-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OoX7IeAe4CPIgAw0xpZ8lOAtZZZUigBZYuepRztPbgQ69MENTazYwq7dVzLllIGr v19XfFYGBny7P4CHiVd1fg== 0000950147-98-000813.txt : 19981014 0000950147-98-000813.hdr.sgml : 19981014 ACCESSION NUMBER: 0000950147-98-000813 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981013 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAMOND EQUITIES INC CENTRAL INDEX KEY: 0000923150 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 880232816 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-24138 FILM NUMBER: 98724751 BUSINESS ADDRESS: STREET 1: 2010 E UNIVERSITY DR STREET 2: STE 3 CITY: TEMPE STATE: AZ ZIP: 85281 BUSINESS PHONE: 6028298777 FORMER COMPANY: FORMER CONFORMED NAME: UNITED PAYPHONE SERVICES INC DATE OF NAME CHANGE: 19940516 10KSB40 1 FORM 10-KSB F.T.Y.E. 6/30/98 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 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] 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. In addition, a Form 8-K was filed on July 17, 1998 regarding a voluntary change of auditors for the Registrant. TABLE OF CONTENTS PART I Page No. Item 1. Description of Business...........................................3 Item 2. Description of Property...........................................9 Item 3. Legal Proceedings.................................................9 Item 4. Submission of Matters to a Vote of Security Holders..............10 PART II Item 5. Market Price of and Dividends on the Registrant's Common Equity and Other Stockholder Matters.............................10 Item 6. Management's Discussion and Analysis or Plan of Operation........11 Item 7. Financial Statements.............................................12 Item 8. Changes in and Disagreements With Accountants....................13 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons.....13 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............................16 2 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. RECENT DEVELOPMENTS. Prior to June, 1998, the Company was essentially a "blank check" company, as a result of the Asset Sale discussed above, with cash and a promissory note as its primary assets. On November, 1997, the Company established a subsidiary, Precision Plastics Molding, Inc. ("Precision" or the "Subsidiary"), a Nevada corporation, and on June 15, 1998 the Company and Precision purchased the assets of Premier Plastics Corporation, a Tempe, Arizona private corporation engaged in the plastic injection molding business. Consideration of $80,000 in cash was paid along with the assumption of various notes and payables in the amount of approximately $40,000. In addition, the selling shareholder of Premier received 300,000 shares of common stock of the Subsidiary valued at $0.25 per share. Prior to this acquisition, the Subsidiary had no assets. The purchase price was determined by negotiations between the parties. The cash paid was from the Registrant's own funds. There was no prior relationship between Premier and its sole shareholder and the officers and directors of the Registrant or its Subsidiary. On July 15, 1998, the Company and Precision closed a transaction involving the purchase of substantially all the assets of Accurate Thermoplastics, Inc. ("Accurate") an Arizona private corporation engaged in the plastic injection molding business. The assets purchased included equipment, inventories, contract rights, customer lists, know-how, drawings, specifications and intellectual property. The sole shareholder of Accurate, Roy L. Thompson, was engaged to serve as a consultant to Precision. The business of Accurate will be continued under the name Precision Plastics, Inc.. Precision acquired the assets of Accurate for payment of Five Hundred Sixty Thousand Dollars ($560,000) consisting of cash and a promissory note, and in consideration for the assumption by Precision of certain liabilities of Accurate. The purchase price paid by Precision was determined by negotiations between the parties. The cash paid was from funds paid to Precision by the Registrant for 2,000,000 shares of Precision's common stock 68.9% of the outstanding common stock of Precision. There was and is no relationship between Accurate and its sole shareholder and the officers and directors of the Registrant or Precision. 3 OVERVIEW OF THE PLASTICS INDUSTRY. The plastics industry, as broadly defined, is the fourth largest industry in the United States. Only the motor vehicle, petroleum refining and electronics manufacturing industries are larger. While plastics in various forms have been around for many years, the real growth of the industry began in the 1970's and in the 1980's it enjoyed 6% average annual growth. Plastics invaded wood, metal, glass, paper, and other industries as new and better plastics were found to be superior or adequate substitutes for traditional materials. New uses were found for plastics which other materials could not compete with. Presently, plastics manufacturers produce over five hundred different types of resins and compounds. There are varying grades of physical property and price associated with this wide array of materials. There are four major divisions of plastics resins. They are commonly referred to as: 1. Commodity resins - represents the bulk of production and is low tech and produced by many suppliers. 2. Intermediate resins - more advanced and specialized than commodity resins. 3. Engineering resins - exhibit more advanced physical characteristics and are generally produced on a smaller scale. 4. Advanced resins - most capable of withstanding impact and high heat. Can carry high loads and resists chemicals and solvents. Plastics are often divided by their physical properties. Thermoplastics can be re-melted and reused repeatedly. They represent 83% of the industry production. Polyethylene represents 40% of the thermoplastics market and is heavily used in packaging. Quantum Chemical, Union Carbide and Dow Chemical are some of the largest producers of Polyethylene. PVC is the second largest of the thermoplastics products and is commonly used in construction (PVC pipe, for instance). Occidental Petroleum, Shintech and Formosa Plastics are some of the leading PVC producers. Thermosets are plastics that are hardened by chemical reaction. They represent the remaining 17% of the plastics market. 50% of Thermosets are used in construction as plywood adhesives, insulation, etc This is a more mature and less dynamic sector of the plastics industry Shipments of plastics have grown 22% in the most recent two-year period for which figures are available. Prices of plastics, which had remained relatively flat during the early 90's jumped dramatically in the mid-90's due to strong demand and short supplies of raw materials. At present, the top twenty plastics manufacturers account for 66% of all production. Smaller purchasers have a difficult time securing price breaks, creating a motivation for molders to consolidate to be competitive and profitable. The United States is a huge consumer of plastics, using 24% of all the plastics used in the world. The U.S. is an exporter of plastics, with 4.2% of all plastics jobs tied to exports. A 1995 report from U.S. Industry Profiles states, "The plastics industry should grow from 8% to 10% annually in the late 1990's, as a general increase in the use of plastics leads to strong demand." This appears to be occurring as the industry creates new compounds and invests in research and development. The industry's overall share of the economy continues to grow. OVERVIEW OF THE COMPANY'S LOCAL MARKET. Arizona is one of seven states with double-digit growth in the number of plastics jobs according to a recent report from Probe Economics as commissioned by The Society of the Plastics Industry. Database Publishing's Arizona Industrial Directory for 1997 indicates that there were forty eight companies in Arizona defined as "plastic injection molders". Of these, at least thirty six are estimated by Database to have sales in either the $1,000,000 to $5,000,000 range or to have sales of less than $1,000,000. Actually, there are probably no companies over $3,000,000 from this group. The December 29,1997 issue of the Plastics News provided a table of the largest plastic injection molders below the top 100 in the United States. Only three Arizona molders are on the list. Their sales ranged from $2,300,000 down to $1,600,000. 4 Of the remaining twelve companies on Database's list, only two to four companies appear to be in the mid-range. Several, such as Badger Meter and Richco are primarily involved in non-plastics production (i.e. in Richco's case they are primarily a metals manufacturer). Geographically, the molders are concentrated in the metro Phoenix area. Only fourteen are located in other parts of the state and, of those, eight are in Tucson. Consequently, it is most likely that additional companies which may be acquired will be located in the metro Phoenix area, making consolidation of operations easier and less costly to accomplish, with more immediate impact on profits. However, should a good acquisition opportunity arise outside of the metro Phoenix area, the Company will carefully consider such an opportunity. It is clear that there is a need for an active, mid-range plastic injection molding company in Arizona to serve customers who are in need of larger production capabilities and the lower prices resulting from the enhanced buying power of a mid-sized molder. Companies such as Motorola, Intel and others have many products that would lend themselves to being produced by a mid-range molder and the Company intends to pursue those customers. CURRENT MANUFACTURING OPERATIONS -- BUSINESS. The Company, through its majority-owned subsidiary, Precision Plastics Moldings, Inc., is now primarily engaged in the plastics injection molding business. The operations of Premier have been combined with those of Accurate, with both acquisitions now operating under the name of Precision Plastics Molding, Inc., and all operations are conducted at the former Accurate facility at 216 S. Alma School Rd., Mesa, AZ. The following is a brief discussion of the business conducted by Precision / the Company. BUSINESS. The business of Precision is to produce a plastic product from the customer's designs. The customers either provide their own molds or have Precision build a mold in its facility. When the mold is completed Precision then manufactures as many or as few products as the customers desire. Most products require more than just one molded part. In most cases several parts are molded and then assembled. Precision does not always mold all of the parts for assembly nor does Precision normally do the assembly. PRODUCTS. Precision manufactures many products that are owned by its customers. Precision does not presently own the rights to any of the products that it produces. Precision offers the service of manufacturing parts for a customer's products at the level of quality they demand. MARKETING. Currently, Precision does not have a marketing or sales force. The current customers were acquired from the companies purchased. Precision intends to hire personnel to find companies that need plastic parts manufactured for their own products. CUSTOMERS / SUPPLIERS. Precision currently makes products for approximately twenty five (25) different customers. The largest by far is Ryobi. Management estimates that Ryobi's business makes up at least forty percent (40%) of Precision's sales. Precision works with thirty (30) different suppliers of different products consumed in manufacturing products such as boxes and plastic resin. Precision's main suppliers of plastic are Ferro Corp, GE Plastics, Polymerland, and Plastics General Polymers. SALES. Precision has, as of September 1, 1998, a sales backlog of 20 days but already has the raw materials to run production for these sales. The tooling department has a sales backlog of $75,000 and will require $20,000 of raw material and $7,500 of in-house labor to produce the tools. GENERAL. The Company intends to continue to use its working capital to take advantage of business opportunities which arise from time to time. Management anticipates that such opportunities will be available to the Company due primarily to its status as a small, publicly-held entity with a bona fide business 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 other agreements, understandings or arrangements to acquire or participate in any specific business opportunity. 5 FUTURE OPERATIONS. The Company, Diamond Equities, Inc., will seek corporate opportunities which it finds or which are presented to it by persons or firms that desire to employ the Company's funds in their business and/or obtain the perceived advantages being part 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 ventures of virtually any kind or nature. Management anticipates that it may be able to participate in a limited number of business ventures, due primarily to the Company's limited capital. Lack of diversification is a substantial risk in investing in the Company because it may not permit the Company to offset potential losses from one venture against gains from another and will expose the Company to the cyclicality and other risks of any business in which it invests. The Company has been seeking business opportunities 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- or majority-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 may 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 other companies 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, estate planning and other factors. Business opportunities may occur in many different industries and at various stages of development, all of which can 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 equity interests in a public company at substantially less cost than is required, for example, to conduct an initial public offering. The owners of the business opportunities could, 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. Analyses of new business acquisitions 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 considers 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 6 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. 