UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required).
For the fiscal year June 30, 1997
Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required).
For the Transition period from: to:
Commission File Number. 0-24138
DIAMOND EQUITIES, INC.
(Formerly United Payphone Services, Inc.)
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(Name of Small Business Issuer in its Charter)
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Nevada 88-0232816
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State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization
2010 E. University Drive, Ste. # 3 - Tempe, Arizona 85281
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(Address of Principal Executive Offices) (Zip Code)
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(602) 921-2760
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
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Class A Warrants
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Class B Warrants
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Check whether the issuer: (1) filed all Reports 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
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Check here if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definite proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Issuer's revenues for the year ended June 30, 1997, were $ none .
The aggregate market value of the voting stock held by non-affiliates
(approximately 1,775,034 shares as of September 27, 1997) based upon the average
of the bid and asked prices of such stock as of September 27, 1997, as reported
on the Electronic Bulletin Board, was $0.13.
The number of shares of Common Stock of the issuer outstanding as of
September 27, 1997, was 4,666,099.
Transitional Small Business Disclosure Format (check one): Yes No [X]
Documents incorporated by Reference:
Certain exhibits required to be filed herewith are incorporated by
reference from the issuer's registration statement on Form 10-SB (Commission
file No. 0-24138) filed with the Commission on May 13, 1994. Also incorporated
by reference into this Form 10-KSB are certain exhibits filed the Company's 1996
Annual Report on Form 10-KSB, the exhibits filed with the Company's Registration
Statement on Form SB-2 (Commission File number 33-85884) filed with the
Commission on October 24, 1994, and the exhibits filed with the Company's
Current Report on Form S8-K filed with the Commission on December 1, 1996.
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TABLE OF CONTENTS
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PART I Page No.
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Item 1. Description of Business ........................................................ 3
Item 2. Description of Property ........................................................ 7
Item 3. Legal Proceedings .............................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders ............................ 9
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and Other
Stockholder Matters ............................................................ 9
Item 6. Management's Discussion and Analysis or Plan of Operation ...................... 10
Item 7. Financial Statements ........................................................... 12
Item 8. Changes in and Disagreements With Accountants .................................. 12
Item 9. Directors, Executive Officers, Promoters and Control Persons ................... 12
PART III
Item 10. Executive Compensation ......................................................... 13
Item 11. Security Ownership of Certain Beneficial Owners and Management ................. 14
Item 12. Certain Relationships and Related Transactions ................................. 16
Item 13. Exhibits List and Reports on Form 8-K .......................................... 17
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PART I
Item 1. Description of Business.
History. The Company was organized under the laws of the State of
Nevada on July 24, 1987, under the name of KTA Corporation. On September 25,
1989, the Company changed its name to United Payphone Services, Inc. At that
time, the Company was in the business of operating, servicing and maintaining a
system of privately-owned public pay telephones in Nevada. In January, 1990 the
Company expanded its operations into Arizona. In December, 1994, the Company
sold all of its pay telephone location contracts in Las Vegas, Nevada, but did
not include the pay telephone equipment. All of the Nevada equipment was then
relocated to Arizona where the Company did business under the name "U.S.
Payphone, Inc." The Company generated revenues, after the sale of its Nevada
contracts, from coin and non-coin calls made from approximately 865 telephones
located and installed throughout the State of Arizona.
On November 15, 1996, the Company sold substantially all of its fixed
assets (the "Asset Sale") to Tru-Tel Communications, L.L.C., a Nevada limited
liability company ("Tru-Tel"). Under an asset purchase agreement (the "Asset
Purchase Agreement") for $1,711,250 in cash and a secured promissory note of
$811,250 (the "Tru-Tel Note"). The Tru-Tel Note is payable on a monthly basis
commencing on February 15, 1997, and bears interest at the rate of 8% per annum.
The final payment of all accrued and unpaid interest and outstanding principal
is due on or before January 15, 2002. The Tru-Tel Note is secured by a lien on
all assets transferred in the Asset Sale and is further secured by personal
guarantees of the principals of Tru-Tel. The Company effected the Asset Sale
because the directors determined that the changing regulatory environment and
business prospects would have a negative effect on the Company's future
operations.
The Asset Purchase Agreement prohibits the Company from engaging in,
either directly or indirectly, in any business which operates public or private
pay phones within the State of Arizona. In addition, the Company may not install
or maintain any phone equipment, or provide related services, for any party to
its existing contracts, which were sold to Tru-Tel. As a result, the Company has
had no business operations since the Asset Sale and had no income in fiscal year
1997. On June 20, 1997, the company changed its name to Diamond Equities, Inc.
General. The Company intends to use its working capital to take
advantage of business opportunities which may arise from time to time.
Management anticipates that such opportunities will become available to the
Company due primarily to its status as a small, publicly-held entity with liquid
assets and to its flexibility in structuring and participating in business
opportunities. Decisions as to which business opportunities to acquire will be
made by management of the Company, which will in all probability act without the
consent, vote or approval of the Company's shareholders. The Company presently
has no agreement, understanding or arrangement to acquire or participate in any
specific business opportunity, nor has it identified any opportunities for
investigation.
Plan of Operation. The Company will seek corporate opportunities which
it finds or which are presented to it by persons or firms who or which desire to
employ the Company's funds in their business and/or obtain the perceived
advantages of a publicly-held corporation. The Company's principal business
objective will be to seek long-term growth potential in a business venture
rather than to seek immediate, short-term earnings. The Company will not
restrict its search to any specific business, industry or geographical location,
and the Company may participate in a business venture of virtually any kind or
nature. The discussion of the proposed business under this caption and
throughout this Form 10-KSB is purposefully general and is not meant to be
restrictive of the Company's virtually unlimited discretion to search for and
enter into potential business opportunities.
The Company's working capital will be used generally for the purpose of
identifying, investigating, analyzing and acquiring business opportunities. The
Company's proposed business is sometimes referred to as a "blind pool" because
shareholders will entrust their investment monies to the Company's management
before they have a chance to analyze any ultimate use to which their money may
be applied. Consequently, the Company's potential success is
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heavily dependent on the Company's management, which will have virtually
unlimited discretion in searching for and entering into business opportunities.
Management anticipates that it may be able to participate in only one
potential business venture, due primarily to the Company's limited capital. This
lack of diversification is a substantial risk in investing in the Company
because it will not permit the Company to offset potential losses from one
venture against gains from another and will expose the Company to the
cyclicality of any business in which it invests.
The Company may seek a business opportunity in firms which have
recently commenced operations, are developing companies in need of additional
funds for expansion into new products or markets, are seeking to develop a new
product or service, or are established businesses which may be experiencing
financial or operating difficulties and are in need of additional capital. In
some instances, a business opportunity may involve the acquisition of, or merger
with a corporation which does not need substantial additional cash but which
desires to establish a public trading market for its common stock. The Company
may purchase assets and establish wholly-owned subsidiaries in various
businesses or purchase existing businesses as subsidiaries.
The Company anticipates that the selection of a business opportunity in
which to participate will be complex. However, because of general economic
conditions, rapid technological advances being made in some industries, and
shortages of available capital, the Company believes that there are numerous
firms seeking even the limited additional capital which the Company has and/or
the benefits of a publicly-traded corporation. The perceived benefits of a
publicly-traded corporation may include facilitating or improving the terms on
which additional equity financing may be sought, providing liquidity for the
principals of a business, creating a means for providing incentive stock options
or similar benefits to key employees, providing liquidity (subject to
restrictions of applicable statutes) for all shareholders, and other factors.
Business opportunities may occur in many different industries and at various
stages of development, all of which will make the task of comparative
investigation and analysis of such business opportunities extremely difficult
and complex.
The Company may have insufficient capital with which to provide the
owners of business opportunities with sufficient cash or other assets. However,
the Company plans to offer owners of business opportunities the possibility of
acquiring a controlling ownership interest in a public company at substantially
less cost than is required to conduct an initial public offering. The owners of
the business opportunities will, however, incur significant post-merger or
acquisition registration costs if they wish to register a portion of their
shares for subsequent sale. The Company will also incur significant legal and
accounting costs in connection with the acquisition of a business opportunity
including the costs of preparing registration statements if required, Forms 8-K,
agreements and related reports and documents.
In connection with the acquisition of or merger with another business,
the Company may use a portion of its working capital to make short-term (less
than one year) loans to a target business. The Company will attempt to assure
that the borrower will have the ability to repay the loan within its stated term
and that the loan is either fully secured or personally guaranteed, but there
can be no assurance in this regard. The Company may make unsecured loans as well
as secured loans and, in either event, could lose its entire principal in such a
loan.
Evaluation of Opportunities. The analysis of new business opportunities
will be undertaken by or under the supervision of the officers and directors of
the Company, none of whom is a professional business analyst. In analyzing
prospective business opportunities, management will consider such matters as the
available technical, financial, and managerial resources; working capital and
other financial requirements; history of operation, if any; prospects for the
future; nature of present and expected competition; the quality and experience
of management services which may be available and the depth of such management;
the potential for further research, development, or exploration; specific risk
factors not now foreseeable but which then may be anticipated to impact the
proposed activities of the Company; the potential for growth or expansion; the
potential for profit; the perceived public recognition or acceptance of
products, services, or trades; name identification; and other relevant factors.
