UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
AMENDMENT NO. 2
(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:
For Fiscal Years Ending June 30, 1998 and 1997
HEADING PAGE
------- ----
Independent Auditor's Report F-1
Consolidated Balance Sheet for the Year Ended June 30, 1998 F-2
Consolidated Statements of Operations for the Years Ended
June 30, 1998 and 1997 F-3
Consolidated Statements of Changes in Stockholder's Equity
for the years ended June 30, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 1998 and 1997 F-5
Notes to Financial Statements F-7
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 *1
3(v) Articles of Incorporation - Precision Plastics Molding, Inc. *3
3(vi) Bylaws - Precision Plastics Molding, Inc. *3
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 the Company's 1997
Annual Report on Form 10-KSB (Commission file No. 0-24138) filed with
the Securities and Exchange Commission on October 9, 1997.
*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 26, 1998
-----------------
By: /s/ Todd D. Chisholm
-------------------------------------
Todd D. Chisholm, Chief Financial Officer
Date: October 26, 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 26, 1998
-----------------
By: /s/ Todd D. Chisholm
-------------------------------------
Todd D. Chisholm, Director
Date: October 26, 1998
-----------------
5
<PAGE>
DIAMOND EQUITIES, INC.
FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
C O N T E N T S
Page
----
CONSOLIDATED INDEPENDENT AUDITORS' REPORT ...............................F-1
CONSOLIDATED BALANCE SHEET...............................................F-2
CONSOLIDATED STATEMENTS OF OPERATIONS ...................................F-3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY...............F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS....................................F-5
NOTES TO FINANCIAL STATEMENTS ...........................................F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Diamond Equities, Inc.:
We have audited the accompanying consolidated balance sheet of Diamond Equities,
Inc. (the "Company"), as of June 30, 1998 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diamond Equities,
Inc. at June 30, 1998 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KING, WEBER & ASSOCIATES, P.C.
Tempe, Arizona
August 6, 1998
F-1
<PAGE>
DIAMOND EQUITIES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 600,231
Certificate of deposit 505,404
Accounts receivable (net of allowance of $35,588) 10,560
Notes receivable - current portion 35,750
Inventories 5,400
Prepaid expenses 5,111
-----------
Total current assets 1,162,456
PROPERTY, MACHINERY AND EQUIPMENT 197,162
OTHER ASSETS 66,000
NOTES RECEIVABLE - noncurrent portion 405,625
-----------
TOTAL ASSETS $ 1,831,243
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 111,234
Accrued liabilities 8,473
Preferred stock dividends payable 194,023
Capital lease obligations - current portion 21,362
Bank lines of credit 250,200
-----------
Total current liabilities 585,292
CAPITAL LEASE OBLIGATIONS - LONG-TERM PORTION 10,150
-----------
Total liabilities 595,442
MINORITY INTEREST 66,975
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, convertible, 18,000 shares
authorized, issued and outstanding 1,817,591
Common stock, $0.001 par value, 50,000,000 shares
authorized, 4,666,099 issued and outstanding 4,666
Paid in capital 2,582,282
Accumulated deficit (3,235,713)
-----------
Total stockholders' equity 1,168,826
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,831,243
===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
DIAMOND EQUITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
(AS RESTATED)
GENERAL AND ADMINISTRATIVE EXPENSES $ 355,100 $ 230,021
----------- -----------
MISCELLANEOUS (INCOME) AND EXPENSES
Allowance for note and related account receivable 441,213
Interest income (53,179) (57,514)
Interest expense 2,849
Other income (6,409) (896)
----------- -----------
Total other expense 384,474 (58,410)
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST (739,574) (171,611)
INCOME TAX PROVISION 50 50
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST (739,624) (171,661)
MINORITY INTEREST 5,114
----------- -----------