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 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. 7 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 shareholders 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. FORWARD-LOOKING STATEMENTS. This report contains forward-looking statements 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 uncertain factors: the inability to make additional acquisitions; the probability of losses due to its new line of business; the continued employment of key management; a change in control of the Company. COMPETITION. In terms of making other acquisitions, the Company will be a minor 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 compared to the Company's competitors in making desirable acquisitions. Also, the Company may be competing with other small, blind-pool, public companies located in the Southwest and elsewhere. REGULATION. 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 8 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. Mergers or acquisitions of the Company are structured in such a manner as to minimize federal and state tax consequences to the Company and the target company. Management of the Company also reviews 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. The Company's subsidiary, Precision, has twenty eight (28) non-union employees and fifteen (15) machine operators. Two (2) are tool makers, three (3) shift supervisors, four (4) are quality assurance inspectors, one (1) handles shipping and receiving, and three (3) are office and clerical personnel. 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, 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 was $1036.80 plus tax per month and for the second year, $1071.36 plus tax per month. Effective July 15, 1998, the Company's subsidiary, Precision, leases 15,000 square feet of space at 216 South Alma School Road, Mesa, Arizona 85210, of which 13,000 square feet are used for production and 2,000 square feet for offices. The space is rented at $6,750 per month. ITEM 3. LEGAL PROCEEDINGS. Neither the Company nor any of its subsidiaries 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. 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 certain former directors and officers of the Company and other non-affiliated individuals, who were accused of racketeering, RICO violations, securities fraud and wire fraud. All of the charges against the former directors and officers arose out of alleged activities the individuals undertook while serving as directors and officers of the Company. The Company is not a party of and 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 persons named in the indictments as discussed in prior 10-KSB filings, are no longer officers, directors or control persons of the Company. 9 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 never informed the Company as to the relief, if any, to be sought. The Company complied with the subpoena DUCES TECUM (to produce Company records and documents) 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. 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 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, 1998, 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, 1998, 303,800 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, 1997 Second $ 0.63 $ 0.50 Third $ 0.69 $ 0.50 Fourth $ 0.82 $ 0.50 FISCAL YEAR ENDED First $0.1875 $ 0.125 JUNE 30, 1998 Second $ 0.16 $0.0625 Third $ 0.08 $0.0325 Fourth $ 0.51 $0.0325 10 As of September 14, 1998, there were approximately 639 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. The Registrant previously had 727 shares of Series A 6% Preferred Stock outstanding, with $194,023 in accrued but unpaid dividends. On October 28, 1997 the Registrant entered into an agreement with Dingaan Holdings, S.A., the sole shareholders of the Series A Preferred Stock, to exchange these shares and the accrued dividends for 18,000 shares of new Series B Preferred Stock. The Series B Preferred Stock carries no dividend and is convertible to 18,000,000 shares of common stock of the Registrant. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 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 through June 15, 1998 when it acquired Premier Plastics, Inc. a plastic injection molding business in Tempe, Arizona. Because the Company had some operations in the pay telephone industry in fiscal year 1997, the results of operations will differ from that of fiscal year 1998. The Company had a net loss of $(769,923) in the fiscal year ended June 30, 1998 as compared to a net income of $1,598,517 in the fiscal year ended June 30, 1997. The difference in net loss in the year ended June 30, 1998 versus the gain in 1997 is largely due to the gain recognized on the sale of the operations of $1,688,750 in 1997. The net loss from continuing operations for the fiscal 1998 was $(734,500), as compared to $(171,661) for the fiscal 1997 and the allowance for defaulted collection on the Tru-Tel note receivable. The difference is partially due to general and administrative expenses being included in discontinued operations for the fiscal 1997 year. When these two factors are considered the net loss from operations were very comparable for the two years. Interest income decreased to $53,179 in fiscal 1998 as compared to $98,076 in the fiscal year ended June 30, 1997, due to diminishing cash balances. No operating revenues from the new plastics operations were realized until July 1998. The Company's selling, general and administrative expenses decreased by 52% to $355,100 for the fiscal year 1998 as compared to $744,442 (including discontinued operations) for the fiscal year ended June 30, 1997. 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 $0 and $1,848,279 in the fiscal years ended June 30, 1998, and 1997, respectively. The difference was due to the sale of approximately 99% of the fixed assets of the Company. In June 1994, the Company issued 727 shares of its Series A 6% Preferred Stock to Teletek 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., during the fiscal year ended June 30, 1997. The above shares requires 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. However, in September 1997 the Company issued a Series B Preferred Stock to the holders of the Series A Preferred Stock in an exchange. The Series B Preferred has no dividend and converts into 18,000,000 shares of common. No dividends were therefore accrued during the fiscal 1998 year. The Company's future results of operations will be materially affected due to the recent change of operations into the plastics industry. The Company anticipates that in the fiscal year ending June 30, 1999, that the operations in the plastics industry will be expanded with additional acquisitions and growth. Subsequent to June 30, 1998, the Company acquired its second plastics company, 11 Accurate Thermoplastics, Inc, and is looking for a third acquisition. 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 B PREFERRED STOCK OR OTHER EVENTS. LIQUIDITY AND CAPITAL RESOURCES. The Company requires capital to support the new injection molding operations and general and administrative expenses of the Company in its search for viable acquisitions. At June 30, 1998, the Company had cash and cash equivalents of $600,231 compared to cash and cash equivalents of $1,586,983 at June 30, 1997. This decrease of $986,752 resulted primarily from the purchases of a Certificate of Deposit in the amount of $500,000, the purchase of investments and notes receivable of $175, 000 and the use of cash in operations of $545,000. The company borrowed $250,000 against the CD which increased the cash position. The funding sources currently available to the Company include two lines of credit for $200,000 and $235,000 each and potential public or private offerings. The Company has current plans to raise additional funds in its subsidiary Precision Plastics through private placements of its common stock or preferred stock to assist with the capital requirements of additional acquisitions and to consolidate debt. There are however no third party financing arrangements in place at this time. 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 payment of notes associated with the purchase of assets by Precision. Subsequent to June 30, 1998 the Company paid $375,000 for the acquisition of Accurate Thermoplastics and signed a 90-day Note for an additional $185,000. There is currently no requirement to pay accrued and unpaid dividends on its previously outstanding shares of Series A 6% Preferred Stock and no dividends are payable on its Series B 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 significant revenues and operations. See Item 6 "Results of Operations for the Fiscal Years Ended June 30, 1998 and 1997". The acquisition of Accurate Thermoplastics subsequent June 30, 1998 may materially change the cash requirements of the Company depending on the success of operations of that entity. ITEM 7. FINANCIAL STATEMENTS. The following financial statements are attached hereto and incorporated herein: HEADING PAGE ------- ---- Independent Auditor's Report F-3 Balance Sheets for the Years Ended June 30, 1998 and 1997 F-4 Statements of Operations for the Years Ended June 30, 1998 and 1997 F-6 Statements of Stockholder's Equity for the years ended June 30, 1998, 1997 and 1996 F-8 Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 F-9 Notes to Financial Statements F-10 12 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. As reported on Form 8-K dated July 17, 1998, the Company changed accountants, without any disagreement or adverse opinion or disclaimer. 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, 32, 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, 36, 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 travel and tanning center. Mr. Chisholm received a bachelor of arts degree in business from the University of Utah. He has been a certified public accountant since 1992. The Registrant also employs Mr. Chisholm as it's C.F.O. and Secretary/Treasurer. Mr. Chisholm, performs accounting services for the Registrant for which he is paid a flat fee of $920 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 between Mr. Chisholm and the Registrant are at least as favorable as terms that could be obtained with a non-affiliated party. 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. 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, 1998, 1997 and 1996. Annual Compensation Name and Principal Positions Year Salary Bonus Other Annual Compensation David Westfere, President (1) 1998 $36,800 $0.00 $51,787 (2) 1997 $36,800 $0.00 $42,429.81 (3) 1996 $32,400 $16,000 $46,972.00 (4) - ---------- 13 (1) The Company did not pay any long-term compensation to Mr. Westfere during the above periods. (2) During the fiscal year 1998, the Company paid (i) health insurance premiums of $5,920 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. (3) The Company paid health insurance premiums of $6,429.81 for Mr. Westfere and his family during the fiscal year 1997. 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. (4) During the fiscal year 1996, the Company paid health insurance premiums for Mr. Westfere and his family of $5,972; and $36,000 to C&N, Inc., a corporation controlled by Mr. Westfere. No executive officer of the Company received compensation exceeding $100,000 for the fiscal years ended June 1998, 1997, 1996. 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 1998. 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 1, 1998, 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: NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS (8) ---------------- -------------------- -------------------- 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 14 Todd D. Chisholm 10,000 (6) (8) 50 West Broadway Suite 1130 Salt Lake City, Utah 84101 David Westfere 46,000 (7) (8) 105 E. Ellis Drive Tempe, AZ 85282 Directors and Executive Officers 56,000 (8) (8) as a Group (2 persons) - ---------- (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 18,000 shares of the Company's Series B Preferred Stock. These shares of Series B Preferred Stock are convertible to 18,000,000 shares of common stock. In the event Dingaan converts all the Series B Preferred Stock, Dingaan would own a total of 18,992,065 shares of Common Stock, or 80.3% of the total then issued and outstanding shares of Common Stock of the Company. (6) These shares are held directly and of record by Todd D. Chisholm, an individual. (7) These shares are owned jointly by Mr. and Mrs. Westfere, husband and wife. (8) Less than 1%. (9) Percentages reflect the beneficial ownership of related parties. See above footnotes. The above table and footnotes reflects the removal of certain entities which no longer own 5% or more of the outstanding Common Stock. 15 As of September 24, 1998, the Company had outstanding 18,000 shares of Series B 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 B 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. 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, 1998. 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 $920 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 October 3, 1996, the Company and Mr. Michael G. Swan, formerly a director of the Company, entered into a Severance Agreement, pursuant to which (a) a prior consulting agreement was terminated; (b) Mr. Swan is 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 the Company's Chief Executive Officer; and (c) the Company agreed to pay Mr. Swan $5,000 per month through April 1998. The Company may terminate the Severance Agreement in the event Mr. Swan (i) breaches the Severance Agreement, (ii) is convicted of a felony involving or related to his previous employment with the Company or services provided by him for the benefit of or related to the Company; or (iii) dies. 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. 3 (vi) Bylaws - Precision Plastics Molding, Inc. 4 (a) Form of certificate evidencing shares of Common Stock * 4 (b) Form of certificate evidencing shares of Series A 6% Preferred Stock *** 16 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. 