Officers and directors of the Company will meet personally with management and
key personnel of the target business as part of their investigation. To the
extent possible, the Company intends to utilize written reports and personal
investigation to evaluate the above factors.
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The Company may allocate a minor portion of its working capital for the
retention of outside consultants, if the Board deems it necessary, to aid in the
analysis of a business opportunity.
Since the Company is subject to Section 13 of the Exchange Act, it will
be required to furnish certain information about significant acquisitions,
including audited financial statements for the company(s) acquired, covering
one, two or three years depending upon the relative size of the acquisition.
Consequently, acquisition prospects that do not have or are unable to obtain the
required audited statements may not be appropriate for acquisition so long as
the reporting requirements of the Exchange Act are applicable.
It is anticipated that any opportunity in which the Company
participates will present certain risks. Many of these risks cannot be
adequately identified prior to selection of the specific opportunity, and the
Company must, therefore, depend on the ability of management to identify and
evaluate such risks. Certain of the opportunities available to the Company may
have been unable to develop a going concern or may be in development stage in
that they have not generated significant revenues from their principal business
activities prior to the Company's participation. In such cases, the combined
enterprises may not become going concerns or advance beyond the development
stage even after the Company's participation in the activity and the related
expenditure of the Company's findings. Many of the opportunities may involve new
and untested products, processes, or market strategies which may not succeed.
Such risks will be assumed by the Company and, therefore, its shareholders.
The Company will not restrict its search to any specific kind of firms,
but may acquire a venture which is in any stage of its corporate life,
including, but not limited to, companies in the development stage and those
already in operation. It is impossible to predict at this time the status or
maturity of any business in which the Company may become engaged through
acquisition or otherwise.
Acquisition of Opportunities. In acquiring a particular business, the
Company may become party to a merger, consolidation, reorganization, joint
venture, or licensing agreement with another corporation or entity. It may also
purchase the stock or assets of an existing business. On the consummation of a
transaction, it is possible that the present management and shareholders of the
Company will not be in control of the Company. In addition, a majority or all of
the Company's directors may, as part of the terms of the acquisition
transaction, resign and be replaced by new directors without a vote of the
Company's shareholders.
It is anticipated that any securities issued in any such reorganization
would be issued in reliance on exemptions from registration under applicable
federal and state securities laws. In some circumstances, however, as a
negotiated element of this transaction, the Company may agree to register such
securities either at the time the transaction is consummated, under certain
conditions, or at specified times thereafter. The issuance of substantial
additional securities and their potential sale into any trading market which may
develop in the Company's Common Stock may adversely affect the market for such
securities.
While the actual terms of a transaction to which the Company may be a
party cannot be predicted, it is expected that the parties to the business
transaction will find it desirable to avoid the creation of a taxable event and
thereby structure the acquisition in a "tax free" reorganization under Sections
368(a)(1) or 351 of the Internal Revenue Code of 1954, as amended (the "Code").
In order to obtain tax free treatment under the Code, it may be necessary for
the owners of the acquired business to own 80% or more of all classes of stock
of the surviving entity. In such event, the shareholders of the Company, would
retain less than 20% of the issued and outstanding shares of the surviving
entity, which could result in significant dilution in the percent ownership of
such shareholders.
As part of the Company's investigation, officers and directors of the
Company may meet with management and key personnel of a target company, may
visit and inspect facilities, obtain independent analysis or verification of
certain information provided by such Company, check references of management and
key personnel, and take other reasonable investigative measures, to the extent
that the Company's limited financial resources and management expertise allow.
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The manner in which the Company participates in an opportunity will
depend on the nature of the opportunity, the respective needs and desires of the
Company and other parties, the management of the target company, and the
relative negotiating strength of the Company and such other management.
With respect to any mergers or acquisitions, negotiations with target
company management will be expected to focus on the percentage of the Company
which target company shareholders would acquire in exchange for their
shareholdings in the target company. Depending upon, among other things, the
target company's assets and liabilities, the Company's shareholders will, in all
likelihood, hold a lesser percentage ownership interest in the Company following
any merger or acquisition. Such dilution of ownership interest may be
significant in the event the Company acquires a target company with substantial
assets. Any merger or acquisition effected by the Company can be expected to
have a significant dilutive effect on the percentage of shares held by the
Company's shareholders, including those Unitholders who continue their
investment.
It is possible that the Company will not have sufficient working
capital to undertake any significant development, marketing, or manufacturing of
any product which may be acquired. Accordingly, following the acquisition of any
such product, the Company may be required to either seek additional debt or
equity financing or obtain funding from third parties, in exchange for which the
Company may be required to give up a substantial portion of its interest in any
acquired product. There can be no assurance that the Company will be able to
obtain additional financing or to interest third parties in providing funding
for the further development, marketing, and manufacturing of any products
acquired.
The Company will participate in a business opportunity only after the
negotiation and execution of appropriate written agreements. Although the terms
of such agreements cannot be predicted, generally such agreements will require
specific representations and warranties by all of the parties thereto, will
specify certain events of default, will detail the terms of closing and the
conditions which must be satisfied by each of the parties prior to such closing,
will outline the manner of bearing costs if the transaction is not closed, will
set forth remedies on default, and will include other terms typical in
transactions of such nature.
It is anticipated that the investigation of specific business
opportunities and the negotiation, drafting, and execution of relevant
agreements, disclosure documents, and other instruments will require substantial
management time and attention and substantial costs for accountants, attorneys,
and others,. If a decision is made not to participate in a specific business
opportunity, the costs incurred in the related investigation would not be
recoverable. Furthermore, even if an agreement is reached for the participation
in a specific business opportunity, the failure to consummate that transaction
may result in the loss to the Company of the related costs incurred.
As is customary in the industry, the Company may pay a finder's fee for
locating a merger or acquisition candidate and for location of additional
financing. If any such fee is paid, it will be approved by the Company's board
of directors and will be in accordance with industry standards. This type of fee
would not be paid to any employee, officer, director or a 5% or more shareholder
of the Company.
The foregoing is a forward-looking statement within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and is subject to the safe harbors
created thereby. Actual results could differ materially because of the following
factors: the inability to secure business operations; losses due to an
unprofitable new line of business; the continued employment of key management; a
change in control of the Company due to the conversion by Dingaan Holdings, S.A.
of its Series A 6% Preferred Stock or other events.
Competition. The Company will be an insignificant participant among the
firms which engage in the acquisition of business opportunities. There are many
established venture capital and financial concerns which have significantly
greater financial and personnel resources and technical expertise than the
Company. In view of the Company's limited financial resources, the Company will
continue to be at a significant competitive disadvantage
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compared to the Company's competitors. Also, the Company will be competing with
a large number of other small, blind-pool, public companies located in the
Southwest and elsewhere.
Regulation and Taxation. In view of the Sales of Assets, the Company is
no longer engaged in the telecommunications business and therefore is not
subject to regulations of such activity by the FCC and state public service
conversions.
The Company might, in certain circumstances, be deemed to be an
investment company under the provisions of Section 3(a)(3) of the 1940 Act,
which could have substantial adverse impact on its operations. This could occur
if a significant proportion of its working capital were invested in short-term
debt instruments for longer than a one-year period and the Company had no
significant operations. The Company intends to take all reasonable steps to
avoid such classification.
The Company intends to structure a merger or acquisition in such a
manner as to minimize federal and state tax consequences to the Company and any
target company. Management of the Company will also review any mergers or
acquisitions in an effort to minimize the possibility that any merger or
acquisition will be classified as a taxable event by the Internal Revenue
Service.
Employees. The Company presently has three employees. All engaged in
management, administrative or clerical functions. The Company will also engage,
from time to time, services of outside consultants to assist it in evaluation of
prospective target companies. The Company may allocate a minor portion of its
working capital for part-time secretarial services required by the Company.
Item 2. Description of Property.
Until September, 1997 the Company maintained its offices rent-free in
office space provided by the Company's President in his home. The President did
not receive any rent, but was reimbursed for out-of-pocket expenses for
telephone use, etc., not to exceed $500.00 per month.
On September 1, 1997, the Company leased approximately 1,725 square
feet of office space, located at 2010 E. University Drive, Suite # 3, Tempe,
Arizona 85281. The term, of the lease is from September 1, 1997 through August
31, 1999. The rent for the first year is $1036.80 plus tax per month and for the
second year, $1071.36 plus tax per month.
Item 3. Legal Proceedings.
Neither the Company nor any of its properties is a party to any
material pending legal proceedings or government actions (except as set forth
below), including any material bankruptcy, receivership, or similar proceedings.
Except as set forth below, management of the Company does not believe that there
are any material proceedings to which any officer or affiliate of the Company,
any owner of record of beneficially of more than 5% of the Common Stock of the
Company, or any associate of any such director, officer, affiliate of the
Company, or security holder is a party adverse to the Company or has a material
interest adverse to the Company.
Sales Tax Appeal. In March, 1993, the Arizona Department of Revenue
issued an Arizona transaction privilege (sales) tax deficiency assessment in the
amount of $73,680 against the Company with respect to coin revenues received in
operating private pay telephones in the State of Arizona during the period from
January 1, 1990 through January 31, 1993. A timely protest was filed with the
Department seeking the abatement of the entire assessment. The principal issue
in the Company's controversy is the taxability of its coin revenues under the
telecommunications classification. The Company does not believe that the
operation of private pay telephones constitutes telecommunications because pay
telephones do not transmit signals. At the first administrative hearing, the
hearing officer for the Department ruled in favor of the Company, determining
that the operation of pay telephones did not constitute intrastate
telecommunications services. Upon review, the Director of the Department
reversed that
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decision and upheld the assessments. The case is now pending before the Arizona
State Board of Tax Appeals. Management believes that the Company will incur a
tax liability of approximately $130,000 upon the resolution of this case. The
Company has previously reserved an amount sufficient to pay this tax liability.