LOSS FROM CONTINUING OPERATIONS (734,510) (171,661)
DISCONTINUED OPERATIONS
Loss from discontinued operations,
net of applicable income taxes (35,413) (78,101)
Gain on disposal of discontinued operations,
net of applicable income taxes of $11,740 1,848,279
----------- -----------
Total discontinued operations (35,413) 1,770,178
----------- -----------
NET (LOSS) INCOME ($ 769,923) $ 1,598,517
=========== ===========
BASIC NET (LOSS) INCOME PER COMMON SHARE
Continuing operations $ (0.16) $ (0.06)
Discontinued operations (0.01) 0.36
=========== ===========
Total $ (0.17) $ 0.30
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,666,099 4,971,878
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
DIAMOND EQUITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL PREFERRED DEFICIT TOTAL
SHARES AMOUNT PAID-IN STOCK (AS RESTATED) (AS RESTATED)
------ ------ ------- ----- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JULY 1, 1996 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 (AS RESTATED) -- -- -- -- 1,598,517 $ 1,598,517
---------- ------- ---------- ---------- ----------- -----------
BALANCE JUNE 30,1997 4,666,099 4,666 2,582,282 1,817,591 (2,465,790) 1,938,749
Net loss -- -- -- -- (769,923) (769,923)
---------- ------- ---------- ---------- ----------- -----------
BALANCE JUNE 30, 1998 4,666,099 $ 4,666 $2,582,282 $1,817,591 ($3,235,713) $ 1,168,826
========== ======= ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
DIAMOND EQUITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (AS RESTATED)
Net (loss) income $ (769,923) $ 1,598,517
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Undistributed minority interest (5,114)
Loss from discontinued operations 35,413 78,101
Gain on sale of discontinued operations (1,848,279)
Depreciation and amortization 8,458 4,979
Allowance on note and accounts receivable 441,213
Loss on disposal of equipment 1,425
Changes in assets and liabilities
(net of acquisitions):
Accounts receivable (9,697) 9,232
Interest receivable 316 (1,900)
Inventories (5,400)
Prepaid expenses (5,111) 8,742
Other assets (6,000)
Accounts payable (8,068) 5,815
Accrued liabilities (99,250) (22,592)
----------- -----------
Net cash flows used in continuing activities (421,738) (167,385)
Net cash flows (used in) provided from
discontinued operations (123,511) 49,157
----------- -----------
Net cash used in operating activities (545,249) (118,228)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, machinery and equipment (8,345) (4,994)
Cash loaned for notes receivable (35,750)
Purchase of certificates of deposit (505,404)
Purchase of business assets (80,000)
Cash committed and paid under investment agreement (60,000)
Capital expenditures of discontinued operations (40,617)
Proceeds from the sale of discontinued operations 1,688,750
----------- -----------
Net cash (used in) provided by investing
activities (689,499) 1,643,139
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit 250,200
Payments on long-term liabilities (173,971)
Cash used to rescind stock issuance (458,250)
Principal payments on capital leases (2,204)
----------- -----------
Net cash provided by (used in) financing
activities 247,996 (632,221)
----------- -----------
(DECREASE) INCREASE IN CASH (986,752) 892,690
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,586,983 694,293
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 600,231 $ 1,586,983
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
DIAMOND EQUITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,634 $ 17,838
======== ========
Income taxes paid $ 11,840 $ 50
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
1998
Accounts payable assumed in asset purchase $ 6,490
========
Capital leases assumed in asset purchase $ 33,716
========
Value of subsidiary common stock issued
in asset purchase $ 75,000
========
1997
Note receivable from sale of equipment $811,250
========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
DIAMOND EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts and activity of
Diamond Equities, Inc. and its majority owned subsidiary Precision
Plastics, Inc. (the "Company"). All significant intercompany transactions
and balances have been eliminated in consolidation.
