UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year JUNE 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from:____________to:___________
Commission File Number. 0-24138
DIAMOND EQUITIES, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
NEVADA 88-0232816
- ------------------------------ ------------------------------------
State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization
2010 E. UNIVERSITY DRIVE, STE. # 3 - TEMPE, ARIZONA 85281
- --------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(602) 921-2760
------------------------------------------------
(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
CLASS A WARRANTS
CLASS B WARRANTS
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 [ ]
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]
<PAGE>
The Issuer's revenues for the year ended June 30, 1998, 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 23, 1998, as reported
on the Electronic Bulletin Board, was $0.05.
The number of shares of Common Stock of the issuer outstanding as of
September 23, 1998, was 4,666,099.
Transitional Small Business Disclosure Format (check one): Yes No [X]
Documents incorporated by Reference:
Incorporated by reference to this annual report are Forms 8-K filed by
the Registrant on June 19, 1998 and July 29, 1998, respectively, which disclosed
acquisitions of two entities engaged in the plastic injection molding industry.
One acquisition took place after the Registrant's fiscal year ending June 30,
1998.
A Form 8-K was filed on July 17, 1998 regarding a voluntary change of
auditors for the Registrant.
A Rule 12b-25 Notice of Inability to Timely File was filed on September
28, 1998, and the Form 10-KSB was filed on October 13, 1998.
<PAGE>
TABLE OF CONTENTS
Page No.
--------
PART II
Item 7. Financial Statements.............................................3
PART III
Item 13. Exhibits List and Reports on Form 8-K............................4
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are attached hereto and incorporated
herein:
HEADING PAGE
------- ----
For Fiscal Year Ending June 30, 1997 and 1996
Independent Auditor's Report F-17
Balance Sheets for the Years Ended June 30, 1997 and 1996 F-18
Statements of Operations for the Years Ended June 30, 1997,
1996 and 1995 F-20
Statements of Stockholder's Equity for the years ended June 30, 1997,
1997 and 1995 F-22
Statements of Cash Flows for the years ended June 30, 1997, 1996
and 1995 F-23
Notes to Financial Statements F-24
3
<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 SB-2.
Exhibit
No. Description of Exhibit Page
- ------- ---------------------- ----
3(i) Articles of Incorporation as amended *
3(ii) Bylaws 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
3(v) Articles of Incorporation - Precision Plastics Molding, Inc. E-1
3(vi) Bylaws - Precision Plastics Molding, Inc. E-2
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) ******
10.8 Asset Purchase Agreement between the Company, Precision
and Premier Plastics Corp, dated June 15, 1998. *3
10.9 Asset Purchase Agreement between the Company, Precision and Accurate
Thermoplastics, Inc., dated July 15, 1998 *3
10.10 Preferred Stock Exchange Agreement *3
23 Consent of Independent Certified Public Accountants *3
27 Financial Data Schedule *3
- -------------
* 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.
****** Incorporated by reference to the Company's current Report on Form 8-K
(Commission File No. 0-24138) filed with the Securities and Exchange
Commission on March 15, 1997.
*1 Incorporated by reference to the exhibits filed with Annual Report on
January 26, 1998 on Form 10-KSB.
*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.
*3 Incorporated by reference to the exhibits filed with the Company's 1998
Annual Report on Form 10-KSB (Commission file No. 0-24138) filed with
the Securities and Exchange Commission on October 13, 1998.
b) Form 8-Ks were filed electronically by the Company on June 19, 1997
(amended July 17, 1998) and July 29, 1998 disclosing the acquisition of
the assets of Premier Plastics Corp and Accurate Thermoplastics, Inc.,
respectively. It also filed a Form 8-K to report a voluntary change in
accountants, on July 17, 1998.
A Rule 12b-25 Notice of Inability to Timely File was made on September
28, 1998 and the Annual Report form 10-KSB for fiscal year ending June 30, 1998
was filed on October 13, 1998.
4
<PAGE>
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 , 1998
-----------------
By: /s/ Todd D. Chisholm
-------------------------------------
Todd D. Chisholm, Chief Financial Officer
Date: October , 1998
-----------------
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 , 1998
-----------------
By: /s/ Todd D. Chisholm
-------------------------------------
Todd D. Chisholm, Director
Date: October , 1998
-----------------
5
<PAGE>
DIAMOND EQUITIES, INC.
FINANCIAL STATEMENTS
JUNE 30, 1997, AND 1996
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITORS' REPORT ............................................F-17
BALANCE SHEETS...........................................................F-18
STATEMENTS OF OPERATIONS ................................................F-20
STATEMENTS OF STOCKHOLDERS' EQUITY.......................................F-22
STATEMENTS OF CASH FLOWS.................................................F-23
NOTES TO FINANCIAL STATEMENTS ...........................................F-24
<PAGE>
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.
As discussed in Note 14 to the financial statements, an error in the recording
of a severance agreement as of June 30, 1997, was discovered. The error resulted
in the understatement of liabilities and the overstatement of net income.
Accordingly, the June 30, 1997 financial statements have been restated to
correct the error.
Wisan, Smith, Racker & Prescott, LLP, Certified Public Accounts.
Salt Lake City, Utah
August 6, 1997
except for Note 14, as to which the date is
September 28, 1998
F-17
<PAGE>
DIAMOND EQUITIES, INC.
BALANCE SHEETS
JUNE 30, 1997, AND 1996
1997 1996
---- ----
ASSETS
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
========== ==========
CERTAIN 1996 ITEMS HAVE BEEN RECLASSIFIED TO CONFORM TO THE 1997 PRESENTATION.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-18
<PAGE>
DIAMOND EQUITIES, INC.