Federal Grand Jury Indictments. On November 6, 1996, a true bill was
returned by the Grand Jury in the United States District Court in Nevada against
Michael G. Swan and Claudia Higgins who are former directors and officers of the
Company. Mr. Swan and Ms. Higgins are accused of racketeering, RICO violations,
securities fraud and wire fraud. All of the charges arise out of alleged
activities of Mr. Swan and Ms. Higgins while serving as directors and officers
of the Company. Also named in the indictment was Kevin Orton, the Company's
former accountant. Mr. Swan and Ms. Higgins were also named as "other relevant
persons and entities," but were not charged, in two other indictments, alleging
among other things, securities fraud violations, filed respectively on October
30, 1996, and November 6, 1996. The Company was not named as a defendant in the
indictments. However, because the indictments relate to activities alleged to
have been perpetrated by then officers and directors of the Company, there can
be no assurance that the indictments ultimately will not have a material adverse
effect on the Company.
The government informed the Company on August 21, 1996 that Mr. and
Mrs. Westfere, the Company's then current Chief Executive Officer and
Secretary/Treasurer, were neither subjects or targets of the grand jury
investigation, and the government did not contact any other then current
officers or employees concerning the investigation. The government has not
informed the Company as to the relief, if any, to be sought. The Company
complied with the subpoena it received and cooperated with the government's
investigation. The Company is presently unable to assess the potential
liability, if any, to the Company as a result of activities which are the
subject of the above investigation.
Mr. Swan was an officer and of the Company in April 1995. Concurrently
with Mr. Swan's resignation the Company and Mr. Swan entered into a consulting
agreement pursuant to which Mr. Swan was to serve as a financial consultant and
advisor to the Company in return for the Company's payment of a monthly
consulting fee of $5,000 to Mr. Swan and the Company's reimbursement of Mr.
Swan's reasonable business expenses on behalf of the Company. The Consulting
Agreement had a term of three years commencing in April 1995. Mr. Swan also
received options to purchase 250,000 shares of the Company's at the then-current
market price of the Company's Common Stock. On October 3, 1996, the Company and
Mr. Swan entered into a Severance Agreement, pursuant to which to: (a) the
Consulting Agreement was terminated; (b) Swan was expressly prohibited from
performing any services for or from representing himself to be an agent or a
representative of the Company, without the prior written consent of the
Company's Chief Executive Officer, and (c) the Company agreed to pay Mr. Swan
$5,000 per month through the original term of the Consulting Agreement (April
1998). The Company may terminate the Severance Agreement in the event (i) Swan
breaches the Severance Agreement, (ii) Swan is convicted of a felony involving
or related to Swan's previous employment with the Company or services provided
by Swan for the benefit of or related to the Company, or (iii) of Swan's death.
Sec also "Item 12 - Certain Relationships 12 and Related Transactions."
Breach of Contract Litigation. In connection with the sale of its
pay-telephone operations, the Company received a promissory note in the
principal sum of $811,250. Monthly payments of $14,000 on the note were to
commence on February 15, 1997. No payments on the note have been received. On
March 18, 199'/ a complaint for breach of contract was filed with the Eighth
Judicial District Court of Clark County, Nevada. The complaint alleges an
anticipatory breach by the defendant, Tru-Tel Communications, LLC, issuer of the
promissory note. The complaint also names as party defendants, the principals of
Tru-Tel Communications, LLC and Finova Capital Corporation (provider of the
financing used to purchase the assets.)
The defendants have responded by issuing counterclaims. The
counterclaims allege that the revenues of the Company reported to Tru-Tel
Communications, LLC and Finova Capital Corporation were purportedly overstated
at the time of the asset purchase agreement. The Company intends to vigorously
contest the counterclaims and pursue the original claims against all party
defendants. While it is not feasible at this time to predict or determine the
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ultimate financial outcome of the complaint, management does not believe that
the Company will be party to any unfavorable judgments.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fiscal year ended June 30, 1997, to
a vote of the Company's security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is currently traded in the over-the-counter
market and is quoted on the OTC Bulletin Board. According to information
provided to the Company, during the fiscal year ended June 30, 1997, only
112,000 shares of the Company's Common Stock were traded on the Bulletin Board.
The Company therefore believes that there is no established public trading
market for the Company's Common Stock. The Company also believes that there are
only five market makers which currently make a market in the Company's Common
Stock. These quotations reflect inter-dealer prices, without retail markup,
markdown, or commission and may not necessarily represent actual transactions.
Quarter High Low
Fiscal Year ended First $0.75 $0.50
June 30, 1996 Second $0.63 $0.50
Third $0.69 $0.50
Fourth $0.82 $0.50
Fiscal Year ended First $0.50 $0.25
June 30, 1997 Second $0.25 $0.19
Third $0.19 $0.13
Fourth $0.13 $0.13
As of September 27, 1997, there were approximately 580 holders of
record of the Company's Common Stock as reported to the Company by its transfer
agent.
No cash dividends have been declared or paid to date on the Company's
Common Stock. As of September 27, 1996, the Company had outstanding 727 shares
of its Series A 6% Preferred Stock which had preference on any dividends paid.
The Company paid no dividends on its Series A 6% Preferred Stock in the fiscal
year ended June 30, 1997, and the Company has $194,023 in accrued but unpaid
dividends on such Preferred Stock for the fiscal year ended June 30, 1997.
Nevada law restricts the funds from which dividends may legally be paid. The
Company anticipates that dividends for the foreseeable future, if any, will be
limited to dividends necessary to satisfy the Company's obligations under the
issued and outstanding shares of the Company's Series A 6% Preferred Stock and
that no dividends will be paid on Company's Common Stock.
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Item 6. Management's Discussion and Analysis or Plan of Operation.
Results of Operations
Results of operations for the years ended June 30, 1997 and 1996
On November 15, 1996, the Company sold its payphone base and all
related equipment, contracts, automobiles and nearly all furniture & fixtures to
Tru-Tel Communications, L.L.C. for $1,711,250 in cash and a note receivable of
$811,250. The Company assigned the office and warehouse lease to the buyer and
moved its operations to another location in Tempe, Arizona. Since November 15,
1996, the Company has been winding down operations relative to the payphone
business and has been involved in searching for new business ventures and
operations to acquire in different industries. Because the Company discontinued
its operations in the pay telephone industry in fiscal year 1997, the results of
operations will greatly differ from that of fiscal year 1996.
The Company had net income of $1,362,863 in the fiscal year ended June
30, 1997, compared to a net loss of $92,529 in the fiscal year ended June 30,
1996. The Company had net income attributable to its Common Stock (which gives
effect to dividends accrued during such fiscal year on the Company's issued and
outstanding Series A 6% Preferred Stock) of $1,253,807 during the fiscal year
ended June 30, 1997, compared to a net loss attributable to its Common Stock of
$201,585 in the fiscal year ended June 30, 1996. The difference in net income
for the year ended June 30, 1997 is largely due to the gain recognized on the
sale of the operations of $1,688,750.
The Company's gross revenues from the discontinued operations decreased
to $835,857 in the fiscal year ended June 30, 1997, compared to $2,127,574 in
the comparable prior period, a decrease of 61%. Interest income increased to
$98,076 in the fiscal year ended June 30, 1997, compared to $2,995 in the
comparable prior period, due to the increase in cash and notes receivable. The
Company's cost of sales decreased by 65%, or to $346,775 for the year ended June
30, 1997 from $988,876 for the year ended June 3 0, 1996. As a result of the
foregoing, the Company's gross profit margins were 58.5% and 53.5% for the years
ended June 30, 1997 and 1996, respectively. Management believes the increase in
gross profit margin resulted largely from the decrease in coin operated pay
telephone (copt) bills by converting phone bills to the flat rate program.
The Company's selling, general and administrative expenses decreased by
42% to $744,442 for the fiscal year ended June 30, 1997 compared to $1,286,296
in the fiscal year ended June 30, 1996. The decrease is due to the change of
operations as well as a large decrease in depreciation due to the sale of
assets. The Company had a gain on the sale of equipment of $1,860,019, and
$3,625 in the fiscal years ended June 30, 1997, and 1996, respectively. The
difference was due to the sale of approximately 99% of the fixed assets of the
Company.
The Company issued 727 shares of its Series A 6% Preferred Stock to
Teletek in June 1994 in consideration for cash advances and the settlement of
certain litigation involving the Company. In 1997, these shares were sold by
Teletek to Dingaan Holdings, S.A., a major shareholder of the Company, during
the fiscal year ended June 30, 1997. The above shares require the Company to pay
a cumulative annual dividend equal to 6% of the face value of the Preferred
Stock ($1,817,591), plus accrued and unpaid dividends, until redeemed or
converted. The Company accrued $109,056 in preferred dividends during the fiscal
year ended June 30, 1997, and paid dividends of $24,088 and accrued $84,468 in
preferred dividends in the fiscal year June 30, 1996. During the year 1997, the
Company paid the note payable of $113,760 for the 1995 and 1994 fiscal year
dividends that were unpaid.
