease was primarily due to a decrease of $1,055,000 in the Company's Entertainment segment. This decrease was primarily the result of the Company significantly scaling back operations in the Entertainment segment for the comparable periods. Also there were legal and accounting and consulting fees related to the Company's change in control that occurred in September, 2000 and allocated to the Women of Wrestling segment. In the Telecom Site Development segment, the Company had an increase of $448,000 in selling, general and administrative expenses for the six months ended February 28, 2002 compared to the same period in the previous fiscal year. This increase was primarily attributable to an increase in employee compensation and benefits, legal, accounting and consulting fees and the fact that the Company did not commence operations in the segment until July 2001. In the Holding Company, there was an increase of $187,000 in selling, general and administrative expenses for the six months ended February 28, 2002 compared to the same period in the previous fiscal year. This increase was primarily related to an increase in employee compensation and benefits, legal, accounting and consulting fees. Interest income for the six months ended February 28, 2002 was approximately $42,000, compared to $14,000 for the six months ended February 28, 2001, an increase of $28,000. This increase was primarily due to an increase in funds held in money market accounts and accrued interest income from employee held recourse promissory notes. Interest expense for the six months ended February 28, 2002 was zero. Interest expense for the six months ended February 28, 2001 was approximately $66,000 from a line of credit. There were no outstanding borrowings at February 28, 2002, and the line of credit expired during the year ended August 31, 2001. Gain on investments in marketable securities, net for the six months ended February 28, 2002 was approximately $208,000. No such gain was recorded for the six months ended February 28, 2001. Net loss on sale of assets for the six months ended February 28, 2002 was approximately $4,000 from the sale of fixed assets. No such loss was recorded for the six months ended February 28, 2001. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and investments in other liquid securities (i.e., publicly traded stocks and bonds) of approximately $1,066,000 as of February 28, 2002. As of February 28, 2002, the Company had no outstanding bank borrowings or other indebtedness. 20 As of March 31, 2002, the Company had cash and net investments in other liquid securities (i.e., publicly traded stocks and bonds net of margin balances) of approximately $1,051,000, and no outstanding bank borrowings or other indebtedness. The Company's 2002 capital budget provides for expenditures of approximately $1,800,000, for which management of the Company believes will be significantly if not entirely offset by revenues from operations and investments. The Company's management believes that its capital resources will be adequate to satisfy its cash requirements over the next 12 months. The Company reviews, as opportunities arise, the potential acquisition and/or operation of other businesses. Any such action will be based upon management's analysis of the specific business and the respective industry, as well as the Company's ability to utilize a capital structure that is beneficial to the Company's shareholders. If funding through the equity and debt markets can be obtained on attractive terms, the Company would consider financing its acquisition and operating activities by such means. The Company's short and long term capital requirements will depend upon many factors, including whether it acquires and/or operates other businesses, the operating success of its Telecom Site Development segment, and the potential license of the WOW - Women of Wrestling(R) property. Many of these and other factors are beyond the Company's control. Over the next 12 months, the Company plans to hire a significant number of additional employees in its Telecom Site Development segment. However, the hiring of these employees will be approximately correlated with an increase in operating revenue. PDH, Inc., a wholly owned subsidiary of the Company, acquired certain assets of DicksonHughes Group, LLC, ("DHG") a real estate development company established in 1989, through an Asset Purchase Agreement dated January 18, 2002. The assets acquired included certain of DHG's accounts receivable with a book value of approximately $386,000; work-in-process with a book value of approximately $137,000; prepaid expenses with a book value of approximately $8,000; software, computer hardware and fixtures with a book value of approximately $209,000; and backlog. The nature and amount of consideration given for the acquired assets was Seven Hundred Forty Thousand Two Hundred Seven Dollars ($740,207.00), which is subject to adjustments as described in the Agreement. PDH intends to devote the physical assets to its existing telecommunications business. PDH also hired eighteen employees of DHG. As of June 29, 2001, the Company announced a major capital restructuring, which was effective July 2, 2001. The restructuring, which was part of several agreements and commitments between the Company and Carter Fortune, the Company's largest shareholder and the holder at that time of certain debt and preferred stock in WOW, allowed the Company to eliminate its existing debt, acquire Murphy Development, Ltd., a commercial and retail real estate development company 50% owned by Mr. Fortune, and issue new convertible debt to be used to purchase and operate the Company's existing and future businesses. 21 As part of the restructuring, Mr. Fortune agreed to a settlement in which he received $3,250,000 of the Company's common stock at the June 28, 2001 closing price of $0.20 a share, or 16,250,000 restricted shares, in exchange for his $2,000,000 of WOW preferred stock and in full satisfaction of his approximately $5,424,000 of WOW debt. In addition, Mr. Fortune and Julie Fisbeck, who is the sister of John Fisbeck, one of the members of the Control Group, also agreed to exchange their respective 50% ownership interests in Murphy Development, in exchange for $120,000 of the Company's common stock at the June 28, 2001 closing price of $0.20 a share. Mr. Fortune and Ms. Fisbeck each received 300,000 restricted shares of the Company's common stock. Mr. Fortune also agreed to loan $500,000 to Murphy Development. The loan was secured by all of the assets of Murphy Development and convertible at Mr. Fortune's option into shares of the Company's common stock at $0.407401 a share. Mr. Fortune exercised the conversion feature for the principal amount of $500,000, on August 27, 2001 and received 1,227,292 restricted shares of the Company's common