The Company was previously in the business of locating sites and installing
pay telephone equipment. The Company would pay commissions to the owners of
the sites where its equipment was located and earned its revenue based on
pay telephone charges to customers. On November 15, 1996, the Company sold
all of its pay-telephone assets, its only business segment, to Tru-Tel
Communications, LLC. The discontinued operations were located in the
southwestern United States. The Company changed its name to Diamond
Equities, Inc. on June 20, 1997 and has since been seeking acquisition
targets. On June 15, 1998 the Company's wholly owned subsidiary, Precision
Plastics Molding, Inc. ("Precision"), purchased the assets of a plastic
injection molding business. The new business is located in Arizona and its
business is generated in the southwestern United States. Operations of
Precision are included for the period June 15, 1998 through June 30, 1998
in the accompanying statement of operations for the year ended June 30,
1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS include all short-term highly liquid investments
that are readily convertible to known amounts of cash and have original
maturities of three months or less.
INVENTORIES consist of finished goods, work in process and raw materials
and are stated at the lower of cost (specific identification) or market.
PROPERTY, MACHINERY AND EQUIPMENT are stated at cost and are depreciated on
the straight-line method over their respective estimated useful lives
ranging from 3 to 10 years. Property, machinery and equipment under
capitalized leases are stated at the lesser of fair market value or the
present value of future minimum lease payments as of the date placed in
service, and amortized on the straight-line method over the term of the
lease.
REVENUE RECOGNITION - The Company recognizes revenue upon shipment of
product and recognized revenue from the discontinued pay-telephone
operation upon receipt of coin and rendering of telephone service.
INCOME TAXES - The Company provides for income taxes based on the
provisions of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, which among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
F-7
<PAGE>
FINANCIAL INSTRUMENTS - Financial instruments consist primarily of cash and
cash equivalents, notes receivable, investments and obligations under
accounts payable, accrued expenses, debt, and capital lease instruments.
The carrying amounts of cash and cash equivalents, accounts payable,
accrued expenses and short-term debt approximate fair value because of the
short maturity of those instruments. The carrying value of the Company's
capital lease arrangements approximates fair value because the instruments
were valued at the retail cost of the equipment at the time the Company
entered into the arrangements. Fair value of officer notes receivable
cannot be estimated because of the nature of the relationship with the
creditor. The fair value of the note receivable related to the business
segment disposal is discussed in Note 5.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
EARNINGS (LOSS) PER COMMON SHARE - Net earnings (loss) per common share is
calculated by dividing net income (loss) by the weighted average number of
common shares outstanding. The Company adopted SFAS No. 128 EARNINGS PER
SHARE for the year ended June 30, 1997. There was no effect of adopting
SFAS No. 128 on net income per common share other than because SFAS No. 128
requires the use of income from continuing operations as the "control
number" for determination of whether to include potentially dilutive
securities, diluted earnings per share for the year ended June 30, 1997 is
not presented because the effect of including the convertible preferred
stock would be antidilutive since there is a loss from continuing
operations.
3. 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, 1998, the Company's uninsured bank balances total $954,872.
4. INVESTMENT
The Company entered into an investment agreement in March 1998 to purchase
120,000 shares of common stock of a company at $0.50 per share or $60,000.
The agreement stipulates that the funds are to be held in a separate
account and used by the investee to pay agreed upon expenditures. The
shares are being held by a transfer agent and are to be issued ratably as
expenditures are paid. At June 30, 1998, $10,763 had been advanced and the
balance of $49,237 remains in the special restricted account. The total
investment balance of $60,000 is included in other assets in the
accompanying balance sheet.
F-8
<PAGE>
5. NOTES RECEIVABLE
Notes receivable consist of the following at June 30, 1998:
Note receivable, sale of assets $ 811,250
Loans to officers 20,000
Other receivables 15,750
Allowance for possible losses (405,625)
---------
Total 441,375
Less current portion 35,750
=========
Long-term portion $ 405,625
=========
On November 15, 1996 the Company sold all of its assets related to the
operation of the pay-telephone business. In connection with the sale of the
assets, the Company received a note receivable of $811,250. The note is
payable to the Company in monthly installments of $14,000 including
interest at 8% per annum, which were to commence February 15, 1997, with
the balance due January 15, 2002. No payments have been received on the
note and the Company has commenced legal proceedings to collect the amount.
Management has estimated the discounted value of the note based on
probabilities it has established for collection and timing of such
collections including any receipt of collateral from the guarantor.