The Company's future results of operations will be materially affected
due to the change of operations and lack of significant revenues. The Company
anticipates that in the fiscal year ending June 30, 1998, that new operations
will be secured to generate sufficient revenues to cover its operating expenses.
However, no such operations have yet been identified, and management is
continuing its search for a viable merger candidate or business operations to
begin. The foregoing is a forward-looking statement within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and is subject to the safe harbors
created thereby. Actual results could differ materially because of the following
factors: the inability to secure business operations; losses due to an
unprofitable new line of business; the continued employment of key management;
10
<PAGE>
a change in control of the Company due to the conversion by Dingaan Holdings,
S.A., of its Series A 6% Preferred Stock or other events.
Results of Operations for the Years Ended June 30, 1996 and 1995
The Company had a net loss of $92,529 in the fiscal year ended June 30,
1996, compared to a net loss of $190,163 in the fiscal year ended June 30, 1995.
The Company had a net loss attributable to its Common Stock (which gives effect
to dividends accrued during such fiscal year on the Company's issued and
outstanding Series A 6% Preferred Stock) of $201,585 during the fiscal year
ended June 30, 1996, compared to a net loss attributable to its Conimon Stock of
$299,441 in the fiscal year ended June 30, 1995.
The Company's gross revenues increased to $2,127,574 in the fiscal year
ended June 30, 1996, compared to $2,074,244 in the comparable prior period, an
increase of 2.5% over the comparable prior period. The Company's cost of sales
increased by 3.6%, or to $988,876, for the year ended June 30, 1996 from
$954,385 for the year ended June 30, 1995. As a result of the foregoing, the
Company's gross profit margins were 53.5% and 54.0% for the years ended June 30,
1996 and 1995, respectively. The Company believes that this slight reduction in
gross profit and gross profit margin resulted largely from the decrease in
operator service revenues. The Company had miscellaneous income of $48,499 in
the year ended June 30, 1996, compared to $12,095 in the year ended June 30,
1995. The Company's Miscellaneous income includes approximately $42,000 in
income recognized from a reserve previously taken to cover potential charges
owed to AT&T.
The Company's selling, general and administrative expenses decreased by
7. 1% to $1,286,296 for the fiscal year ended June 30, 1996, compared to
$1,384,225 in the fiscal year ended June 30, 1995. This decrease was
attributable to a reduction in depreciation and amortization charges to $319,518
in the current year from $438,331 in the comparable prior period as a result of
the full depreciation and amortization of a portion of the Company's fixed
assets. This Was offset by an increase of 2.2% in the Company's general and
administrative expenses to $966,778 int he current year from $945,894 in the
comparable prior period as a result of expenses incurred in connection with the
Company's SB-2 stock offering. The Company had a gain on the sale of equipment
of $3,625 and $58,117 in the fiscal years ended June 30, 1996 and 1995,
respectively. The gain in the comparable prior period resulted from the sale of
the Company's Las Vegas pay telephone location contracts in December 1994.
Liquidity and Capital Resources
The Company requires capital to support the general and administrative
expenses of the Company in its search for viable operations.
At June 30, 1997, the Company had cash and cash equivalents of
$1,586,983, compared to cash and cash equivalents of $694,293 at June 30, 1996.
This increase of $892,690 resulted primarily from the sale of the payphone
operations, from which the Company received $1,688,750. The foregoing increase
in cash was offset by a net decrease in cash of $118,228 from continuing and
discontinued operations, the return of the SB-2 offering of $458,250, the payoff
of long term debt of $173,971, and the purchase of property & equipment of
$45,61 1.
The funding sources currently available to the Company include
potential public offerings, however, the Company has no current plans to sell
additional shares of capital stock and has no third party financing arrangements
in place. Therefore, the Company's sole source of operating capital for the
foreseeable future is likely to be from current cash reserves. Principal uses of
working capital will include payment of the Company's general and administrative
expenses and the Company's liabilities for accrued and unpaid dividends on its
outstanding shares of Series A 6% Preferred Stock.
The Company believes that its existing cash balances and net cash flows
from operations (if any) will be sufficient to meet the Company's cash
requirements for the next 12 months. However, the foregoing and the Company's
ability to operate profitably are subject to material uncertainties due to the
lack of signficant revenues and operations. See Item 6 "Results of Operations
for the Fiscal Years Ended June 30, 1997 and 1996". The Company is
11
<PAGE>
exploring various business combinations, in various industries which might
result in the acquisition of one or more subsidiaries. This may materially
change the cash requirements of the Company, however the Company has not entered
into any agreement concerning the foregoing, and there may be no assurance that
such an agreement will be entered into by the Company.
Item 7. Financial Statements.
The following financial statements are attached hereto and incorporated
herein:
<TABLE>
<CAPTION>
Heading Page
------- ----
<S> <C>
Independent Auditor's Report F-3
Balance Sheets for the Years Ended June 30, 1997 and 1996 F-4
Statements of Operations for the Years Ended June 30, 1997 and 1996 F-5
Statements of Stockholder's Equity for the years ended June 30, 1997, 1996 and 1995 F-7
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 F-8
Notes to Financial Statements F-9
</TABLE>
Item 8. Changes in and Disagreements With Accountants.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
General.
The following information is provided for each of the executive
officers and directors of the Company:
David Westfere, age 31, has been a director, president and chief
executive and operating officer of the Company since April 6, 1995, and was
General Manager of Operations from January 1991 to April 1995. From 1988 until
1990 he was the route supervisor for the Company's pay telephone operation in
Bakersfield, California, and from 1990 until 1991 he was the route supervisor of
the Company's pay telephone operation in Phoenix, Arizona. From September 1984
to June 1987 Mr. Westfere attended the University of Akron.
Todd D. Chisholm, age 34, has been a director of the Company since June
27, 1995. From June 1990 until September 1992 he was employed as a staff
accountant by Orton & Company, Certified Public Accountants, and from September
1992 until June 1994 he was employed as audit manager by Jones, Jensen, Orton &
Company, Certified Public Accountants. Since June 1994 he has been self-employed
as a certified public accountant. Since April 1995 he has also been the
vice-president and chief financial officer of The Solarium, Inc., a privately
held tanning salon. Mr. Chisholm received a bachelor of arts degree in business
from the University of Utah. He has been a certified public accountant since
1992.
12
<PAGE>
Mr. Westfere and Mrs. Ramona Westfere were appointed as directors of
the company on April 6, 1995 by the Company's sole remaining directors at the
time. Mr. Chisholm was appointed as a director on June 27, 1995 by the
directors. Mrs. Westfere resigned as a director and officer of the Company on
February 1, 1997.
Compliance with Section 16(a) of the Exchange Act. Beginning with the
fiscal year ended June 30, 1995, Teletek Inc., a 10% owner of the Company's
Common Stock during such fiscal year, failed to file a Form 3 on a timely basis.
Said party failed to file a Form 3 upon the Company registering its Common Stock
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, on or
about July 12, 1994. Teletek also failed to file a Form 5 for such fiscal year
and for the fiscal year ended June 30, 1996. Teletek sold its holdings of Common
Stock of the Company on December 1, 1996 to Dingaan Holdings, S.A..
Item 10. Executive Compensation.
The following table set forth the aggregate executive compensation
earned by or paid to current management of the Company for the fiscal year ended
June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Positions Year Salary Bonus Other Annual Compensation
<S> <C> <C> <C> <C>
David Westfere, President (1) (2) 1997 $36,800 $ 0.00 $42,429.81 (3)
1996 $32,400 $16,000 $46,972.00 (4)
1995 $32,400 $16,000 $35,031.00 (5)
</TABLE>
- -------------
(1) Mr. Westfere has been Chief Executive Officer and a director of the Company
since April 6, 1995. He was the Company's general manager of operations during
the fiscal year ended June 30, 1994 and during the portion of the fiscal year
ended June 30, 1995 prior to being appointed Chief Executive Officer of the
Company.
(2) The Company did not pay any long-term compensation to Mr. Westfere during
the above periods.
(3) During the fiscal year 1997, the Company paid (i) health insurance premiums
of $6,429.81 and (ii), $36,000 to C&N, Inc., a company controlled by Mr.
Westfere, for management services. See "Item 12 - Certain Relationships and
Related Transactions.
(4) The Company paid health insurance premiums of $5,972 for Mr. Westfere and
his family during the fiscal year 1996. The Company also paid a total of $36,000
to C&N, Inc., a company controlled by Mr. Westfere, for management services
during such period.
(5) During the fiscal year 1995, the Company paid (i) health insurance premiums
for Mr. Westfere and his family of $ 8,331; (ii) a car allowance of $8,700 to
Mr. Westfere; (iii) fees for property management services related to the
Company's leased office and warehouse facilities of $6,000 to Mr. Westfere and
$12,000 to C&N, Inc., a corporation controlled by Mr. Westfere.
No other executive officer of the Company received any compensation
exceeding $100,000 for the fiscal years ended June 1997, 1996, 1995.
Compensation of Directors. Directors are permitted to receive fixed
fees and other compensation for their services as directors, as determined by
the Board of Directors. No such fees were paid to the Company's directors for
the fiscal year 1997.