stock. Mr. Fortune also agreed to make available to Murphy Development a line of credit of up to $2,250,000, if and as needed, to fund its operations. The line of credit was secured by all of the assets of Murphy Development and convertible at Mr. Fortune's option into shares of the Company's common stock at $0.407401 a share. On August 27, 2001, the Company drew down the entire $2,250,000 line of credit. Also on August 27, 2001, Mr. Fortune exercised the conversion feature on the full principal amount, and received 5,522,814 restricted shares of the Company's common stock. The Company's wholly owned subsidiary, Women of Wrestling, Inc. ("WOW"), was organized in May, 2000, began production of its weekly syndicated television series, WOW - Women of Wrestling(R) in September, 2000 and began airing the programs in the United States and marketing them internationally in October, 2000. In February 2001, WOW completed production of its first season of over-the-air syndicated shows and began re-airs of its original episodes in March 2001. After assessing the syndication, cable and network television markets for the 2001 season, the Company decided as of June, 2001 not to produce future episodes of its WOW-Women of Wrestling(R) program and discontinued related activities. In July 2001, the Company agreed in principle to general terms for licensing the WOW - Women of Wrestling(R) property to David McLane Enterprises, Inc. ("DME") for a minimum monthly dollar amount plus a percentage of certain revenues for three and one half years. DME is owned by David McLane, who was until June, 2001, the president, a director and one of the controlling shareholders of the Company. When a licensing agreement is concluded, the Company also plans to grant an option to DME to purchase the WOW - Women of Wrestling(R) property at the end of the license. As of the date of this report, a licensing agreement with DME has not been finalized and it is uncertain whether any licensing agreement will be entered into with DME. 22 As of May 22, 2001, the Company and its subsidiary, Women of Wrestling, Inc. ("WOW"), executed an Amendment to its Distribution Agreement with M/G Perin, Inc. and Richard Perin (collectively "Perin") in which they agreed to terminate their Distribution Agreement dated January 18, 2000 and enter into a new agreement covering only WOW's free television programs created through May 22, 2001. The new agreement extended through September 30, 2001 for domestic distribution and December 31, 2001 for foreign distribution. Perin was entitled to collect and retain all domestic distribution and foreign television advertising or licensing revenues relating to any licensing of WOW's programs that occured during Perin's continued representation through September 30, 2001 or December 31, 2001, respectively (with the exception only of amounts, if any, already paid to WOW). Since Perin was paying all expenses relating to distribution of WOW's programs, Perin had the right to discontinue the distribution of the programs at any time, provided Perin gave as much advance notice to WOW as reasonably practicable. In the event a substantial portion of the assets or stock of WOW were sold or licensed, Perin's rights to continue to distribute WOW's programs would have terminated thirty days after the consummation of such a sale or license. Also as part of the agreement, Mr. Perin returned for cancellation by the Company 1,839,556 restricted shares which represented all of his common stock in the Company. All rights to warrants issuable under the Distribution Agreement were also voided. Perin also received funding from WOW sufficient to pay certain payables incurred in connection with its representation of WOW. The funds used to pay Perin were loaned to WOW by Carter Fortune, a member of the Control Group of the Company. Following the conclusion of its first season of production of WOW-Women of Wrestling(R), the Company terminated its agreements with its performers and terminated its production staff. As of the date of this report, the Company does not have any employees in its Women of Wrestling, Inc. subsidiary. The Company's subsidiary, Women of Wrestling, Inc., no longer leases space at The Great Western Forum located 3900 W. Manchester Blvd., Los Angeles, California. For the six months ended February 28, 2002, cash flows used for operating activities were $1,370,000, as compared to cash flows used for operating activities of $5,048,000 million for the six months ended February 28, 2001. The change is primarily related to a decrease in net losses associated with the Company's Women of Wrestling operations. For the six months ended February 28, 2002, cash flows used for investing activities were $1,033,000, as compared to $54,000 for the six months ended February 28, 2001. The increase in cash flows used in this period is primarily due to an increase in investments in marketable securities, as well as the use of funds to purchase fixed assets. For the six months ended February 28, 2002, cash flows provided by financing activities were zero as compared to $4,884,000 for the six months ended February 28, 2001. The decrease was primarily related to a reduction in net cash inflows from preferred stock and line of credit borrowings. 23 PART II--OTHER INFORMATION. Item 1. Legal Proceedings. The Company is not involved in any legal proceedings or claims that management believes will have a material adverse effect on the Company's business or financial condition. Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. In January, 2002, the Company appointed and the Control Group elected by written consent in lieu of a meeting Carter M. Fortune as Chief Executive Officer, a Director, and Chairman of the Board. Also, at the same time, the Company appointed and the Control Group elected by written consent in lieu of a meeting William A. Shoemake to the Company's Board of Directors. Douglas E. May remained as a Director. Effective December 31, 2001, Jeffrey J. Lewis resigned as a Director and Chief Executive Officer of Fortune Diversified Industries, Inc., Women of Wrestling, Inc., WOW Women of Wrestling Music I, Inc., and Murphy Development, Ltd. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description -------------- ----------- None (b) Reports on Form 8-K. The following report was filed by the Company during the second quarter of fiscal year 2001-2002: (1) Form 8-K dated January 18, 2002 with respect to the acquisition by a subsidiary of the Company of certain assets of DicksonHughes Group, LLC. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FORTUNE DIVERSIFIED INDUSTRIES, INC. Date: 4/11/02 By: /s/ Douglas E. May --------- ---------------------------- Douglas E. May Vice President of Finance and Chief Financial Officer EXHIBIT INDEX EXHIBIT NO. 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