10.9 Asset Purchase Agreement between the Company, Precision and Accurate Thermoplastics, Inc., dated July 15, 1998 10.10 Preferred Stock Exchange Agreement 23 Consent of Independent Certified Public Accountants 27 Financial Data Schedule - ------------- * 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. *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 on Form 8-K (Commission File No. 0-24138) filed with the Securities and Exchange Commission on March 15, 1997. (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. 17 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 13, 1998 ----------------- By: /s/ Todd D. Chisholm ------------------------------------- Todd D. Chisholm, Chief Financial Officer Date: October 13, 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 13, 1998 ----------------- By: /s/ Todd D. Chisholm ------------------------------------- Todd D. Chisholm, Director Date: October 13, 1998 ----------------- 18 FORM 10-KSB DIAMOND EQUITIES, INC. EXHIBITS 10.8 Asset Purchase Agreement between the Company, Precision and Premier Plastics Corp, dated June 15, 1998 10.9 Asset Purchase Agreement between the Company, Precision and Accurate Thermoplastics, Inc., dated July 15, 1998 10.10 Preferred Stock Exchange Agreement 23 Consent of Independent Certified Public Accountants 27 Financial Data Schedule Independent Auditor's Report.............................................. F-3 Balance Sheets for the Years Ended June 30, 1998 and 1997................. F-4 Statements of Operations for the Years Ended June 30, 1998 and 1997....... F-6 Statements of Stockholder's Equity for the years ended June 30, 1998, 1997 and 1996............................................................ F-8 Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996. F-9 Notes to Financial Statements............................................. F-10 19 DIAMOND EQUITIES, INC. FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 C O N T E N T S Page INDEPENDENT AUDITORS' REPORT ............................................F-3 BALANCE SHEETS...........................................................F-4 STATEMENTS OF OPERATIONS ................................................F-6 STATEMENTS OF STOCKHOLDERS' EQUITY.......................................F-8 STATEMENTS OF CASH FLOWS.................................................F-9 NOTES TO FINANCIAL STATEMENTS ...........................................F-10 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. Salt Lake City, Utah August 6, 1997 except for Note 14, as to which the date is September 28, 1998 F-3 DIAMOND EQUITIES, INC. BALANCE SHEETS JUNE 30, 1997, 1996 AND 1995 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-4 DIAMOND EQUITIES, INC. BALANCE SHEETS JUNE 30, 1997, 1996 AND 1995 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-5 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-6 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-7 DIAMOND EQUITIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1997, 1996 AND 1995
CAPITAL IN RETAINED TOTAL COMMON STOCK EXCESS OF PREFERRED EARNINGS STOCKHOLDERS' SHARES AMOUNT PAR VALUE STOCK (DEFICIT) (EQUITY) ------ ------ --------- ----- --------- -------- 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 ========= ======= =========== ========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-8 DIAMOND EQUITIES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995 ---- ---- ---- 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 =========== ========= =========
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-9 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-10 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-11 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-12 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-13 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-14 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-15 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-16 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-17 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-18 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-19 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-20 EX-10.8 2 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT This Asset Purchase Agreement ("Agreement")is entered into this day by and Premier Plastics Corporation ("PPC"), an Arizona corporation ("Seller"), John O. Hoffman ("Seller's Shareholder") Diamond Equities, Inc., a Nevada corporation ("Diamond") and Precision Plastics Molding, Inc. a Nevada corporation and subsidiary of Diamond ("Purchaser"). RECITALS Seller operates a business primarily engaged in the plastic injection molding business. Seller's principal place of business is 5869 S. Kyrene Road #18, Tempe, Arizona 85283. Seller owns equipment, inventories, contract rights, customer lists, intellectual property including trade secrets, methods process, know-how, drawings, specifications and all memoranda, notes and records with regard to any research and development ("Assets") and miscellaneous assets used in connection with the operation of its business; Purchaser desires to acquire substantially all the Assets used or useful, or intended to be used, in the operation of Seller's business, and Seller desires to sell such Assets to Purchaser; and WHEREAS, Seller's Shareholder is the sole shareholder of Seller; and WHEREAS, Diamond Equities, Inc. is the parent company of Precision Plastics, Inc., NOW THEREFORE, IT IS AGREED AS FOLLOWS: SECTION 1. ASSETS PURCHASED; LIABILITIES ASSUMED. 1.1 ASSETS PURCHASED. Seller agrees to sell to Purchaser and Purchaser agrees to purchase from Seller, on the terms and conditions set forth in this Agreement. Seller owns assets including equipment, inventories, contract rights, customer lists, intellectual property including trade secrets, methods process, know-how, drawings, specifications and all memoranda, notes and records with regard to any research and development ("Assets") and miscellaneous assets used in connection with the operation of its business set forth more specifically on Schedule A hereto ("Assets"). Assets shall include all accounts receivable, notes receivable, prepaid accounts, and any other assets of the business not specified in herein. 1.2 LIABILITIES ASSUMED. Purchaser shall accept the assignment and assume responsibility for all unfilled orders from customers of Seller assigned to Purchaser pursuant to Section 1.1, shall assume responsibility of payment for purchase orders for inventory items that have been placed by Seller prior to the Closing Date but that will not be delivered until after the Closing Date, shall assume and perform all of Seller's obligations under leases, agreements, and other contracts listed on Schedule B hereto, and shall assume liability for all other liabilities of Seller set forth on Schedule B hereto. Should Precision default on the leases to Balboa, the equipment covered by the leases will revert back to Premier and John O. Hoffman. Page 1 of 21 SECTION 2. PURCHASE PRICE. The price for the Assets shall be paid as follows: 2.1 At Closing, Purchaser shall pay, by cashier's check or certified check, the sum of Eighty Thousand Dollars ($80,000). 2.2 The assumption by Precision of Seller's notes and payables in the amount of Forty Thousand Dollars ($40,000), as shown on Schedule B hereto. Any difference between this amount and the actual pay-off balance as of the date of close will be refunded to Premier. This amount is not to exceed Five Thousand Dollars ($5,000). 2.3 Seventy Five Thousand Dollars ($75,000) worth or three hundred thousand shares (300,000) at twenty five cents (.25) per share of the common stock of Precision Plastics Molding, Inc. SECTION 3. ADJUSTMENTS. The operation of Seller's business and related income and expenses up to the close of business on the day before the Closing Date shall be for the account of Seller and thereafter for the account of Purchaser. Expenses, including but not limited to utilities, personal property taxes, rents, real property taxes, wages, vacation pay, payroll taxes, and fringe benefits of employees of Seller, shall be prorated between Seller and Purchaser as of the close of business on the Closing Date, the proration to be made and paid, insofar as reasonably possible, on the Closing Date, with settlement of any remaining items to be made within thirty (30) days following the Closing Date. SECTION 4. SELLER'S AND SELLER'S SHAREHOLDER REPRESENTATIONS AND WARRANTIES. Seller and Seller's Shareholder each represent and warrant to Purchaser as follows: 4.1 CORPORATE EXISTENCE. Seller is now and on the Closing Date will be a corporation duly organized and validly existing and in good standing under the laws of the State of Arizona. Seller has all requisite corporate power and authority to own, operate and/or lease the Assets, as the case may be, and to carry on its business as now being conducted. 4.2 AUTHORIZATION. The execution, delivery, and performance of this Agreement have been duly authorized and approved by the board of directors and shareholders of Seller, and this Agreement constitutes a valid and binding Agreement of Seller in accordance with its terms. 4.3 FINANCIAL STATEMENTS. Attached hereto as Schedule C are Seller's financial statements. The Financial Statements are in accordance with the books and records of Seller and are true, correct, and complete; fairly present financial conditions of Seller at the dates of such Financial Statements and the results of its operations for the periods then ended; and were prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior accounting periods. Except as described in this Agreement, since May 22, 1998 there has been no material adverse change in the financial condition of Seller. Page 2 of 21 4.4 TITLE TO ASSETS. Except as described in Schedule A of this Agreement, Seller holds good and marketable title to the Assets, free and clear of restrictions on or conditions to transfer or assignment, and free and clear of liens, pledges, charges, or encumbrances. 4.5 BROKERS AND FINDERS. Neither Seller nor Seller's Shareholder has employed any broker or finder in connection with the transactions contemplated by this Agreement, or taken action that would give rise to a valid claim against any party for a brokerage commission, finder's fee, or other like payment. 4.6 TRANSFER NOT SUBJECT TO ENCUMBRANCES OR THIRD-PARTY APPROVAL. The execution and delivery of this Agreement by Seller and Seller's Shareholder, and the consummation of the contemplated transactions, will not result in the creation or imposition of any valid lien, charge, or encumbrance on any of the Assets, and will not require the authorization, consent, or approval of any third party, including any governmental subdivision or regulatory agency. 4.7 LABOR AGREEMENTS AND DISPUTES. Seller is neither a party to, nor otherwise subject to any collective bargaining or other agreement governing the wages, hours, and terms of employment of Seller's employees. Neither Seller nor Seller's Shareholder is aware of any labor dispute or labor trouble involving employees of Seller, nor has there been any such dispute or trouble during the two years preceding the date of this Agreement. 4.8 ERISA AND RELATED MATTERS. Schedule D sets forth a description of all "Employee Welfare Benefit Plans" and "Employee Pension Benefit Plans" (as defined in A7A73(1) and 3(2), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) existing on the date hereof that are or have been maintained or contributed to by the Seller. To the extent any such plans are in place, Seller agrees to provide additional details on request of Purchaser. 4.9 NON-CANCELABLE CONTRACTS. At the time of Closing, there will be no material leases, employment contracts, contracts for services or maintenance, or other similar contracts existing or relating to or connected with the operation of Seller's business not cancelable within thirty (30) days, except those Agreements listed on Schedule E. 4.10 COMPLIANCE WITH CODES AND REGULATIONS. Seller and Seller's Shareholder have no knowledge that leasehold improvements violate and provisions of any applicable building codes, fire regulations, building restrictions, or other ordinances, orders, or regulations. 4.11 LITIGATION. Seller and Seller's Shareholder have no knowledge of any claim, litigation, proceeding, or investigation pending or threatened against Seller that might result in any material adverse change in the business or condition of Assets being conveyed under this Agreement. 4.12 ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the representations or warranties of Seller or Seller's Shareholder contain or will contain any untrue statement of a material fact or omit or will omit or misstate a material fact necessary in order to make statements in this Agreement not Page 3 of 21 misleading. Seller and Seller's Shareholder know of no fact that has resulted, or that in the reasonable judgment of Seller's Shareholder will result in a material change in the business, operations, or assets of Seller that has not been set forth in this Agreement or otherwise disclosed to Purchaser. SECTION 5. REPRESENTATIONS OF PURCHASER. Purchaser represents and warrants as follows: 5.1 CORPORATE EXISTENCE. Both Diamond and Precision is a corporation duly organized, validly existing, and in good standing under the laws of the State of Nevada. Purchaser has all requisite corporate power and authority to enter into this Agreement and perform its obligations hereunder. 5.2 AUTHORIZATION. The execution, delivery, and performance of this Agreement have been duly authorized and approved by the board of directors and shareholders of Purchaser, and this Agreement constitutes a valid and binding Agreement of Purchaser in accordance with its terms. 5.3 BROKERS AND FINDERS. Neither Purchaser nor Seller have employed any broker or finder in connection with the transaction contemplated by this Agreement and has taken no action that would give rise to a valid claim against any party for a brokerage commission, finder's fee, or other like payment. 