13
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth certain information concerning the
Common Stock ownership as of September 27, 1997, of (i) each person who is known
to the Company to be the beneficial owner of more than five percent of the
Company's Common Stock; (ii) all directors; (iii) each of the Company's
executive officers; and (iv) directors and executive officers of the Company as
a group:
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Beneficial Percent of Class
- ------------------------------------ -------------------------------- ----------------
Ownership
---------
<S> <C> <C>
Oak Holdings, Inc. 2,500,000 (1) 53.6%
Apartado 63685
Panama, Republic of Panama
Grafton Holdings S.A. 2,500,000 (2) 53.6%
Apartado 63685
Panama, Republic of Panama
Peter Robin Baily 2,500,000 (3) 53.6%
Apartado 6-4569
Panama City, Republic of Panama
Pedro Coronado 2,500,000 (4) 53.6%
Apartado 6-2495
Panama City, Republic of Panama
Dingaan Holdings, S.A. 992,065 (5) 21.3%(5)
Enro Canadian Center
First Floor
Marlborough Street
P.O. Box N-3802
Nassau, Bahamas
Higgins Family Limited Partnership 235,230 (6) 5.0%
2654 East Topaz Square
Las Vegas, Nevada 89121
Michael G. Swan 487,198 (7) 10.4%
2654 East Topaz Square
Las Vegas, Nevada 89121
Todd D. Chisholm 0 N/A
50 West Broadway
Suite 1130
Salt Lake City, Utah 84101
David Westfere 20,000 (8) (9)
1725 West Third Street
Tempe, AZ 85281
Directors and Executive Officers as a Group (3 20,000 (9) (9)
persons)
</TABLE>
14
<PAGE>
- ----------------
(1) These shares are held directly and of record by Oak Holdings, Inc.
(2) These shares are held and of record by Oak Holdings, Inc., Grafton Holdings,
S.A. ("Grafton") has indicated that it has direct beneficial ownership of such
shares. However, the Company believes that Grafton has indirect ownership of
such shares as the sole corporate director of Oak Holdings, Inc.. As the sole
corporate director of Oak Holdings, Inc., Grafton has represented to the Company
that it is responsible for the management of Oak Holdings, Inc..
(3) These shares are held by and of record by Oak Holdings, Inc.. Mr. Baily has
indicated to the Company that he has indirect beneficial ownership of such
shares by virtue of being a controlling shareholder of Oak Holdings, Inc.
with Pedro Coronado.
(4) These shares are held directly and of record by Oak Holdings, Inc.. Mr.
Coronado has indicated to the Company that he has indirect beneficial ownership
of such shares by virtue of being a controlling shareholder of Oak Holdings,
Inc..
(5) These shares were previously held by Teletek, Inc., Las Vegas, Nevada, and
were sold to Dingaan Holdings, S.A. under a Stock Purchase Agreement dated
December 1, 1996, the consideration for the transfer of the securities was the
forgiveness of debt in the amount of two million dollars representing a loan
made by Dingaan Holdings, S.A., to Teletek on August 22, 1996.
Of the shares sold, a total of 992,065 shares are now held of record by Dingaan
Holdings, S.A. ("Dingaan"). Based solely upon the foregoing shares, Dingaan
currently owns approximately 21.3% of the total issued and outstanding shares of
Common Stock of the Company (4,666,099 shares). In addition, Dingaan owns 727
shares of the Company's Series A 6% Preferred Stock. These shares of Series A 6%
Preferred Stock are convertible at 75% of the average bid prices of the Common
Stock for the ten trading days immediately prior to conversion based upon the
cash amount attributable to such shares and any unpaid interest. The cash amount
of such preferred shares, plus unpaid interest, as of September 27, 1997, was
approximately $2,011,614. The average bid price of the Company's Common Stock on
the 10 trading days immediately prior to September 27, 1997 was $0.13 per share.
Therefore, based upon the conversion price of $.10 per share, the shares of
Series A 6% Preferred Stock owned by Dingaan would be convertible into a total
of 20,116,140 shares of the Company's Common Stock. In that event Dingaan would
own a total of 21,108,205 shares of Common Stock, or 85.2% of the total then
issued and outstanding shares of Common Stock of the Company.
(6) These shares are held of record by this entity. Michael Swan, a former Chief
Executive Officer and director of the Company, is the general partner of the
Partnership and controls the disposition of the shares owned by the Partnership.
Mr. Swan may therefore be deemed to be a beneficial owner of such shares.
(7) Represents (i) 237,198 shares owned by the Higgins Family Limited
Partnership, of which Mr. Swan is the General Partner.
(8) These shares are owned jointly by Mr. and Mrs. Westfere, husband and wife.
(9) Less than 1%.
As of September 27, 1997, the Company had outstanding 727 shares of Series A 6%
Preferred Stock, all of which shares were owned of record by Dingaan Holdings,
S.A..
There are no arrangements known to the Company, the operation of which may at a
subsequent date result in a change of control of the Company. However, if at any
time Dingaan should elect to convert its shares of Series A 6% Preferred Stock
into shares of Common Stock, control of the Company would change to that entity
upon such conversion. See Footnote 5 to the Table immediately above.
15
<PAGE>
Item 12. Certain Relationships and Related Transactions.
The Company pays $3,000 per month to C&N, Inc. ("C&N"), an Arizona
corporation, for management services. The Company paid C&N a total of $36,000
under this agreement during the fiscal year ended June 30, 1997. Mr. Westfere,
an officer and director of the Company, is the president of C&N, and Mr.
Westfere and his wife and their minor children are C&N's sole shareholders. The
agreement between the Company and C&N commenced on January 1, 1995, and is
renewable from year to year. The agreement was negotiated between Mr. Westfere
and former management of the Company as part of the total compensation package
for Mr. and Mrs. Westfere. It is believed that the terms of the agreement are
more favorable to Mr. and Mrs. Westfere than the Company could obtain with a
non-affiliated party.
Mr. Chisholm, a director of the Company, performs accounting services
for the Company. He is paid a flat fee of $890 per month for compilation and
payroll services and is paid an hourly fee for any additional work. It is
believed that the terms of the arrangement are at least as favorable as the
terms that could be obtained with a non-affiliated party.
On April 6, 1995, the Company entered into a Consulting Agreement with
Michael G. Swan, who was a director of the Company and the Company's Chief
Executive Officer until his resignation on that same date. Pursuant to the
Consulting Agreement, Mr. Swan served as a financial consultant and advisor to
the Company in return for the Company's payment of a monthly consulting fee of
$5,000 and the Company's reimbursement of Mr. Swan's reasonable business
expenses on behalf of the Company. Mr. Swan also received options to purchase
250,000 shares of the Company's Common Stock at the then-current market price
for the Company's Common Stock. The Consulting Agreement had a term of three
years commending in April 1995. The Company paid Mr. Swan $60,000 in consulting
fees and reimbursed Mr. Swan (through an entity controlled by Mr. Swan, High
Desert Holdings, Inc.) for $8,092 in business expenses incurred during the
fiscal year ended June 30, 1996. On October 3, 1996, the Company and Mr. Swan
entered into a Severance Agreement, pursuant to which (a) the Consulting
Agreement was terminated; (b) Mr. Swan is expressly prohibited from performing
any services for the company, or from representing himself to be an agent or
representative of the Company, without the prior written consent of Mr.
Westfere, the Company's Chief Executive Officer; and (c) the Company agreed to
pay Mr. Swan $5,000 per month through the original term of the Consulting
Agreement (April 1998). The Company may terminate the Severance Agreement in the
event (i) breaches the Severance Agreement, (ii) is convicted of a felony
involving or related to Swan's previous employment with the Company or services
provided by Swan for the benefit of or related to the Company; or (iii) dies.
See also "Item 3 - Legal Proceedings" for additional information concerning
legal proceedings involving the Company and Mr. Swan.
16
<PAGE>
Item 13. Exhibits List and Reports on Form 8-K.
(a) The following exhibits are furnished with this Report pursuant to
Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page
<S> <C> <C>
3(i) Articles of Incorporation as amended *
3(ii) By-Laws of the Company, as currently in effect *
3(iii) Certificate regarding Series A 6% Preferred Stock ***
3(iv) Certificate of Amendment of Articles of Incorporation, dated June 20, 1997 E-1
4(a) Form of certificate evidencing shares of Common Stock *
4(b) Form of certificate evidencing shares of Series A 6% Preferred Stock ***
10.1 Assignment and Assumption of Liabilities Agreement **
10.2 Stock Purchase Agreement dated April 3, 1995 between Oak Holdings and ****
Teletek, Inc.
10.3 Consulting Agreement dated April 6, 1995, between the Company and
Michael Swan ****
10.4 Consulting Agreement dated January 1, 1995, between the Company and
C&N, Inc. ***
10.5 Severance Agreement dated October 3, 1996 between the Company and
Michael Swan *2
10.6 Form 12b-25 dated September 27, 1997 *****
10.7 Stock Purchase Agreement between Teletek, Inc. and Dingaan Holdings, S.A. ******
dated December 1, 1996 (change in control of registrant)
</TABLE>
- -------------
* Incorporated by reference to the exhibits with the Company's registration
statement on Form 10-SB (Commission File No. 0-24138) filed with the Securities
and Exchange Commission on May 13, 1994.
** Incorporated by reference to the exhibits filed with the Company's 1994
annual report on Form 10-KSB (Commission File No. 0-24138) filed with the
Securities and Exchange Commission on October 13, 1994.