BALANCE SHEETS
JUNE 30, 1997, AND 1996
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 112,812 $ 106,997
Accrued expenses 107,723 32,212
Sales tax payable 88,098 --
Accrued preferred dividends 194,023 84,967
Current portion of long-term liabilities -- 770
----------- -----------
TOTAL CURRENT LIABILITIES 502,656 224,946
LONG-TERM LIABILITIES -- 173,201
CONTINGENT LIABILITIES -- 132,442
----------- -----------
TOTAL LIABILITIES 502,656 530,589
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) (2,465,790) (3,955,251)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,938,749 907,538
----------- -----------
TOTAL LIABILITIES AND EQUITY $ 2,441,405 $ 1,438,127
=========== ===========
CERTAIN 1996 ITEMS HAVE BEEN RECLASSIFIED TO CONFORM TO THE 1997 PRESENTATION.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-19
<PAGE>
DIAMOND EQUITIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
INCOME
Revenues $ -- $ -- $ --
Cost of sales -- -- --
----------- --------- ---------
GROSS PROFIT -- -- --
EXPENSES
General and administrative expenses 225,042 -- --
Depreciation and amortization 4,979 -- --
----------- --------- ---------
230,021 -- --
----------- --------- ---------
OPERATING LOSS (230,021) -- --
----------- --------- ---------
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 (171,611) 2,995 4,041
Income tax expense 50 -- --
----------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (171,661) 2,995 4,041
----------- --------- ---------
DISCONTINUED OPERATIONS
Loss from discontinued operations,
net of applicable income taxes of $0,
$50 and $50 (78,101) (95,524) (194,204)
Gain on disposal of discontinued
operations, net of applicable income
taxes of $11,740 1,848,279 -- --
----------- --------- ---------
1,770,178 (95,524) (194,204)
----------- --------- ---------
NET INCOME (LOSS) 1,598,517 (92,529) (190,163)
Preferred dividends 109,056 109,056 109,278
----------- --------- ---------
NET INCOME (LOSS)
ATTRIBUTABLE TO
COMMON STOCK $ 1,489,461 $(201,585) $(299,441)
=========== ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-20
<PAGE>
DIAMOND EQUITIES, INC.
STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
PRIMARY EARNINGS (LOSS)
PER COMMON SHARE
Loss before discontinued operations $ (0.06) $ (0.02) $ (0.02)
Discontinued operations 0.36 (0.02) (0.04)
---------- ---------- ----------
PRIMARY EARNINGS
(LOSS) PER SHARE $ 0.30 $ (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 0.18 -- --
---------- ---------- ----------
FULLY-DILUTED EARNINGS
PER SHARE $ 0.16 $ -- $ --
========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES USED IN
FULLY-DILUTED CALCULATION 9,818,787 -- --
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-21
<PAGE>
DIAMOND EQUITIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CAPITAL IN RETAINED TOTAL
COMMON STOCK 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 -- -- -- -- 1,598,517 1,598,517
--------- ------- ----------- ---------- ----------- -----------
Balance at 6/30/97 4,666,099 $ 4,666 $ 2,582,282 $1,817,591 $(2,465,790) $ 1,938,749
========= ======= =========== ========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-22
<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 223,845 -- --
Income taxes paid to governments 50 -- --
----------- --------- ---------
223,895 -- --
----------- --------- ---------
Net cash flows from (used by) continuing activities (167,385) 2,995 4,041
Net cash flows from discontinued operations 49,157 218,730 384,437
----------- --------- ---------
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
=========== ========= =========
</TABLE>
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.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-23
<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.
F-24
<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.
F-25
<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:
ACCUMULATED NET BOOK
1997 COST DEPRECIATION VALUE
---- ---- ------------ -----
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
========== ========== ========
F-26
<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
======= ========
F-27
<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.
F-28
<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.
F-29
<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 $ -- $ --
========= ===========
F-30
<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) $ 1,598,517 $(92,529) $(190,163)
Adjustments to reconcile
net income (loss) to net
cash flows from operating
activities:
Loss from
discontinued operations 78,101 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 -- --
F-31
<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 (167,385) 2,995 4,041
Net cash flows from
discontinued operations 49,157 218,730 384,437
--------- -------- --------
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
F-32
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
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 14, the Company has entered into a severance
agreement with an individual. The individual is a related party
by virtue of stock ownership in the Company.
F-33
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
NOTE 14 - SUBSEQUENT DISCOVERY OF AN ERROR
In September, 1998 an error was discovered in the June 30, 1997
financial statements. The Company had a long-term consulting
agreement with a shareholder. The agreement called for the
payment of a monthly consulting fee of $5,000. For the years
ended June 30, 1995 and 1996 the total consulting fees were
$60,000 and $60,000. Such amounts have been included in
discontinued operations.
During October 1996, the Company modified the agreement to be a
severance agreement. The severance agreement called for the same
payments of $5,000 per month. At June 30, 1996 there was $47,783
remaining to be paid on the agreement, which was not accrued.
This resulted in an understatement of liabilities by $47,783, an
understatement of the loss before discontinued operations of
$35,000 and an overstatement of income from discontinued
operations of $82,783. The net effect of the error on the net
income amount was an overstatement of $47,783.
The financial statements have been restated to reflect the proper
treatment of the modification of the agreement. The total fee
associated with the consulting/severance agreement for the year
ended June 30, 1997 was $107,783, all of which was included in
discontinued operations.
F-34