5.4 ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the representations or warranties of Purchaser contain or will contain any untrue statement of a material fact or omit or will omit or misstate a material fact necessary in order to make the statements contained herein not misleading SECTION 6. COVENANTS OF SELLER AND SELLER'S SHAREHOLDER. 6.1 SELLER'S OPERATION OF BUSINESS PRIOR TO CLOSING. Seller and Seller's Shareholder agree that between the date of this Agreement and the Closing Date, Seller will: 6.1.1 Continue to operate the business that is the subject of this Agreement in the usual and ordinary course and in substantial conformity with all applicable laws, ordinances, regulations, rules, or orders, and will use its best efforts to preserve its business organization and preserve the continued operation of its business with its customers, suppliers, and others having business relations with Seller. 6.1.2 Not assign, sell, lease, or otherwise transfer or dispose of any of the Assets used in the performance of its business, whether now owned or hereafter acquired, except in the normal and ordinary course of business and in connection with its normal operation. 6.1.3 Maintain all of its Assets other than inventories in their present condition, reasonable wear and tear and ordinary usage excepted, and maintain the inventories at levels normally maintained. Page 4 of 21 6.2 ACCESS TO PREMISES AND INFORMATION. At reasonable times prior to the Closing Date, Seller will provide Purchaser and its representatives with reasonable access during business hours to the Assets, titles, contracts, and records of Seller and furnish such additional information concerning Seller's business as Purchaser from time to time may reasonably request. 6.3 EMPLOYEE MATTERS. 6.3.1 Prior to Closing, Seller will deliver to Purchaser a list on Schedule F of the names of all persons on the payroll of Seller, together with a statement of amounts paid to each during Seller's most recent fiscal year and amounts paid for services from the beginning of the current fiscal year to the Closing Date. Seller will also provide Purchaser with a schedule of all employee bonus arrangements and a schedule of other material compensation or personnel benefits or policies in effect. 6.3.2 Prior to the Closing Date, Seller will not, without Purchaser's prior written consent, enter into any material agreement with any employees, increase the rate of compensation or bonus payable to or to become payable to any employee, or effect any changes in the management, personnel policies, or employee benefits, except in accordance with existing employment practices. 6.3.3 Seller and Seller's Shareholder will undertake all action necessary or appropriate to permit Purchaser, if Purchaser so desires, to take over Seller's pension and profit-sharing plan , if any, as a successor employer, and will cooperate with Purchaser with respect to this undertaking. 6.3.4 As of the Closing Date, Seller will terminate all of its employees not having employment agreements transferable to Purchaser and will pay each employee all wages, commissions, and accrued vacation pay earned up to the time of termination, including overtime pay. 6.4 CONDITIONS AND BEST EFFORTS. Seller and Seller's Shareholder will use their best efforts to effectuate the transactions contemplated by this Agreement and to fulfill all the conditions of the obligations of Seller and Seller's Shareholder under this Agreement, and will do all acts and things as may be required to carry out their respective obligations under this Agreement and to consummate and complete this Agreement. SECTION 7. COVENANTS OF PURCHASER. 7.1 CONDITIONS AND BEST EFFORTS. Purchaser will use its best efforts to effect the transactions contemplated by this Agreement and to fulfill all the conditions of Purchaser's obligations under this Agreement, and shall do all acts and things as may be required to carry out Purchaser's obligations and to consummate this Agreement. 7.2 CONFIDENTIAL INFORMATION. If for any reason the sale of Assets is not closed, Purchaser will not disclose to third parties any confidential information received from Seller or Seller's Shareholder Page 5 of 21 in the course of investigating, negotiating, and performing the transactions contemplated by this Agreement. SECTION 8. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS. The obligation of Purchaser to purchase the Assets is subject to the fulfillment, prior to or at the Closing Date, of each of the following conditions, any one or portion of which may be waived in writing by Purchaser: 8.1 Purchaser, after inspection of Seller's premises, operations, financial and other affairs, as provided in Paragraph 5, approves of the condition and affairs of the Assets or financial results; 8.2 Purchaser shall have received a reasonably satisfactory valuation of the Assets prepared in accordance with standard valuation industry practice from an independent business valuation firm reasonably acceptable to Purchaser, at Purchaser's own expense; 8.3 Purchaser, on the Closing Date, shall receive all the Assets of Seller free and clear of any liens, encumbrances or other obligations; 8.4 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF SELLER AND SELLER'S SHAREHOLDER. All representations and warranties made in this Agreement by Seller and Seller's Shareholder shall be true as of the Closing Date as fully as though such representations and warranties had been made on and as of the Closing Date, and, as of the Closing Date, neither Seller nor Seller's Shareholder shall have violated or shall have failed to perform in accordance with any covenant contained in this Agreement. 8.5 LICENSES AND PERMITS. Purchaser shall have obtained all licenses and permits from public authorities necessary to authorize the ownership and operation of the business of Seller. 8.6 CONSENTS. Purchaser shall have obtained the consent of any lessor of equipment to the assignments of such agreements to the Purchaser. 8.7 CONDITIONS OF THE BUSINESS. There shall have been no material adverse change in the manner of operation of Seller's business prior to the Closing Date. 8.8 NO SUITS OR ACTIONS. At the Closing Date no suit, action, or other proceeding shall have been threatened or instituted to restrain, enjoin, or otherwise prevent the consummation of this Agreement or the contemplated transactions. SECTION 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AND SELLER'S SHAREHOLDER. The obligations of Seller and Seller's Shareholder to consummate the transactions contemplated by this Agreement are subject to the fulfillment, prior to or at the Closing Date, of each of the following conditions, any one or a portion of which may be waived in writing by Seller; 9.1 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF PURCHASER. All representations and warranties made in this Agreement by Purchaser shall be true as of the Closing Date as fully as though Page 6 of 21 such representations and warranties had been made on and as of the Closing Date, and Purchaser shall not have violated or shall not have failed to perform in accordance with any covenant contained in this Agreement. SECTION 10. PURCHASER'S ACCEPTANCE. Purchaser represents and acknowledges that it has entered into this Agreement on the basis of its own examination, personal knowledge, and opinion of the value of the business. Purchaser has not relied on any representations made by Seller other than those specified in this Agreement. Purchaser further acknowledges that neither Seller nor Seller's Shareholder has made any agreement or promise to repair or improve any of the leasehold improvements, equipment, or other personal property being sold to Purchaser under this Agreement, and that Purchaser takes all such property in the condition existing on the date of this Agreement, except as otherwise provided in this Agreement. SECTION 11. RISK OF LOSS. The risk of loss, damage, or destruction to any of the equipment, inventory, or other personal property to be conveyed to Purchaser under this Agreement shall be borne by Seller to the time of Closing. In the event of such loss, damage, or destruction, Seller, to the extent reasonable, shall replace the lost property or repair or cause to repair the damaged property to its condition prior to the damage. If replacement, repairs, or restorations are not completed prior to Closing, then the purchase price shall be adjusted by an amount agreed upon by Purchaser and Seller that will be required to complete the replacement, repair, or restoration following Closing. If Purchaser and Seller are unable to agree, then Purchaser, at its sole option and notwithstanding any other provision of this Agreement, upon notice to Seller, may rescind this Agreement and declare it to be of no further force and effect, in which event there shall be no Closing of this Agreement and all the terms and provisions of this Agreement shall be deemed null and void. If, prior to Closing, any of the real properties that are the subject of the leases mentioned herein are damaged or destroyed, then Purchaser may rescind this Agreement in the manner provided above unless arrangements for repair satisfactory to all parties involved are made prior to Closing. SECTION 12. INDEMNIFICATION AND SURVIVAL. 12.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement shall survive the Closing of this Agreement, except that any party to whom a representation or warranty has bee made in this Agreement shall be deemed to have waived any misrepresentation or breach of representation or warranty of which such party had knowledge prior to Closing. Any party learning of a misrepresentation or breach of representation or warranty under this Agreement shall immediately give written notice thereof to all other parties to this Agreement. The representations and warranties in this Agreement shall terminate two (2) years from the Closing Date, and such representations or warranties shall thereafter be without force or effect, except any claim with respect to which notice has been given to the party to be charged prior to such expiration date. Page 7 of 21 12.2 SELLER'S AND SELLER'S SHAREHOLDER'S INDEMNIFICATION. 12.2.1 Seller and Seller's Shareholder each hereby agree to indemnify and hold Purchaser, it successors, and assigns harmless from and against 12.2.2 Any and all claims, liabilities, and obligations of every kind and description, contingent or otherwise, arising out of or related to the operation of Seller's business prior to the close of business on the day before the Closing Date, except for claims, liabilities, and obligations of Seller expressly assumed by Purchaser under this Agreement or paid by insurance maintained by Seller, Seller's Shareholder, or Purchaser. 12.2.3 Any and all damage or deficiency resulting from any material misrepresentation, breach of warranty or covenant, or non-fulfillment of any agreement on the part of Seller and Seller's Shareholder under this Agreement. 12.2.4 Seller's and Seller's Shareholder's indemnity obligations shall be subject to the following: 12.2.5 If any claim is asserted against Purchaser that would give rise to a claim by Purchaser against Seller and Seller's Shareholder for indemnification under the provisions of this Section, then Purchaser shall promptly give written notice to Seller's Shareholder concerning such claim and Seller's Shareholder shall, at no expense to Purchaser, defend the claim. 12.2.6 Seller's Shareholder shall not be required to indemnify Purchaser for an amount that exceeds the total purchase price paid by Purchaser under Sections 3 and 5 of this Agreement. 12.3 PURCHASER'S INDEMNIFICATION. Purchaser agrees to defend, indemnify, and hold harmless Seller and Seller's Shareholder from and against: 12.3.1 Any and all claims, liabilities, and obligations of every kind and description arising out of or related to the operation of the business following Closing or arising out of Purchaser's failure to perform obligations of Seller assumed by Purchaser pursuant to this Agreement. 12.3.2 Any and all damage or deficiency resulting from any material misrepresentation, breach of warranty or covenant, or non-fulfillment of any agreement on the part of Purchaser under this Agreement. SECTION 13. DISSOLUTION OF SELLER. Seller agrees that after Closing Seller will liquidate completely and terminate its corporate existence. From and after the Closing Date, Seller will not engage in any business or other activity, except as required to complete its liquidation and dissolution. Nothing in this Agreement shall prevent Seller from dissolving promptly on or after the Closing Date. Page 8 of 21 SECTION 14. CLOSING. 14.1 DATE. This Agreement shall be closed as soon as practicable after (i) completion of the due diligence investigation contemplated; (ii) execution of this Agreement; (iii) satisfaction of all conditions to closing set forth in this Agreement; and (iv) receipt of any required approvals under Arizona and Nevada corporate law and any other required regulatory approvals. If Closing has not occurred on or prior to June 20, 1998, then any party may elect to terminate this Agreement. If, however, the Closing has not occurred because of a breach of contract by one or more parties, the breaching party or parties shall remain liable for breach of contract. 14.2 PLACE. Closing will take place at the law office of A.F. Schaffer, P.C., 2700 N. Central Avenue, Suite 1500, Phoenix, Arizona 85004. 14.3 OBLIGATIONS OF SELLER AND SELLER'S SHAREHOLDER AT THE CLOSING. At the Closing and coincidentally with the performance by Purchaser of its obligations described herein, Seller and Seller's Shareholder shall deliver to Purchaser the following: 14.3.1 All documents specified in the Exhibits referred to herein. 14.3.2 All documents which are required to effect transfer to Purchaser the Assets described herein. 14.4 OBLIGATIONS OF PURCHASER AT THE CLOSING. At the Closing and coincidentally with the performance by Seller and Seller's Shareholder of their obligations described in Section 19.2, Purchaser shall deliver to Seller the following: 14.4.1 a certified or cashiers check in the amount of $80,000. 14.4.2 Certificate for 300,000 Shares of Common Stock of Purchaser. SECTION 15. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING. 15.1 PRODUCT LIABILITY INSURANCE. Subsequent to the Closing, Purchaser will cause Seller and Seller's Shareholder to be carried as an insured party under all of Purchaser's insurance policies that provide product liability coverage Seller's Shareholder shall pay to Purchaser an amount equal to any increase, if any, in premiums occasioned by Purchaser's compliance with the provisions of this Section. 15.2 BOOKS AND RECORDS. This sale does not include the books of account and records of Seller's business. However, possession and custody of such books and records, except for Seller's general ledger, may be retained by Purchaser at the place of business Purchaser is acquiring from Seller under this Agreement for a period of six (6) months. During this period, Seller or its agents shall have access to such books and records and may make copies thereof. Purchaser will exercise reasonable care in the safekeeping of such records. Seller shall retain its general ledger but shall make it available Page 9 of 21 for inspection by Purchaser from time to time upon reasonable request. All books and records of Seller shall remain in Maricopa County for two (2) years from the date this Agreement is signed. 15.3 SELLER'S RIGHT TO PAY. In the event Purchaser fails to make any payment of taxes, assessments, insurance premiums, or other charges that Purchaser is required to pay to third parties under this Agreement, Seller shall have the right, but not the obligation, to pay the same. Purchaser will reimburse Seller for any such payment immediately upon Seller's demand, together with interest at the same rate provided in the Note from the date of Seller's payment until Purchaser reimburses Seller. Any such payment by Seller shall not constitute a waiver by Seller of any remedy available by reason of Purchaser's default for failure to make the payments. SECTION 16. DEFAULT. 16.1 REMEDIES. If Purchaser fails to perform any of the terms, covenants, conditions, or obligations of this Agreement then Seller, subject to the requirements of the notice provided in Section 19.2, shall have the right to exercise any remedy available. SECTION 17. BULK TRANSFERS. Purchaser waives compliance by Seller with the Arizona Bulk Transfers Article of the Uniform Commercial Code ("Bulk Transfers Article"). Except for those liabilities assumed by Purchaser, as provided in Section 1.2, in the event any creditor of Seller claims the benefit of the Bulk Transfers Article as against Purchaser or any of the Assets being conveyed to Purchaser under this Agreement, Seller and Seller's Shareholder shall immediately pay or otherwise satisfy such claim or undertake its defense. Seller and Seller's Shareholder shall indemnify and hold Purchaser harmless from and against any and all loss, expense, or damage resulting from the failure to comply with the Bulk Transfers Article. If Seller fails to comply with the provisions of this Section and Purchaser is required to pay any creditor of Seller in order to protect the property purchased under this Agreement from claims or liens of Seller's creditors, except those assumed by Purchaser, then Purchaser may offset the amount it pays against the balance due Seller on the Note by furnishing to the escrow agent proof of such payment in the form of a receipt from the creditor involved. SECTION 18. MISCELLANEOUS PROVISIONS. 18.1 AMENDMENT AND MODIFICATION. Subject to applicable law, this Agreement may be amended, modified, or supplemented only by a written agreement signed by all of the parties hereto. 18.2 NOTICES. All notices, requests, demands, and other communications required or permitted hereunder will be in writing and will be deemed to have been duly given when delivered by hand or two days after being mailed by certified or registered mail, return receipt requested, with postage prepaid: If to Purchaser, to: Copy to: David D. Westfere, President A.F. Schaffer, P.C. Precision Plastics Molding, Inc. 2700 N. Central Avenue, Suite 1500 2010 E. University Drive, Suite 3 Phoenix, AZ 85004 Tempe, AZ 85281 Page 10 of 21 If to Seller, to: Copy to: John O. Hoffman 5869 S. Kyrene Road, Suite 18 Tempe, AZ 85283 18.3 ATTORNEY FEES. In the event an arbitration, suit or action is brought by any party under this Agreement to enforce any of its terms, or in any appeal therefrom, it is agreed that the prevailing party shall be entitled to reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or appellate court. 18.4 LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. 18.5 COMPUTATION OF TIME. In computing any period of time pursuant to this Agreement, the day of the act, event or default from which the designated period of time begins to run shall be included, unless it is a Saturday, Sunday or a legal holiday, in which event the period shall begin to run on the next day which is not a Saturday, Sunday or legal holiday. 18.6 TITLES AND CAPTIONS. All section titles or captions contained in this Agreement are for convenience only and shall not be deemed part of the context nor affect the interpretation of this Agreement. 18.7 PRONOUNS AND PLURALS. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or persons may require. 18.8 ENTIRE AGREEMENT. This Agreement contains the entire understanding between and among the parties and supersedes any prior understandings and agreements among them respecting the subject matter of this Agreement. Any amendments to this Agreement must be in writing and signed by the party against whom enforcement of that amendment is sought. 18.9 AGREEMENT BINDING. This Agreement shall be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto. 18.10 ARBITRATION. If at any time during the term of this Agreement any dispute, difference, or disagreement shall arise upon or in respect of the Agreement, and the meaning and construction hereof, every such dispute, difference, and disagreement shall be referred to a single arbiter agreed upon by the parties, or if no single arbiter can be agreed upon, an arbiter or arbiters shall be selected in accordance with the rules of the American Arbitration Association and such dispute, difference, or disagreement shall be settled by arbitration in accordance with the then prevailing commercial rules of the American Arbitration Association, and judgment upon the award rendered by the arbiter may be entered in any court having jurisdiction thereof. Page 11 of 21 18.11 PRESUMPTION. This Agreement or any Section thereof shall not be construed against any party due to the fact that said Agreement or any Section thereof was drafted by said party. 18.12 FURTHER ACTION. The parties hereto shall execute and deliver all documents, provide all information and take or forbear from all such action as may be necessary or appropriate to achieve the purpose of the Agreement. 18.13 COUNTERPARTS. This Agreement may be executed in several counterparts and all so executed shall constitute one Agreement, binding on all the parties hereto even though all the parties are not signatories to the original or the same counterpart. 18.14 PARTIES IN INTEREST. Nothing herein shall be construed to be to the benefit of any third party, nor is it intended that any provision shall be for the benefit of any third party. 18.15 SAVINGS CLAUSE. If any provision of this Agreement, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby. The following parties hereby agree and approve all of the terms and conditions of this Agreement, by signing where indicated. Seller: Purchaser: PREMIER PLASTICS CORPORATION PRECISION PLASTICS MOLDING, INC. an Arizona corporation a Nevada corporation By: /s/ John O. Hoffman By: /s/ David D. Westfere ---------------------------- --------------------------------- John O. Hoffman, President David D. Westfere, President ----------------------------- John O. Hoffman, Seller's Shareholder DIAMOND EQUITIES, INC. [NOTARY SEAL OF MARCIE G. BROWN] /S/ Marcie G. Brown By: /s/ David D. Westfere ------------------------------- David D. Westfere, President EX-10.9 3 ASSET PURCHASE AND SALE AGREEMENT ASSET PURCHASE AND SALE AGREEMENT THIS ASSET PURCHASE AND SALE AGREEMENT ("Agreement"), is entered into effective July 15, 1998, among ACCURATE THERMOPLASTICS, INC., an Arizona corporation (the "Company"), DIAMOND EQUITIES, INC., a Nevada Corporation ("Diamond"), PRECISION PLASTICS, INC., a Nevada Corporation ("Precision"), a majority-owned subsidiary of Diamond, and Roy L. Thompson who is the holder of all of the capital stock of the Company (the "Selling Shareholder"). RECITALS: WHEREAS, the Company is engaged in the plastic injection molding business; and WHEREAS, Diamond, through Precision, desires to purchase and the Company desires to sell all of its right, title and interest in and to all or substantially all of the tangible and intangible assets utilized in the Company's business as now conducted (die "Assets"). NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Company, Diamond, Precision and the Selling Shareholder hereby agree as follows: COVENANTS: Subject to the terms and conditions of this Agreement, on the Closing Date, as defined in Paragraph 3, "Closing Date," the Company shall sell, convey, transfer and assign to Precision and Precision shall purchase from the Company, all of the Company's right, title and interest in and to the Assets, as described in Schedule 1.1, accounts receivable as of July 15, 1998 are set forth in Schedule 1. 1. 1. Precision shall assume the liabilities set forth in Paragraph 1, "Assumption of Liabilities" and pay the consideration set forth in Paragraph 2, "Purchase Price and Payment for Assets," to purchase the Assets. All of the Exhibits and Schedules referred to in this Agreement are made a part of this Agreement by this reference. 1. ASSUMPTION OF LIABILITIES. Subject to the terms and conditions of this Agreement, Precision shall assume certain specified liabilities and obligations of the Company and the Selling Shareholder as set forth in Schedule 2. 1, all outstanding purchase orders, all accounts payable as of July 15, 1998, as set forth in Schedule 2. 1. 1, and all liabilities incurred in the ordinary course of business, including employment responsibilities for the Company's employees, who become employees of Precision with the execution of this Agreement . Except as set forth in Paragraph 1, Precision shall not assume any other liabilities or obligations in connection with its purchase of the Assets 2. PURCHASE PRICE AND PAYMENT FOR ASSETS. Precision will acquire the Assets in consideration for payment of Five Hundred Sixty Thousand Dollars ($560,000) consisting of cash and a promissory note (the "Note") as set forth in Paragraph 2.1, and in consideration for the assumption by Precision of certain -1- liabilities as set forth in Paragraph 1. The purchase price ("Purchase Price") shall be allocated among the Assets according to Schedule 2.2. The Purchase Price will be subject to reduction as set forth in Paragraph 2.1.2. 2.1. Precision will pay the cash and issue the Note to the Selling Shareholder and the Company as follows: 2.1.1. Three Hundred Seventy Five Thousand Dollars ($375,000) in cash in the form of two cashiers checks, one in the amount of $300,000 made payable to Wilfried Solenthaler and one in the amount of $75,000 made payable to the Company; and 2.1.2. The Note, attached hereto as Exhibit A, in the principal amount of One Hundred Eighty Five Thousand Dollars ($185,000) bearing interest at the rate of 8.0% per annum. The principal and accrued interest thereon will be due and payable in one installment of One Hundred Five Thousand Dollars ($105,000) and one installment of Eighty Thousand Dollars ($80,000). The first payment will be made Ninety (90) days from the Closing ("Initial Maturity Date") and the second payment will be made One Hundred Eighty (180) days from the Closing ("Final Maturity Date"). The Note will be secured by the Assets. The security agreement securing the Note ("Security Agreement") will be in the form set forth as Exhibit B. The Purchase Price will be reduced and the principal amount of the Note will be subject to offset or reduction, as specified in the Note, to the extent any pre-existing security interests, liens, encumbrances, mortgages or charges of any nature whatsoever remain outstanding on the Final Maturity Date (or if a court of competent jurisdiction finds liability on behalf of Precision or Diamond for any amounts owed to Jerry Scruggs relating to the December 22, 1995 Agreement), and if Precision agrees to and does satisfy any such liability. 2.2. The Company will transfer title to the Assets to Precision subject to any pre-existing security interests, liens, encumbrances, mortgages, or charges as disclosed on Schedule 2.1 on the Closing. Further, the Company shall maintain its Corporate Records within Maricopa County for two years after the Closing. The term "Corporate Records" shall mean any and all records kept by the Company in its current and prior operations, including, but not limited to, the financial records, inventory records, all magnetic media, any transferable licenses issued by the federal government or any state or municipal government acquired by the Company in its current or prior operations and its tax returns. 3. CLOSING DATE. 3.1. As of the execution of this Agreement (the "Closing") the following shall occur or shall have occurred: 3.1.1 Consent of the Selling Shareholder and the Company to the transactions contemplated in this Agreement; 3.1.2 Receipt of a lease in a form satisfactory to Precision for the building in which the Assets are located; -2- 3.1.3. Satisfaction of all conditions to closing set forth in Paragraph 6, "Conditions Precedent to Obligations of Diamond and Precision," and Paragraph 7, "Conditions Precedent to the Obligations of the Company and the Selling Shareholder." 