*** Incorporated by reference to the exhibits filed with the Company's
registration statement on Form SB-2 (Commission File No. 33-85884).
**** Incorporated by reference to the exhibits filed with the Company's Current
Report on form 8-K (Commission File No. 0-24138) filed with the Securities and
Exchange Commission on December 1, 1996.
***** Incorporated by reference to the Company's Form 12b-25 dated September 27,
1997.
17
<PAGE>
*2 Incorporated by reference to the exhibits filed with the Company's 1996
Annual Report on Form 10-KSB (Commission file No. 0-24138) filed with the
Securities and Exchange Commission on October 11, 1996.
****** Incorporated by reference to the Company's current Report is on Form 8-K
(Commission File No. 0-24138) filed with the Securities and Exchange Commission
on March 15, 1997.
(b) No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIAMOND EQUITIES, INC.
- ----------------------
Registrant
By: /s/ David D. Westfere
---------------------
David D. Westfere, President
Date: October 7, 1997
By: /s/ Todd D. Chisholm
--------------------
Todd D. Chisholm, Chief Financial Officer
Date: October 7, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ David D. Westfere
---------------------
David D. Westfere, Director
Date: October 7, 1997
By: /s/ Todd D. Chisholm
--------------------
Todd D. Chisholm, Director
Date: October 7, 1997
18
<PAGE>
DIAMOND EQUITIES, INC.
FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITORS' REPORT ..................................................3
BALANCE SHEETS.................................................................4
STATEMENTS OF OPERATIONS ......................................................5
STATEMENTS OF STOCKHOLDERS' EQUITY............................................ 7
STATEMENTS OF CASH FLOWS...................................................... 8
NOTES TO FINANCIAL STATEMENTS ................................................ 9
<PAGE>
WISAN, SMITH, RACKER & PRESCOTT, L.L.P.
---------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
----------------------------
Officers and Directors
Diamond Equities, Inc.
Tempe, Arizona
We have audited the accompanying balance sheets of Diamond Equities, Inc. as of
June 30, 1997 and 1996, and the related statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The financial
statements of Diamond Equities, Inc. for the year ended June 30, 1995, were
audited by other auditors whose report dated August 28, 1995, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diamond Equities, Inc. as of
June 30, 1996 and 1997, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
Salt Lake City, Utah /s/ Wisan, Smith, Racker & Prescott L.L.P.
August 6, 1997 ------------------------------------------
<TABLE>
<S> <C> <C>
MEMBER 132 PIERPONT AVENUE, SUITE 250 MEMBER
AMERICAN INSTITUTE OF SALT LAKE CITY, UTAH 84101 UTAH ASSOCIATION OF
CERTIFIED PUBLIC ACCOUNTANTS FAX (801) 328-2015 CERTIFIED PUBLIC ACCOUNTANTS
(801) 328-2011
</TABLE>
<PAGE>
DIAMOND EQUITIES, INC.
BALANCE SHEETS
June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,586,983 $ 694,293
Receivables:
Trade accounts receivable 20,292 29,524
Interest receivable 1,900 --
Note receivable - current portion 41,123 --
Prepaid expenses -- 5,000
----------- -----------
TOTAL CURRENT ASSETS 1,650,298 728,817
PROPERTY AND EQUIPMENT 20,980 707,204
OTHER ASSETS
Deposits -- 2,106
Note receivable - noncurrent portion 770,127 --
----------- -----------
TOTAL ASSETS $ 2,441,405 $ 1,438,127
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 112,812 $ 106,997
Accrued expenses 59,940 32,212
Sales tax payable 88,098 --
Accrued preferred dividends 194,023 84,967
Current portion of long-term liabilities -- 770
----------- -----------
TOTAL CURRENT LIABILITIES 454,873 224,946
LONG-TERM LIABILITIES -- 173,201
CONTINGENT LIABILITIES -- 132,442
----------- -----------
TOTAL LIABILITIES 454,873 530,589
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001, 6%
cumulative convertible, non-voting
Authorized 100,000 shares, issued
727 shares at stated value 1,817,591 1,817,591
Common stock, par value $.001
Authorized 50,000,000 shares,
issued 4,666,099 and 5,277,099
shares, respectively 4,666 5,277
Capital in excess of par value 2,582,282 3,039,921
Retained earnings (deficit) (2,418,007) (3,955,251)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,986,532 907,538
----------- -----------
TOTAL LIABILITIES AND EQUITY $ 2,441,405 $ 1,438,127
=========== ===========
</TABLE>
Certain 1996 items have been reclassified to conform to the 1997 presentation.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
DIAMOND EQUITIES, INC.
STATEMENTS OF OPERATIONS
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Revenues $ -- $ -- $ --
Cost of sales -- -- --
----------- ----------- -----------
GROSS PROFIT -- -- --
EXPENSES
General and administrative expenses 260,042 -- --
Depreciation and amortization 4,979 -- --
----------- ----------- -----------
265,021 -- --
----------- ----------- -----------
OPERATING LOSS (265,021) -- --
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Miscellaneous income 896 -- --
Interest income 57,514 2,995 4,041
----------- ----------- -----------
58,410 2,995 4,041
----------- ----------- -----------
Income (loss) from continuing
operations before income taxes (206,611) 2,995 4,041
Income tax expense 50 -- --
----------- ----------- -----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (206,661) 2,995 4,041
----------- ----------- -----------
DISCONTINUED OPERATIONS
Income (loss) from discontinued
operations, net of applicable income
taxes of $0, $50 and $50 4,682 (95,524) (194,204)
Gain on disposal of discontinued
operations, net of applicable income
taxes of $11,740 1,848,279 -- --
----------- ----------- -----------
1,852,961 (95,524) (194,204)
----------- ----------- -----------
NET INCOME (LOSS) 1,646,300 (92,529) (190,163)
Preferred dividends 109,056 109,056 109,278
----------- ----------- -----------
NET INCOME (LOSS)
ATTRIBUTABLE TO
COMMON STOCK $ 1,537,244 $ (201,585) $ (299,441)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
DIAMOND EQUITIES, INC.
STATEMENTS OF OPERATIONS (CONTINUED)
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
PRIMARY EARNINGS (LOSS)
PER COMMON SHARE
Loss before discontinued operations $ (0.06) $ (0.02) $ (0.02)
Discontinued operations 0.37 (0.02) (0.04)
--------- --------- ---------
PRIMARY EARNINGS
(LOSS) PER SHARE $ 0.31 $ (0.04) $ (0.06)
========= ========= =========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES USED IN
PRIMARY CALCULATION 4,971,878 4,734,544 4,666,099
========= ========= =========
FULLY-DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Loss before discontinued operations $ (0.02) $ - $ -
Discontinued operations 0.19 - -
--------- --------- ---------
FULLY-DILUTED EARNINGS
PER SHARE $ 0.17 $ - $ -
========= ========= =========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES USED IN
FULLY-DILUTED CALCULATION 9,818,787 - -
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
DIAMOND EQUITIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock Capital in Retained Total
-------------------------- Excess of Preferred Earnings Stockholders'
Shares Amount Par Value Stock (Deficit) (Equity)
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at 6/30/94 4,666,099 4,666 2,587,282 1,817,591 (3,454,225) 955,314
Preferred dividends -- -- -- -- (109,278) (109,278)
Net loss for year ended
6/30/95 -- -- -- -- (190,163) (190,163)
----------- ----------- ----------- ----------- ----------- -----------
Balance at 6/30/95 4,666,099 4,666 2,587,282 1,817,591 (3,753,666) 655,873
Issuance of common
stock with warrants
attached for $.75
per unit 611,000 611 457,639 -- -- 458,250
Cost of stock offering -- -- (5,000) -- -- (5,000)
Preferred dividends -- -- -- -- (109,056) (109,056)
Net loss for year ended
6/30/96 -- -- -- -- (92,529) (92,529)
----------- ----------- ----------- ----------- ----------- -----------
Balance at 6/30/96 5,277,099 5,277 3,039,921 1,817,591 (3,955,251) 907,538
Recision of common
stock issuance (611,000) (611) (457,639) -- -- (458,250)
Preferred dividends -- -- -- -- (109,056) (109,056)
Net income for year
ended 6/30/97 -- -- -- -- 1,646,300 1,646,300
----------- ----------- ----------- ----------- ----------- -----------
Balance at 6/30/97 4,666,099 $ 4,666 $ 2,582,282 $ 1,817,591 $(2,418,007) $ 1,986,532
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
DIAMOND EQUITIES, INC.
STATEMENTS OF CASH FLOWS
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from interest and other income $ 56,510 $ 2,995 $ 4,041
Less cash paid for:
General and administrative expenses 258,845 -- --
Income taxes paid to governments 50 -- --
----------- ----------- -----------
258,895 -- --
----------- ----------- -----------
Net cash flows from (used by) continuing activities (202,385) 2,995 4,041
Net cash flows from discontinued operations 84,157 218,730 384,437
----------- ----------- -----------
Net cash flows from operating activities 118,228 221,725 388,478
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,994) -- --
Capital expenditures of discontinued operations (40,617) (148,210) (480,913)
Sale of property and equipment -- 7,500 74,500
Proceeds from the sale of discontinued operations 1,688,750 -- --
Cash paid for deposits -- -- (979)
----------- ----------- -----------
Net cash flows from (used by) investing activities 1,643,139 (140,710) (407,392)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans -- -- 125,294
Cash used to reduce short-term borrowing -- -- (13,496)
Cash used to reduce long-term liabilities (173,971) (882) --
Cash used to pay dividends -- (24,089) (113,759)
Cash used to rescind stock issuance (458,250) -- --
Cash received from issuance of stock -- 453,250 --
----------- ----------- -----------
Net cash flows from (used by) financing activities (632,221) 428,279 (1,961)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 892,690 509,294 (20,875)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 694,293 184,999 205,874
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 1,586,983 $ 694,293 $ 184,999
=========== =========== ===========
NON-CASH FINANCING ACTIVITIES
During the year ended June 30, 1997 the Company sold equipment for a note
receivable totaling $811,250.