However, management believes there is significant uncertainty regarding the
timing of any future payments as well as the value of personal assets
available from the guarantor of the note. No payments have been received
and there is uncertainty as to the outcome of the litigation. Management
believes that an allowance for loss of $405,625 is reasonable. Interest
income on the impaired loan will be recognized only when payments are
received.
6. INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
1998 1997
---- ----
Per (as restated) Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net (Loss) Income $(769,923) 4,666,099 $ 1,598,517 4,971,878
Preferred Stock Dividends -- (109,056)
--------- -----------
$(769,923) $ 1,489,461
========= ===========
BASIC EARNINGS PER SHARE
(Loss) Income Available to
Common Shareholders
Continuing operations (734,510) $(0.16) $ (280,717) $(0.06)
Discontinued operations (35,413) (0.01) 1,770,178 0.36
--------- ------ ---------- ------
Total $(769,923) 4,666,099 $(0.17) $ 1,489,461 4,971,878 $ 0.30
========= ====== =========== ======
Effect of Dilutive Securities
Preferred Stock N/A N/A
DILUTED EARNINGS PER SHARE N/A N/A
</TABLE>
Diluted earnings per share are not presented because the effect of such
would be antidilutive for both years ending June 30, 1998 and 1997 because
the Company has losses from continuing operations.
F-9
<PAGE>
7. INVENTORIES
Inventories consist of the following at June 30, 1998:
Raw materials $ 300
Work in process 4,891
Packaging supplies 209
------
Total inventories $5,400
======
8. PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment consisted of the following at June 30,
1998:
Equipment $172,320
Furniture and fixtures 33,711
Office equipment 8,769
--------
Total 214,800
Less accumulated depreciation and amortization 17,638
Property, machinery and equipment - net $197,162
========
Depreciation expense for the years ended June 30, 1998 and 1997 was $8,458
and $4,979, respectively.
9. BUSINESS ACQUISITION
In June, 1998, the Company, through its Precision subsidiary, purchased
substantially all of the operating assets of Premier Plastics Corporation,
a plastic injection molding business in Tempe, Arizona, for an $80,000 cash
payment, the assumption of liabilities in the amount of $40,000 and the
issuance of 300,000 shares of common stock of the subsidiary valued at
$75,000. The acquisition was recorded under the purchase method of
accounting. The aggregate purchase price of $195,000 has been allocated to
the assets acquired and liabilities assumed based on their respective fair
market values. The aggregate consideration paid approximated the fair
market value of the net assets acquired and no goodwill was recorded. The
operating results of Premier Plastics are included in the accompanying
consolidated financial statements for the period June 15, 1998 through June
30, 1998.
The following summarizes unaudited pro forma consolidated financial
information assuming that the acquisition of Premier Plastics Corporation
occurred on July 1, 1997:
Net Sales $ 307,601
Net Loss $(693,432)
Loss per Share $ ( 0.15)
The pro forma financial information is presented for informational purposes
only and may not necessarily reflect the results had Premier Plastics
Corporation actually been acquired on July 1, 1997, nor is this information
indicative of the future consolidated results.
F-10
<PAGE>
Management determined that is was not practicable to determine results of
operations for Premier for the year ended June 30, 1997
10. BANK LINES OF CREDIT
Bank line of credit, collateralized by certificate of
deposit, interest at prime plus 0.25% (8.75% at June 30,
1998), interest is due monthly, principal due March 1999,
credit limit of $200,000 $150,200
Bank line of credit, collateralized by certificate of
deposit, interest at prime plus 7.64%, interest is due
monthly, principal due April 1999, credit limit of $235,000
100,000
--------
Total current portion $250,200
========
11. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the years ended June 30, consisted of the following:
1998 1997
---- ----
Current tax provision (benefit) $(134,551) $ 11,790
Deferred tax provision 134,501 -0-
--------- --------
Total income tax provision $ 50 $ 11,790
========= ========
A deferred tax liability of $162,000 at June 30, 1998 relates primarily to
the difference in the financial accounting and tax bases of the note
receivable related to the sale of business assets in fiscal 1997. A
deferred tax asset of $882,736 relates primarily to net operating loss
carryforwards at June 30, 1998 of $2,064,000 for both federal and state
purposes and a credit for alternative minimum tax purposes of $11,740. The
federal carryforwards expire in fiscal 2009 through 2013. The state
carryforwards expire in fiscal 2000 through 2004. The deferred income tax
asset is significantly offset by a valuation allowance of $720,736.