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDER. The acceptance of the Purchase Price by the Company and the Selling Shareholder shall constitute an affirmation by the Company and the Selling Shareholder of the truth, as of the Closing, of the representations and warranties made by the Selling Shareholder in this Agreement and the Selling Shareholder and the Company represent and warrant to Diamond and Precision that: 4.1. ORGANIZATION AND GOOD STANDING. The Company is a corporation duly organized and existing in good standing under the laws of the State of Arizona. The Company has full corporate power and authority to carry on its business as now conducted and to own or lease and operate the properties and assets now owned or leased and operated by it. The Company is duly qualified to transact business in the State of Arizona and in all states and jurisdictions in which the business or ownership of its property makes it necessary so to qualify (other than jurisdictions in which the nature of the property owned or business conducted, when considered in relation to the absence of serious penalties, renders qualification as a foreign corporation unnecessary as a practical matter). 4.2. CAPITALIZATION. The authorized capital stock of the Company consists solely of 400,000 shares of Common Stock, $1 par value per share, of which 1,750 shares are issued and outstanding ("Company Shares"), all of which shares are owned by the Selling Shareholder. 4.3. NO SUBSIDIARIES. The Company has no subsidiaries and does not own five percent (5 %) or more of the securities having voting power of any corporation (or would own such securities in such amount upon the closing of any existing purchase obligations for securities). 4.4. OWNERSHIP AND AUTHORITY. Except as set forth in Schedule 4.4, the Company is the sole owner of the Assets and has the requisite power and authority to own and transfer the Assets, to enter into this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company has been duly authorized by its Board of Directors. This Agreement is valid and binding upon the Company, and is enforceable against the Company in accordance with its terms, subject to bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium, receivership or other similar laws relating to or affecting creditors' rights generally. The execution, delivery and performance of this Agreement by the Company will not result in the violation or breach of any term or provision of charter instruments applicable to the Company or constitute a material default under any indenture, mortgage, deed of trust or other contract or agreement to which the Company is a party or by which the Company or the Assets are bound or will not cause the creation of a lien or encumbrance on the Assets except that contemplated under the Security Agreement. 4.5. LIABILITIES AND OBLIGATIONS. Except to the extent set forth in Schedule 4.5, the Company has no liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) secured by a pledge or a lien on the Assets. Precision shall assume only those obligations set forth in Paragraph 1. Any obligations listed in Schedule 4.5 shall be discharged and satisfied in full by the Company as of the Closing. -3- 4.6. FINANCIAL STATEMENTS. The Financial Statements (i) have been prepared from the books and records of the Company by Wheelwright Peterson PLC, an independent certified public accounting firm, (ii) fairly and accurately present the financial condition of the Company as of the dates thereof in conformity with federal tax accounting principals consistently applied, and (iii) contain and reflect all necessary adjustments for fair and accurate presentation of the financial condition as of such dates. Except as set forth in Schedule 4.6, there has not been any change between the date of the Financial Statements (June 30, 1998) and the date of this Agreement which has had or will have a material adverse effect on the financial position or results of operations of the Company. Except as and to the extent reflected or reserved against in such Financial Statements, or otherwise expressly disclosed therein, or except as disclosed in Paragraph 1, the Company has no liabilities or obligations, contingent or otherwise, of a nature required to be reflected in the Financial Statements in accordance with federal tax accounting principles consistently applied. 4.7. ABSENCE OF CERTAIN CHANGES. Except as disclosed on the Schedules hereto, during the period from June 30, 1998 through and including the Closing, the Company has not: 4.7.1. Suffered any material adverse change affecting its Assets, liabilities, financial condition or business; 4.7.2. Made any increase in the compensation payable or to become payable to any of its employees or agents except for increases which have historically been made in the ordinary course of business, or made any bonus payments, except for the bonuses which have historically been made in the ordinary course of business and those approved by Diamond, or compensation arrangements to or with any of its employees or agents, whether direct or indirect; 4.7.3. Paid or declared any dividends, distributions or other payments due or owing to the Selling Shareholder which will result in a reduction of the book value of the Company, calculated as of June 30, 1998 in accordance with federal tax accounting principles consistently applied, prior to or as of the Closing; 4.7.4. Sold or transferred any of its assets or canceled any indebtedness or claims owing to it, except in the ordinary course of business and consistent with its past practices; 4.7.5. Sold, assigned or transferred any formulas, inventions, patents, patent applications, trademarks, trade names, copyrights, licenses, computer programs or software, know-how or other intangible assets; 4.7.6. Amended or terminated any contract, agreement or license to which it is a party otherwise than in the ordinary course of business or as may be necessary or appropriate for the consummation of the transactions described herein; 4.7.7. Borrowed any money or incurred, directly or indirectly (as a guarantor or otherwise), any indebtedness in excess of $2,500, except in the ordinary course of business and consistent with its past practices; -4- 4.7.8. Except for the items listed on Schedule 4.5, discharged or satisfied any lien or encumbrance or paid any obligation or liability (absolute or contingent), other than current liabilities shown in the Financial Statements or current liabilities incurred since such date in the ordinary course of business, consistent with its past practices; 4.7.9. Mortgaged, pledged or subjected to lien, charge or other encumbrance any of its Assets, except in the ordinary course of business and consistent with its past practices; or 4.7.10. Entered into or committed to any other transaction other than in the ordinary course of business, consistent with past practices or as may be necessary or appropriate for the consummation of the transactions described herein. 4.8. TAXES. The Company (and any predecessor corporation or partnership as to which either of them is the transferee or successor) has timely filed, or has timely secured an extension and will (within the permitted extension) file, all tax returns, including federal, state, local and foreign tax returns, tax reports and forms, as to which the due date for filing is prior to the Closing; has reported all reportable income on such returns; has adopted and followed in the preparation of such returns methods of accounting accepted by law, and has not changed any methods of accounting without compliance with procedures required by law; has not deducted any expenses or charges or claimed any credits which are not allowable; and except as set forth in Schedule 4.8. 1, has paid, or accrued and reserved for, all taxes, penalties and interest shown to be due or required to be paid pursuant to the returns as filed, or as adjusted pursuant to amendment or correction. The Company shall also provide copies of all federal and state income and sales tax returns filed, FICA and state income taxes withholding returns filed and evidence of payment of such taxes as listed in Schedule 4.8.2 hereto. The Selling Shareholder has (i) paid or will pay by the Closing any property taxes owed with respect to the Assets through the Closing; and (ii) no knowledge of any deficiency or assertion of any deficiency relating to property taxes on the Assets. No examination, audit, or inquiry of any tax return, federal, state or otherwise of the Company is currently in progress and neither the Company nor the Selling Shareholder has received notice of intent to commence any inquiry, audit or examination of any tax return from any taxing authority. There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any tax return of the Company. 4.9. ASSETS. The Assets are located solely in the state of Arizona. Except as listed on Schedule 4.9, the Assets are either in good working order and condition or are marketable and will be delivered in the same state to Precision on the Closing. 4.10. TITLE TO THE ASSETS. The Company has good and marketable title to all of the Assets, free and clear of all security interests, liens, encumbrances, mortgages or charges of any nature whatsoever other than those liabilities disclosed on Schedule 2. 1. Any security interests, liens, encumbrances, mortgages or charges not set forth in Schedule 2.1 shall be discharged in full on or before the date of final payment under the Note ("Final Maturity Date") and evidenced by UCC Releases delivered by the Company on the Final Maturity Date. 4.11. ACCOUNTS RECEIVABLE. The Company is aware of no information that the amount of all accounts receivable, unbilled invoices and other debts due as recorded in the records and books of account of the Company as being due to the Company as of the Closing (less the amount of any provision or reserve therefor made in the records and books of the account of the Company) will not be good and -5- collectible in full in the ordinary course of business in accordance with past practices; and none of such accounts receivable or other debts is or will at the Closing be subject to any counterclaim or offset except to the extent of any such provision or reserve. There have been no material adverse changes since June 30, 1998 in the amount of accounts receivable or other debts due the Company or the allowances with respect thereto, or accounts payable of the Company from that reflected in the Financial Statements. 4.12. MATERIAL DOCUMENTS. Set forth in Schedule 4.12 is a complete list of all material documents to which the Company is a party. All such documents listed on and attached to Schedule 4.12 are valid, enforceable and accurate and complete copies of such material documents (or, with the consent of Precision, forms thereof) as have been requested by Precision have been provided to the Precision. Except as disclosed in Schedule 4.12, the Company is not or will not be, merely with the passage of time, in default under any such material document nor is there any requirement for any of such material documents to be novated or to have the consent of the other contracting party in order for such material documents to be valid, effective and enforceable by Precision after the Closing as it was immediately prior thereto. 4.13. INTELLECTUAL PROPERTIES. The Company has no interest in and owns no domestic and foreign letters, patent, patents, patent applications, patent licenses, software licenses and know how licenses, trade names, trademarks, copyrights, unpatented inventions, service mark registrations and applications and copyright registrations and applications owned or used by the Company in the operation of its business (collectively, the "Intellectual Property"). 4.14. NO DEFAULT. Except as provided on Schedule 4.14, the Company and the Selling Shareholder are not in default under any provision of any material contract, commitment, or agreement respecting the Company, the Assets or the capital stock of the Company to which the Company or the Selling Shareholder are parties or by which they are bound. 4.15. LITIGATION. Except as set forth in Schedule 4.15, there are no actions, claims or proceedings pending or threatened before any court, administrative agency or governmental body against the Company, the Assets, or the Company's employees which may have a material adverse effect on the Company, the Assets, or the Company's financial condition. 4.16. EMPLOYEES. Schedule 4.16 hereto sets forth the name and current monthly salary and any accrued benefit for each employee of the Company as of the Closing. 4.17. COMPLIANCE WITH LAWS. The Company has conducted and is continuing to conduct its business in compliance with, and is in compliance with, all applicable statutes, orders, rules and regulations promulgated by governmental authorities relating in any respect to its operations, conduct of business or use of properties, including, without limitation, any applicable statute, order, rule or regulation relating to (i) wages, hours, hiring, nondiscrimination, retirement, benefits, pensions, working conditions, and worker safety and health; (ii) air, water, toxic substances, noise, or solid, gaseous or liquid waste generation, handling, storage, disposal or transportation; (iii) zoning and building codes; (iv) the production, storage, processing, advertising, sale, distribution, transportation, disposal, use and warranty of products; or (v) trade and antitrust regulations. The execution, delivery and performance of this Agreement by the Selling Shareholder and the Company and the consummation by the Selling Shareholder and the Company of the transactions contemplated by this Agreement will not, separately or jointly, -6- violate, contravene or constitute a default under any applicable statutes, orders, rules and regulations promulgated by governmental authorities or cause a lien on any property used, owned or leased by the Company to be created thereunder. There are no proposed changes in any applicable statutes, orders, rules and regulations promulgated by governmental authorities that would cause any representation or warranty contained in this Paragraph 4.17 to be untrue or have an adverse effect on its operations, conduct of business or use of properties. 4.18. FILINGS. The Company and the Selling Shareholder have made all filings and reports required under all local, state and federal laws with respect to its business and of any predecessor entity or partnership, except filings and reports in those jurisdictions in which the nature of the property owned or business conducted, when considered in relation to the absence of serious penalties, renders the required filings or reports unnecessary as a practical matter. 