During the year ended June 30, 1996 the Company acquired office equipment with a
cost of $5,410 through a capital lease.
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies conform to generally accepted
accounting principles. The following policies are considered to
be significant:
Nature of Operations
--------------------
The Company was incorporated on July 24, 1987 as a Nevada
corporation under the name KTA Corporation. In February, 1989 the
Company began operating pay telephones in the Reno, Nevada area.
On September 25, 1989 the Company changed its name to United
Payphone Services, Inc. The Company moved its operations to
Arizona where it operated pay-telephones in the Phoenix and
Tucson areas. On November 15, 1996 the Company sold all of its
pay-telephone assets to Tru-Tel Communications, LLC. On June 20,
1997 the Company changed its name to Diamond Equities, Inc.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and revenues
and expenses during the reporting period. In these financial
statements, assets, liabilities, and earnings involve extensive
reliance on management's estimates. Actual results could differ
from those estimates.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all cash balances and highly
liquid investments with original maturities of less than three
months.
Accounts Receivable
-------------------
Accounts receivable balances considered uncollectible are written
off and bad debt expense is recognized using the direct write-off
method. No allowance for uncollectible accounts is recognized.
The difference between the direct write-off method and the
allowance method is not considered material.
Revenue Recognition
-------------------
Revenue from the discontinued pay-telephone operation was
recognized upon receipt of coin and rendering of telephone
service.
Depreciation
------------
Depreciation expense is computed using the straight-line method
in amounts sufficient to write off the cost of depreciable assets
over their estimated useful lives.
9
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation (continued)
------------------------
Normal maintenance and repair items are charged to costs and
expenses as incurred. The cost and accumulated depreciation of
property and equipment sold or otherwise retired are removed from
the accounts and gain or loss on disposition is reflected in net
income in the period of disposition.
Income Taxes
------------
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of income taxes
currently due plus deferred income tax charges and credits.
Deferred tax assets are evaluated for their potential future
benefit to the Company and valuation allowances are established
based on such analysis.
Earnings (Loss) Per Common Share
--------------------------------
Net earnings (loss) per common share is calculated by dividing
net income (loss) attributable to common stock by the weighted
average number of common shares outstanding. The calculation of
fully diluted earnings per share assumes conversion of the
preferred stock and the elimination of the preferred stock
dividend. Fully diluted earnings per share were not reported in
1996 and 1995 because they were greater than primary earnings per
common share.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company maintains cash balances at banks in Arizona. Accounts
are insured by the Federal Deposit Insurance Corporation up to
$100,000. At June 30, 1997, the Company's uninsured bank balances
total $1,368,674 ($358,550 for 1996).
NOTE 3 - NOTE RECEIVABLE
On November 15, 1996 the Company sold all of its assets related
to the operation of the pay-telephone business (see Note 9). In
connection with the sale of the assets, the Company received a
note receivable totaling $811,250. The note is payable to the
Company in monthly installments of $14,000 including interest at
8% per annum, beginning February 15, 1997, with the balance due
January 15, 2002.
10
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 3 - NOTE RECEIVABLE (CONTINUED)
As discussed in Note 7, no payments have been received on the
note and the Company has commenced legal proceedings to collect
the amount. The Company reports impaired loans in accordance with
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan". This accounting standard defines an
impaired loan as any loan where the creditor is unable to collect
all the amounts due according to the contractual interest
payments and contractual principal payments as scheduled in the
loan agreement. The note receivable discussed above meets this
definition for an impaired loan. Management is unable to estimate
the amount of the impairment and therefore the Company has no
valuation allowance against the note receivable. Interest income
on impaired loans is recognized only when payments are received.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1997 and 1996 are detailed
in the following summary:
<TABLE>
<CAPTION>
Accumulated Net Book
1997 Cost Depreciation Value
- ---- ------------------ ------------------ -----------------
<S> <C> <C> <C>
Furniture and fixtures $ 21,368 $ 7,295 $ 14,073
Office equipment 7,367 2,323 5,044
Automobiles 2,192 329 1,863
----------------- ----------------- -----------------
$ 30,927 $ 9,947 $ 20,980
================= ================= =================
Accumulated Net Book
1996 Cost Depreciation Value
- ---- ------------------ ------------------ -----------------
Furniture and fixtures $ 22,544 $ 11,569 $ 10,975
Office equipment 92,536 59,578 32,958
Automobiles 64,804 37,785 27,019
Payphones 1,650,865 1,559,959 90,906
Payphone accessories 379,002 179,842 199,160
Payphone installations 475,554 161,004 314,550
Property improvements 32,121 5,084 27,037
Equipment under capital leases 5,410 811 4,599
----------------- ----------------- -----------------
$ 2,722,836 $ 2,015,632 $ 707,204
================= ================= =================
</TABLE>
11
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 5 - SALES TAX PAYABLE
During March, 1993, the Arizona Department of Revenue assessed a
sales tax deficiency of $73,680 against the Company for the
period from January 1, 1990 through January 31, 1993 with respect
to coin revenues from privately operated pay-telephones. A timely
protest was filed with the Department of Revenue seeking
abatement of the entire assessment. The basis of the protest is
the taxability of coin revenue under the classification of
telecommunications which is defined under Arizona law as the
transmitting of a signal.
The Company's protest was consolidated with those of other
private pay telephone operators. A favorable ruling was
originally received from a Department of Revenue officer which
was overturned by the Director of the Department of Revenue. An
appeal was made before the Arizona State Board of Tax Appeals in
October, 1995.
Previously the Company has recognized a contingent liability of
$132,442 for the estimated sales tax due. On January 29, 1997 a
preliminary settlement was agreed to whereby the Company will owe
$88,098 for sales taxes for the period from January 1, 1990
through November, 1997. The difference in the previously
recognized contingent liability and the settlement amount of
$44,344 has been recognized as a gain and included in
discontinued operations.
NOTE 6 - LONG-TERM LIABILITIES
1997 1996
--------- ---------
Note payable to related party, principal and
interest due September, 1997, bearing
interest at 8%, unsecured $ - $ 55,683
Note payable to related party, principal and
interest due September, 1997, bearing
interest at 8%, unsecured - 113,760
Capital lease payable to vendor in monthly
installments of $106, due December, 2001,
bearing interest at 12%, secured by
equipment - 4,528
--------- ---------
- 173,971
Less current portion - (770)
--------- ---------
Long-term portion $ - $ 173,201
========= =========
12
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
----------------------------
In connection with the sale of its pay-telephone operations, the
Company received a promissory note in the principal sum of
$811,250. Monthly payments of $14,000 on the note were to
commence on February 15, 1997. To date no payments on the note
have been received. On March 18, 1997 a complaint for breach of
contract was filed with the Eighth Judicial District Court. The
complaint alleges an anticipatory breach by the defendant,
Tru-Tel Communications, LLC, issuer of the promissory note. The
complaint also names as party defendants, the principals of
Tru-Tel Communications, LLC and Finova Capital Corporation
(provider of the financing used to purchase the assets.)
The defendants have responded by issuing counterclaims. The
counterclaims allege that the revenues of the Company reported to
Tru-Tel Communications, LLC and Finova Capital Corporation were
purportedly overstated at the time of the asset purchase
agreement. The Company intends to vigorously contest the
counterclaims and pursue the original claims against all party
defendants. While it is not feasible at this time to predict or
determine the ultimate financial outcome of the complaint,
management does not believe that it will be party to any
unfavorable judgments.
Other amounts due from Tru-Tel Communications, LLC include
$40,562 of interest receivable on the note which has not been
accrued. The Company also paid $18,899 of expenses on behalf of
Tru-Tel Communications, LLC during the transition to the new
ownership. This amount is included in accounts receivable.
Legal Fees
----------
The Company has entered into a contingency fee agreement with the
attorneys that are representing the Company in the sales tax
issue described in Note 5. The agreement sets the contingent
legal fees at one third of the decrease obtained in the sales tax
due to the Arizona Department of Revenue. The Company has accrued
$38,580 in legal fees and has included such amount in accrued
expenses. Management feels that the amount accrued is sufficient
to cover the legal fees that will be required upon ultimate
settlement of the sales tax issue.
Consulting Agreement
--------------------
A long-term consulting agreement has been entered into with an
individual who is also a shareholder to provide consulting
services to the Company. The agreement calls for the payment of a
monthly consulting fee of $5,000. For the year ended June 30,
1997, $35,000 of consulting expense has been included in
continuing operations. For the years ended June 30, 1997, 1996
and 1995, $25,000, $60,000 and $60,000 have been included in
discontinued operations.
13
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 8 - CAPITAL STOCK
Preferred Stock
---------------
The Company has outstanding 727 shares of cumulative,
convertible, preferred stock at June 30, 1997 and 1996.