Deferred income taxes for the year ended June 30, 1998, relate to temporary
differences for the recognition of a deferred income tax asset for the net
operating loss carryforward. The valuation allowance was increased $300,736
from $420,000 (as restated) to $720,736, reflecting primarily the increase
in the 1998 current tax benefit and the $162,000 decrease in the deferred
income tax liability related to the allowance recorded on note receivable
which was accounted for under an installment method for income tax purposes
on the sale of assets in fiscal 1997.
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<PAGE>
A reconciliation setting forth the differences between the effective and
statutory tax rate is as follows:
1998 1997
---- ----
Federal statutory rates (34.0)% 34.0%
State income taxes (8.0) 9.0
Valuation allowance and utilization
of operating loss carryforwards 39.2 (42.3)
Other, net 2.8 --
----- -----
Effective rate -0-% 0.7%
===== =====
12. LEASES
OPERATING LEASES
The Company leases its administrative office and operations facility under
operating leases that expire in 1999 and 1998, respectively. Rent expense
under these leases was approximately $12,000 and $11,000 for the years
ended June 30, 1998 and 1997. Minimum annual lease payments under these
agreements are as follows:
Years ended June 30:
1999 $ 15,112
2000 2,190
--------
Total $ 17,302
========
CAPITAL LEASES
The Company assumed capital leases for equipment in the purchase of assets
as discussed in Note 7. The following presents future minimum lease
payments under capital leases by year and the present value of minimum
lease payments as of June 30, 1998:
Year ended June 30:
1998 $24,394
1999 10,519
------
Total minimum lease payments 34,913
Less amount representing interest 3,401
Present value of minimum lease payments 31,512
Current portion 21,362
-------
Long-term portion $10,150
=======
Assets capitalized under the capital leases total approximately $82,000.
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<PAGE>
13. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In November 1997, the Company's Board of Directors approved the issuance
and exchange of 18,000 shares of a new Series B Preferred Stock for the
outstanding 727 shares of Series A Stock. The Series B Preferred Stock was
valued at $1,817,591, the stated value of the Series A Stock, and is
convertible into 18,000,000 shares of common stock. The Series A Stock 6%
cumulative dividends shall remain in arrears in the amount of $194,023 or
$266.88 per share. There are no cumulative dividends on the Class B
preferred stock.
COMMON STOCK
Options to purchase 250,000 shares of common stock granted in April 1995
pursuant to a consulting agreement, which was terminated in October 1996,
were canceled in November 1997.
14. 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 5) 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 for the year ended June 30, 1997.
The results of discontinued operations for the year ended June 30, 1998
represent the final settlement of an estimated sales tax liability that
had been contested by the Company. Because the tax benefit of the loss is
offset by a corresponding valuation allowance, there is no tax effect of
the loss from discontinued operations for the year ended June 30, 1998.
15. EMPLOYEE STOCK OPTION PLAN
The Company adopted an employee stock option plan in June 1998 pursuant to
which options may be granted to key employees, including officers, whether
or not they are directors, who are selected by the Board of Directors. The
exercise price of the options granted pursuant to the Plan shall be
determined by the Board of Directors on a case-by-case basis. Options are
exercisable over a three year period and only while the optionee remains
an employee of the Company, except that, in the event of an optionee's
termination of employment by reason of disability or death while an
employee. The aggregate number of shares that may be issued under the Plan
shall not exceed 900,000 shares. As of June 30, 1998, no options had been
granted under the Plan.
16. RELATED PARTY TRANSACTIONS
The Company loaned $10,000 each to two officers of the Company in May
1998. The notes receivable bear interest at 5% with principal and interest
due May 1999.