4.19. CERTAIN ACTIVITIES. The Company has not, directly or indirectly, engaged in or been a party to any of the following activities: 4.19.1 Bribes, kickbacks or gratuities to any person or entity, including domestic or foreign government officials or any other payments to any such persons or entity, whether legal or not legal, to obtain or retain business or to receive favorable treatment of any nature with regard to business (excluding commissions or gratuities paid or given in full compliance with applicable law and constituting ordinary and necessary expenses incurred in carrying on its business in the ordinary course); 4.19.2 Contributions (including gifts), whether legal or not legal, made to any domestic or foreign political party, political candidate or holder of political office; 4.19.3 Holding of or participation in bank accounts, funds or pools of funds created or maintained in the United States or any foreign country, without being reflected on the corporate books of account, or as to which receipts or disbursements therefrom have not been reflected on such books, the purpose of which is to obtain or retain business or to receive favorable treatment with regard to business; 4.19.4 Receiving or disbursing monies, the actual nature of which has been improperly disguised or intentionally misrecorded on or improperly omitted from the corporate books of account; 4.19.5 Paying fees to domestic or foreign consultants or commercial agents which exceed the reasonable value of the ordinary and customary consulting and agency services purported to have been rendered; 4.19.6 Paying or reimbursing (including gifts) personnel of the Company for the purpose of enabling them to expend time or to make contributions or payments of the kind or for the purposes referred to in Paragraphs 4.19.1 through 4.19.5 above; 4.19.7 Participating in any manner in any activity which is illegal under the international boycott provisions of the Export Administration Act, as amended, or the international boycott provisions of the Internal Revenue Code, or guidelines or regulations thereunder; and -7- 4.19.8 Making or permitting unlawful charges, mischarges or defective or fraudulent pricing under any contract or subcontract under a contract with any department, agency or subdivision thereof, of the United States government, state or municipal government or foreign government. 4.20. EMPLOYMENT RELATIONS. The Company is in compliance with all federal, state or other applicable laws, domestic or foreign, respecting employment and employment practices, terms and conditions of employment and wages and hours, and has not and is not engaged in any unfair labor practice which would result in a material adverse effect on the Company; no unfair labor practice complaint against the Company is pending before the National Labor Relations Board; there is no labor strike, dispute, slow down or stoppage actually pending or threatened against or involving the Company; no labor representation question exists respecting the employees of the Company; no grievance which might have an adverse effect upon the Company or the conduct of its business exists; no arbitration proceeding arising out of or under any collective bargaining agreement is currently being negotiated by the Company; and the Company has not experienced any material labor difficulty during the last three (3) years. 4.21. INSURANCE COVERAGE. The policies of fire, liability or other forms of insurance of the Company are described in Schedule 4.21. 4.22. CHARTER AND BYLAWS. The Company has heretofore delivered to Precision true, accurate and complete copies of the Articles of Incorporation and Bylaws of the Company, together with all amendments to each of the same as of the date hereof. 4.23. CORPORATE MINUTES. The minute books of the Company made available to Precision at the Closing are the correct and only such minute books and do and will contain complete and accurate records of any and all proceedings and actions at all meetings, including written consents executed in lieu of meetings of its shareholders, Board of Directors and committees thereof through the Closing. The stock records of the Company delivered to Precision at the Closing are the correct and only such stock records and accurately reflect all issues and transfers of record of the capital stock of the Company. 4.24. DEFAULT ON INDEBTEDNESS. The Company is not in monetary default or in material default in any other respect under any evidence of indebtedness for borrowed money. 4.25. INDEBTEDNESS. Except as described in Schedule 4.25, the Selling Shareholder and any corporation or entity with which he is affiliated are not indebted to the Company, and the Company has no indebtedness or liability to the Selling Shareholder or any corporation or entity with which he is affiliated. 4.26. AGREEMENTS, JUDGMENT AND DECREES AFFECTING THE COMPANY AND THE SELLING SHAREHOLDER. The Company and the Selling Shareholder jointly and severally represent and warrant that the Selling Shareholder and the Company are not subject to any agreement, judgment or decree adversely affecting their or its ability to enter into this Agreement, to consummate the transactions contemplated herein, or, to continue as employees or consultants of the Company after Closing. The Company and the Selling Shareholder further represent and warrant that there are no laws or regulations prohibiting the consummation of the transactions contemplated by this Agreement. -8- 4.27. GOVERNMENTAL APPROVALS. No consent, approval or authorization of, or notification to or registration with, any governmental authority, either federal, state or local, is required in connection with the execution, delivery and performance of this Agreement by the Selling Shareholder or the Company. 4.28. COMPLETENESS OF REPRESENTATIONS AND SCHEDULES. The Schedules hereto, where applicable to the Selling Shareholder and the Company, completely and correctly present in all material respects the information required by this Agreement. This Agreement, the certificates to be delivered by the Company and the Selling Shareholder at the Closing, the Schedules and the representations and warranties contained in this Paragraph 4, and the documents and written information pertaining to the Company furnished to Precision or its agents by or on behalf of the Selling Shareholder or the Company, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make this Agreement, or such certificates, schedules, documents or written information not misleading. 5. REPRESENTATIONS AND WARRANTIES OF DIAMOND AND PRECISION. Diamond and Precision represent and warrant to the Selling Shareholder and the Company that: 5.1. ORGANIZATION AND GOOD STANDING. 5.1.1. Precision is a corporation duly organized and existing in good standing under the laws of the State of Nevada. Precision has full corporate power and authority to carry on its business as now conducted. Precision is duly qualified to transact business in the States of Arizona and Nevada and in all states and jurisdictions in which the business or ownership of the Assets makes it necessary so to qualify (other than jurisdictions in which the nature of the property owned or business conducted, when considered in relation to the absence of serious penalties, renders qualification as a foreign corporation unnecessary as a practical matter). 5.1.2. Diamond is a publicly held company and is a reporting company under the Securities Exchange Act of 1934 as amended ("Exchange Act"). All reports due under the Exchange Act have been filed as of the date of this Agreement and are true, correct and complete in all material respects. 5.2. CAPACITY. Precision represents and warrants to the Company and the Selling Shareholder that Precision has read and understands this Agreement, has consulted legal and accounting representatives to the extent deemed necessary and has the capacity to enter into this Agreement and to carry out the transactions contemplated hereby without the consent of any third party. 5.3. FINDERS. No agent, broker, person or firm acting on behalf of Diamond or Precision is, or will be, entitled to any commission or broker's or finder's fees from any of the parties to this Agreement, or from any person controlling, controlled by or under common control with any of the parties to this Agreement, in connection with any of the transactions contemplated in this Agreement. 5.4. AUTHORITY AND CONSENT. The execution, delivery and performance of this Agreement by Diamond and Precision have been duly authorized by their respective Boards of Directors. This Agreement is valid and binding upon Diamond and Precision, and is enforceable against Diamond and Precision in accordance with its terms, subject to bankruptcy, reorganization, insolvency, fraudulent -9- conveyance, moratorium, receivership or other similar laws relating to or affecting creditors' rights generally. 5.5. VALIDITY OF AGREEMENT. Neither the execution nor the delivery of this Agreement by Diamond and Precision, nor the performance by Diamond and Precision of any of the respective covenants or obligations to be performed by Diamond and Precision hereunder, will result in any violation of any order, decree or judgment of any court or other governmental body, or statute or law applicable to Diamond or Precision, or in any breach of any terms or provisions of either the Articles of Incorporation or Bylaws of Diamond or Precision, or constitute a default under any indenture, mortgage, deed of trust or other contract to which Diamond or Precision is a party or by which Diamond or Precision is bound. 5.6. GOVERNMENT APPROVALS. No consent, approval or authorization of, or notification to or registration with, any governmental authority, either federal, state or local, is required in connection with the execution, delivery and performance of this Agreement by Diamond or Precision. 5.7. FINANCIAL STATEMENTS AND PUBLIC REPORTS. The audited consolidated financial statements of Diamond for the fiscal years ended June 30, 1997 and 1996, with accompanying notes, all as contained in Diamond's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997, and the financial statements contained in Diamond's Quarterly Reports on Form 10-QSB for the three months and nine month periods ended March 31, 1998, delivered to the Selling Shareholder, fairly and accurately present, in all material respects, the financial position of Diamond at such dates, the results of its operation and changes in its financial position for the periods and years ended on such dates, in conformity with generally accepted accounting principles consistently applied. Such financial statements will contain and reflect all necessary adjustments for a fair and accurate presentation of the financial condition as of the date of such statements. 5.8. SUBSIDIARIES. Precision is Diamond's only subsidiary as of the date of this Agreement. Diamond owns a majority of the outstanding capital stock of Precision. 5.9. COMPLETENESS OF REPRESENTATIONS AND SCHEDULES. The Schedules and Exhibits hereto completely and correctly present in all material respects the information required by this Agreement. This Agreement, the certificates to be delivered by the officers of Diamond and Precision at the Closing, any Schedules and Exhibits to be delivered under this Agreement and the representations and warranties of this Paragraph 5, and the documents and written information pertaining to Diamond furnished to the Company or its agents and the Selling Shareholder by or on behalf of Diamond, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make this Agreement, or such certificates, schedules, documents or written information, not misleading. 6. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF DIAMOND AND PRECISION . The Closing of this Agreement by Diamond and Precision is in recognition that the following conditions have been, or will be, fulfilled: -10- 6.1. TITLE. 6.1.1 At or prior to the Closing, there shall have been delivered to Precision appropriate bills of sales, assignments and other instruments giving and conveying to Diamond all right, title and interest in and to the Assets described or referred to in Schedule 1.1. 6.1.2 At or prior to the Final Maturity Date, there shall have been delivered to Precision, duly executed UCC-2 Releases, as described in Paragraph 4.10, "Title to the Assets," of this Agreement, or evidence that no liens have been recorded against the Assets and consents to the assignment and transfer by the Company to Precision of all rights of the Company in and to all contracts, agreements, commitments and other assets to be assigned and transferred to Precision hereunder in all instances in which the same may be necessary to vest in Precision all of Company's right title and interest therein and thereto. 6.2. CONSENT OF PRINCIPAL CUSTOMERS. Prior to Closing, the Company shall have obtained all approvals in conjunction with the transfer of the Assets to Precision as may be required by any contracts between the Company and any of its principal customers and such approvals shall be issued in written form and substance satisfactory to Diamond and their counsel or Diamond shall have waived such requirements. 6.3. POSSESSION. The Company and the Selling Shareholder shall deliver to Precision possession of the Assets, including any consents of any third parties required to the sale and transfer of the Assets. 6.4. CONSULTING AGREEMENT. As of the Closing, Roy L. Thompson shall have entered into a consulting and non-compete agreement with Precision in the form attached hereto as Exhibit C. 6.5. PRIVATE PLACEMENT. The Company will provide Diamond with all the information regarding the Company required by Diamond in connection with Diamond's preparation of any private placement of Diamond's debt or equity securities. 6.6. FINANCIAL AND OTHER CONDITIONS. The Company shall have no contingent or other liabilities connected with its business, except as disclosed in the Financial Statements and as described in Paragraph 1. The review of the business, premises and operations of the Company and the Financial Statements by Precision at its expense shall not have revealed any matter which, in the sole judgment of Precision, makes the acquisition on the terms herein set forth inadvisable for Precision. 