Cumulative dividends at 6% are payable annually. Dividends are in
arrears to the amount of $194,023. Each share of preferred stock
is convertible at the option of the holder at a rate equal to 75%
of the average bid price of the common shares for the ten days
prior to the conversion date. The preferred stock is redeemable
by the Company at the cash price paid for the shares plus the
amount of any dividends accumulated and unpaid as of the date of
redemption.
Warrants
--------
Stock purchase warrants were issued in connection with the May,
1996 issuance of common stock. The offering was made in units
consisting of two shares of common stock, one class A warrant and
one class B warrant. As a result of the sale of the operations of
the Company, the May, 1996 stock issuance, including warrants,
was rescinded.
NOTE 9 - DISCONTINUED OPERATIONS
On November 15, 1996 the Company entered into an asset purchase
agreement with Tru-Tel Communications LLC whereby all of the
assets related to the operation of the pay-telephone business
were sold. Proceeds from the sale included $1,688,750 cash and a
promissory note (see Note 3) for $811,250. Tru-Tel
Communications, LLC assumed the Company's capital lease on
equipment and operating leases on facilities. The Company
recorded a gain on the sale of the assets of $1,848,279 after
taxes. Revenues from the discontinued operations totaled
$835,858, $2,127,574 and $2,074,244 for the years ended June 30,
1997, 1996 and 1995, respectively.
NOTE 10 - INCOME TAXES
The Company uses an asset and liability approach to financial
accounting and reporting for income taxes. The difference between
the financial statement and income tax bases of assets and
liabilities is determined annually. Deferred income tax assets
and liabilities are computed for those differences that have
future income tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are
expected to affect taxable income. Valuation allowances are
established, if necessary, to reduce the deferred income tax
asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for
the period plus or minus the net change in the deferred tax
assets and liabilities.
14
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 10 - INCOME TAXES (CONTINUED)
Income taxes payable as of June 30, 1997 and 1996 are detailed in
the following summary:
1997 1996
------------- -------------
Currently payable $ 11,790 $ 50
============= =============
Deferred income tax liability $ 324,000 $ -
Deferred income tax asset 725,000 1,257,000
Valuation allowance (401,000) (1,257,000)
------------- -------------
Net deferred income tax asset 324,000 -
------------- -------------
Net deferred income tax liability $ - $ -
============= =============
The deferred tax assets result from net operating loss
carryforwards available and carryforwards of credits resulting
from alternative minimum taxes paid.
At June 30, 1997, the Company had net operating loss
carryforwards available to offset future income taxes totaling
$1,742,141 expiring from 2003 and 2011. The net change in the
valuation allowance for deferred income tax assets was a decrease
of $856,000, related to the utilization of net operating loss
carryforwards.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at June 30 are as follows:
1997 1996
------------ ------------
Deferred income tax assets:
Net operating loss carryforwards $ 713,260 $ 1,257,000
Credit for alternative minimum taxes paid 11,740 -
------------ ------------
Total gross deferred income tax assets 725,000 1,257,000
Less valuation allowance (401,000) (1,257,000)
------------ ------------
Net deferred income tax asset 324,000 -
------------ ------------
Deferred income tax liabilities:
Difference on note receivable 324,000 -
------------ ------------
Total gross deferred income tax liability 324,000 -
------------ ------------
Net deferred income tax liability $ - $ -
============ ============
15
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 10 - INCOME TAXES (CONTINUED)
The reconciliation of the differences between the statutory U.S.
federal income tax rate and the Company's effective tax rate is as
follows:
1997 1996 1995
------ ------ ------
U.S. Statutory Rate 34.0% (34.0%) (34.0%)
State income tax, net of
federal benefit - - -
Effect of net operating loss
carryforward and valuation
allowance (34.0%) 34.0% 34.0%
------ ------ ------
Effective tax rates - - -
====== ====== ======
NOTE 11 - CASH FLOWS FROM OPERATING ACTIVITIES
The following schedule reconciles net income (loss) as reported in
the accompanying statements of operations with net cash flows from
operating activities in the statements of cash flows:
1997 1996 1995
----------- ----------- -----------
Net income (loss) $ 1,646,300 $ (92,529) $ (190,163)
Adjustments to reconcile
net income (loss) to net
cash flows from operating
activities:
(Income) loss from
discontinued operations (4,682) 95,524 194,204
Gain on sale of discontinued
operations (1,848,279) -- --
Depreciation and amortization
expense 4,979 -- --
(Increase) decrease in assets:
Accounts receivable 9,232 -- --
Interest receivable (1,900)
Prepaid expenses and deposits 8,742 -- --
16
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 11 - CASH FLOWS FROM OPERATING ACTIVITIES (CONTINUED)
1997 1996 1995
--------- --------- ---------
Increase (decrease) in liabilities:
Accounts payable 5,815 -- --
Accrued expenses (22,592) -- --
--------- --------- ---------
Net cash flows from (used
by) continuing activities (202,385) 2,995 4,041
Net cash flows from
discontinued operations 84,157 218,730 384,437
--------- --------- ---------
Net cash flows from
operating activities $ 118,228 $ 221,725 $ 388,478
========= ========= =========
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS
No. 107, "Disclosure about Fair Value of Financial Instruments".
The carrying amounts and fair value of the Company's financial
instruments at June 30, 1997 and 1996 are as follows:
Carrying Fair
1997 Amounts Values
- ---- ---------- ----------
Cash and cash equivalents $1,586,983 $1,586,983
Note receivable including
current maturities 811,250 724,320
Preferred stock 1,817,591 2,682,152
Carrying Fair
1996 Amounts Values
- ---- ---------- ----------
Cash and cash equivalents $ 694,293 $ 694,293
Long-term debt including
current maturities 173,971 173,971
Preferred stock 1,817,591 2,536,744
Warrants, Class A -- 3,055
Warrants, Class B -- 3,055
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
17
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Cash and Cash Equivalents
-------------------------
The carrying amounts reported on the balance sheet for cash and
cash equivalents approximate their fair value.
Note Receivable
---------------
The fair value of the note receivable was determined based on
discounted cash flow analysis using a discount rate similar to
financial instruments with similar risk.
Long-term Debt
--------------
At June 30, 1997, the Company had no long-term debt. At December
31, 1996, the fair values of long-term debt are estimated using
discounted cash flow analysis based on the Company's incremental
borrowing rate as the discount rate.
Preferred Stock
---------------
The Company's preferred stock is not publicly traded and
therefore a fair value is not readily available. Based on the
conversion ratio of the preferred stock and the current market
value of the common stock, a fair value estimate was determined.
Warrants
--------
At June 30, 1997, the Company had no warrants issued or
outstanding. At June 30, 1996, the fair value of the stock
purchase warrants was estimated based on the redemption value of
the warrants. During the first 30 days after the issuance of the
warrants the Company had the right to redeem the warrants at $.01
per warrant. This is the basis of the fair value estimate.
NOTE 13 - RELATED PARTY TRANSACTIONS
As described in Note 6, the Company had notes payable to a
related party. The related party is a significant shareholder in
the Company.
As described in Note 7, the Company has entered into a consulting
agreement with an individual. The individual is a related party
by virtue of stock ownership in the Company. For the year ended
June 30, 1997, $35,000 of consulting expense has been included in
continuing operations. For the years ended June 30, 1997, 1996
and 1995, $25,000, $60,000 and $60,000, respectively of
consulting expense has been included in discontinued operations.
18
<PAGE>
FORM 10-KSB
DIAMOND EQUITIES, INC.
(Formerly United Payphone Services, Inc.)
EXHIBITS
3(iv) Certificate of Amendment of Articles of Incorporation
dated June 20, 1997
19
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
JUN 20 1997
No. C5649-87
---------
/s/ Dean Heller
DEAN HELLER, SECRETARY OF STATE
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
(After Issuance of Stock) Filed by:
UNITED PAYPHONE SERVICES, INC
--------------------------------------
Name of Corporation
We the undersigned DAVID D. WESTFERE and
-----------------------------------------------------
President or Vice President
TODD D. CHISHOLM of UNITED PAYPHONE SERVICES, INC.
---------------------------------- --------------------------------------
Secretary or Assistant Secretary Name of Corporation
do hereby certify:
That the Board of Directors of said corporation at a meeting duly
convened, held on the 10 day of JUNE, 1997, adopted a resolution to amend
the oiriginal articles as follows:
Article 5649-87 is hereby amended to read as follows:
The name of the corporation shall be: DIAMOND EQUITIES, INC.
The number of shares of the corporation outstanding and entitled to
vote on an amendment to the Articles of Incorporation is 4,666,099: that
the said change(s) and amendment have been consented to and approved by a
majority vote of the stockholders holding at least a majority of each class
of stock outstanding and entitled to vote thereon.
/s/ David D. Westfere
--------------------------------------------
President or Vice President
/s/ Todd D. Chisholm
--------------------------------------------
Secretary or Assistant Secretary
State of Arizona )
) ss.
County of Maricopa )
On 6-10-97, personally appeared before me, a Notary Public,
David D. Westfere, who acknowledged
- --------------------------------------------------------------
Name of Person Appearing and Signing Document
that they executed the above instrument.
/s/ Laurel Anne Pearson
----------------------------------------
Signature of Notary
My Commission Expires Oct. 30, 1999
(Notary Stamp or Seal)