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<PAGE>
The Company pays $3,000 per month to C&N, Inc. ("C&N") for management
services. C&N is owned by an officer and director of the Company and his
family. The agreement between the Company and C&N commenced on January 1,
1995 and is renewable from year to year. The Company paid C&N $36,000
under this agreement during the years ended June 30, 1998 and 1997.
An officer and director of the Company performs accounting services for
the Company at a flat fee per month for compilation and payroll services
and is paid an hourly fee for any additional work. The Company paid
$28,610 to the officer's accounting firm for the year ended June 30, 1998.
In October 1996 the Company entered into a Severance Agreement with a
former director of the Company pursuant to which the Company agreed to pay
$5,000 per month to the individual through April 1998. For the years ended
June 30, 1998 and 1997, $2,217 and $107,783 respectively, are included in
discontinued operations relating to this agreement.
17. COMMITMENTS AND CONTINGENCIES
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, 1997 a complaint for
breach of contract was filed. 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 filing counterclaims. The counterclaims
allege that the Company failed to disclose accurately the average life of
the placement contracts for the pay telephones in the Phoenix and Tucson,
Arizona area and that the revenues reported to Tru-Tel Communications, LLC
and Finova Capital Corporation were purportedly overstated at the time of
the asset purchase agreement. Tru-Tel Communications, LLC is claiming that
they have been damaged in an amount in excess of $900,000. The Company
intends to vigorously contest the counterclaims and pursue the original
claims against all party defendants. A trial date of June 1, 1999 has been
scheduled. Although the Company believes that the outcome of this matter
will not adversely affect the Company's financial condition or results of
operations, if the defendant prevails in this matter, it would be unlikely
that the Company would collect on the balance of the note receivable
discussed in Note 5.
On June 15, 1998, the Company entered into an employment agreement with an
employee for an initial term of three years. The employee is to receive a
base salary ranging from $65,000 to $95,000 depending on annual sales and
shall be adjusted annually by the increase, if any, in the cost of living.
For each fiscal year in which the Company has positive earnings before
depreciation, interest and taxes (EBDIT) in the amount of $500,000, the
employee shall receive a bonus of 5% of EBDIT. The agreement is renewable
for additional three year terms.
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<PAGE>
18. SUBSEQUENT EVENTS
The Company's subsidiary, Precision, entered into an asset purchase and
sale agreement with a plastic injection molding business on July 15, 1998.
Precision acquired the assets for a purchase price of $560,000, consisting
of a $375,000 cash payment and a promissory note in the amount of
$185,000, and the assumption of specified liabilities totaling $671,603.
The note is secured by the assets and bears interest at 8% with the
principal and accrued interest payable in two installments of $105,000 due
ninety days from the closing and $80,000 due one hundred eighty days from
the closing.
On July 17, 1998, the Company purchased 2,000,000 shares of common stock
of its majority owned subsidiary Precision for $400,000.
19. PRIOR PERIOD ADJUSTMENT
The financial statements for the year ended June 30, 1997 have been
restated for correction of an error related to a severance agreement
entered into by the Company with a former officer. The error relates to
failure to accrue the liability incurred under that agreement at June 30,
1997. The effect of the error resulted in reducing net income for the year
ended June 30, 1997 by $47,783 representing the unpaid balance of the
severance agreement at June 30, 1997. The effect of the restatement is as
follows:
As previously
For the year ended June 30, 1997 reported As restated
------------------------------------------------------------------------
Balance sheet:
Accrued expenses $ 59,940 $ 107,723
Accumulated deficit 2,418,007 2,465,790
Statement of operations:
Loss from continuing operations (206,661) (171,661)
Income from discontinued operations 1,852,961 1,770,178
Net Loss 1,646,300 1,598,517
Net Inocme (Loss) per Common Share:
Continuing operations $ (0.06) $ (0.06)
Discontinued operations 0.37 0.36
=========== ==========
Total $ 0.31 $ 0.30
=========== ==========
* * * * * *
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