6.7. LEGAL PROHIBITION. There are no injunctions or final judgments, laws or regulations prohibiting the consummation of the transactions contemplated by this Agreement. 6.8. ALL CONTRACTS CONTINUED. All lines of credit, debts, fumcing arrangements, leases and other contracts of the Company shall be acceptable to Precision and shall continue under their present terms and conditions in Precision's name after the Closing and all approvals relating to the sale of the Assets, and to effect the transactions contemplated hereby, required by the foregoing instruments and arrangements shall have been obtained by the Closing. 6.9. DISMISSAL OF BANKRUPTCY. Precision shall have received a copy of the order from the bankruptcy court with jurisdiction over the Company's prior bankruptcy of such bankruptcy's dismissal, closure or final decree. -11- 7. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY AND THE SELLING SHAREHOLDER. The Closing of this Agreement by the Company and the Selling Shareholder is in recognition that the following conditions have been, or will be, fulfilled: 7.1. EXECUTION AN APPROVAL OF AGREEMENT. Diamond and Precision shall have duly executed and delivered this Agreement to the Company and the Selling Shareholder. 7.2. PAYMENT. Subject to the terms and conditions hereof, Precision shall have delivered the cash, executed the Note and assumed the Liabilities of the Company and the Selling Shareholder in exchange for the Assets as described in Paragraph 3, "Purchase Price. " 7.3. CONSULTING AGREEMENT. As of the Closing, Roy L. Thompson shall have entered into a consulting and non-compete agreement with Precision in the form attached hereto as Exhibit C. 7.4. REPRESENTATIONS AND WARRANTIES. The representations and warranties made to the Company and the Selling Shareholder in this Agreement or in any document, statement, list or certificate furnished pursuant hereto shall be true and correct as of the Closing. 8. INDEMNIFICATION. 8.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS. The representations and warranties made by the parties in this Agreement and all of the covenants of the parties in this Agreement, shall survive the execution and delivery of this Agreement and the Closing and shall expire on the third anniversary of the Closing. Any claim for indemnification shall be effective only if notice of such claim is given by the party claiming indemnification or other relief to the party against whom such indemnification or other relief is claimed on or before the third anniversary of the Closing. 8.2. INDEMNIFICATION BY PRECISION. 8.2.1 Precision agrees to indemnify and hold the Company and the Selling Shareholder harmless, from and after the Closing, against and in respect of all matters in connection with any losses, liabilities, costs or damages (including reasonable attorneys' fees) incurred by the Selling Shareholder that result from Precision's business operations and/or any misrepresentation or breach of the warranties by Diamond and Precision in Paragraph 5, "Representations and Warranties of Diamond and Precision, " or any breach or non-fulfillment of any agreement or covenant on the part of Precision contained in this Agreement, and all suits, actions, proceedings, demands, judgments, costs and expenses incident to the foregoing matters, including reasonable attorneys' fees. 8.2.2. In no event shall Precision's liability under Paragraph 8.2.1 above to the Company and the Selling Shareholder (other than for costs and reasonable attorneys' fees incurred by such Selling Shareholder to which they may be entitled pursuant to Paragraph 8.4 or 9.3) collectively exceed the Purchase Price. No claim for indemnification may be made under this Paragraph 9 after the third anniversary of the Closing. -12- 8.3. INDEMNIFICATION BY THE SELLING SHAREHOLDER. 8.3.1. The Selling Shareholder agrees to indemnify and hold Diamond and Precision harmless, from and after the Closing, against and in respect of all matters in connection with any losses, liabilities or damages (including reasonable attorneys' fees) incurred by Diamond or Precision resulting from any misrepresentation or breach of their warranties in Paragraph 4, "Representations and Warranties of the Company and the Selling Shareholder," or any breach or non-fulfillment of any agreement or covenant on the part of the Company and the Selling Shareholder contained in this Agreement and all suits, actions, proceedings, demands, judgments, costs and expenses incident to the foregoing matters, including reasonable attorneys' fees. 8.3.2. Notwithstanding the provisions of Paragraph 8.3. 1 above, Precision shall be entitled to seek indemnification from the Selling Shareholder pursuant to Paragraph 8.3.1 only for the portion of the aggregate of the losses, liabilities, costs and damages (including reasonable attorneys' fees) incurred by Precision which it would be entitled to claim under such Paragraph 8.3.1 that in the aggregate exceeds $10,000. Upon such occurrence, the collective liability of the Selling Shareholder under Paragraph 8.3.1 above to Precision (other than for costs and reasonable attorneys' fees incurred by Precision to which it may be entitled pursuant to Paragraphs 8.4 or 10.3) will not exceed the Purchase Price paid to the Company and the Selling Shareholder. No claim for indemnification may be made under this Paragraph 8 after the third anniversary of the Closing 8.4. ARBITRATION. If Precision believes that a matter has occurred that entitles it to indemnification under Paragraph 8.3, "Indemnification by the Selling Shareholder," or the Selling Shareholder believes that a matter has occurred that entitles them to indemnification under Paragraph 8.2, "Indemnification by Precision," Precision or the Selling Shareholder, as the case may be (the "Indemnified Party"), shall give written notice to the party or parties against whom indemnification is sought (each of whom is referred to herein as an "Indemnifying Party") describing such matter in reasonable detail. The Indemnified Party shall be entitled to give such notice prior to the establishment of the amount of its losses, liabilities, costs or damages and to supplement its claim from time to time thereafter by further notices as they are established. Each Indemnifying Party shall send a written response to such claim for indemnification within thirty (30) days after receipt of the claim stating its acceptance or objection to the indemnification claim, and explaining its position in respect thereto in reasonable detail. If such Indemnifying Parry does not timely so respond, it will be deemed to have accepted the Indemnified Party's indemnification claim as specified in the notice given by the Indemnified Party. If the Indemnifying Party gives a timely objection notice, then the parties will negotiate in good faith to attempt to resolve the dispute, and upon the expiration of an additional thirty (30) day period from the date of the objection notice or such longer period as to which the Indemnified and Indemnifying Parties may agree, any such dispute shall be submitted to arbitration in Phoenix, Arizona to a member of the American Arbitration Association mutually appointed by the Indemnified Party and Indemnifying Party (or, in the event the Indemnified Party and Indemnifying Party cannot agree on a single such member, to a panel of three members of such Association selected in accordance with the rules of such Association), who shall promptly arbitrate such dispute in accordance with the rules of such Association and report to the parties upon such disputed items, and such report shall be final, binding and conclusive on the parties. Judgment upon the award by the arbitrator(s) may be entered in any court having jurisdiction. The prevailing party in any such arbitration shall be entitled to recover from, and have paid by, the other party hereto all fees and disbursements of -13- such arbitrator or arbitrators. For this purpose, a party shall be deemed to be the prevailing party only if such party would be deemed to be a prevailing party under Paragraph 10.1.3. 8.5. NO FINDERS. Precision represents and warrants to the Company and the Selling Shareholder and the Company and the Selling Shareholder represent and warrant that there are no obligations to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. Precision agrees to indemnify and hold the Selling Shareholder harmless from any breach of Precision's representation in the previous sentence, and the Selling Shareholder agrees to indemnify and hold Precision harmless from any breach of his representation in the previous sentence. The parties acknowledge that Lerrin may seek a commission and Diamond and Precision acknowledge that the Company and the Selling Shareholder deny that such commission is owed. In the event that Lerrin seeks such a commission, the Company and the Selling Shareholder agree to indemnify Diamond and Precision against any fees claimed by Lerrin to be owed by Diamond or Precision. In addition, the Company and the Selling Shareholder agree to pay all costs and expenses, including without limitations any legal fees associated with the defense of any suit or proceeding brought by Lerrin against Diamond or Precision with respect to any finder's fee. 8.6. THIRD PERSON CLAIM PROCEDURES. If any third person asserts a claim against an Indemnified Party for an indemnifiable event, the Indemnified Party shall promptly (but in no event later than ten (10) days prior to the time at which an answer or other responsive pleading or notice with respect to the claim is required) notify the Indemnifying Party of such claim. The Indemnifying Party shall have the right, at its election, to take over the defense or settlement of such claim by giving prompt notice to the Indemnified Party that it will do so, such election to be made and notice given in any event at least five (5) days prior to the time at which an answer or other responsive pleading or notice with respect thereto is required. If the Indemnifying Party makes such election, the Indemnifying Party may conduct the defense of such claim through counsel of its choosing (subject to the Indemnified Party's approval, not to be unreasonably withheld), will be responsible for the expenses of such defense, and shall be bound by the results of its defense or settlement of the claim to the extent it produces damage or loss to the Indemnified Party. The Indemnifying Party shall not settle such claims without prior notice to and consultation with the Indemnified Party, and no such settlement involving any injunction or material and adverse effect on the Indemnified Party may be agreed to without its consent. As long as the Indemnifying Party is diligently contesting any such claim in good faith, the Indemnified Party shall not pay or settle any such claim. If the Indemnifying Party does not make such election, or having made such election does not proceed diligently to defend such claim prior to the time at which an answer or other responsive pleading or notice with respect thereto is required, or does not continue diligently to contest such claim, then the Indemnified Party may take over defense and proceed to handle such claim in its exclusive discretion, and the Indemnifying Party shall be bound by any defense or settlement that the Indemnified Party may make in good faith with respect to such claim. The parties agree to cooperate in defending such third party claims, an d the defending party shall have access to records, information and personnel in control of the other part which are pertinent to the defense thereof. 8.7. LIMITATION OF REMEDIES. No party to this Agreement shall be liable to any other party or parties or have any remedies against any other party or parties under this Agreement other than as provided in Paragraph 8, "Indemnification, " and Paragraph 9, "Termination." The parties understand that this requires that all disputed claims shall be submitted to arbitration in accordance with Paragraph 8.4, "Arbitration. " -14- 8.8. INDEMNIFICATION LIMITS. The indemnification rights and obligations of the parties shall cease with respect to any matter as to which notice has not been given to the Indemnifying Parry prior to the third anniversary of the Closing. The maximum amount for which an Indemnifying Party shall be liable for is the Purchase Price paid to the Company and the Selling Shareholder under this Agreement, as described under Paragraph 3, "Purchase Price." 9. EXPENSES AND TRANSFER TAXES. 9.1. Precision shall be solely responsible for paying its own expenses and costs incident to the preparation of this Agreement and to the consummation of the transactions contemplated by this Agreement, and shall have no obligation for paying such expenses or costs of the other parties. 9.2. The Company and the Selling Shareholder shall be solely responsible for paying their own expenses and costs incident to the preparation of this Agreement and to the consununation of the transactions contemplated by this Agreement. The Company and the Selling Shareholder shall have no obligation to reimburse the expenses or costs of Precision. 9.3. Notwithstanding any of the other provisions hereof, in the event of arbitration and/or litigation with respect to the interpretation or enforcement of this Agreement or any provisions hereof, the prevailing party in any such matter shall be entitled to recover from the other party their or its reasonable costs and expense, including reasonable attorneys' fees, incurred in such arbitration and/or litigation. For purposes of this subparagraph 9.3, a party shall be deemed to be the prevailing party only if such party (A)(i) receives an award or judgment in such arbitration and/or litigation for more than 50 % of the disputed amount involved in such matter, or (ii) is ordered to pay the other party less than 50 % of the disputed amount involved in such matter or (B)(i) succeeds in having imposed a material equitable remedy on the other party (such as an injunction or order compelling specific performance), or (ii) succeeds in defeating the other party's request for such an equitable remedy. 9.4. Precision, the Company and the Selling Shareholder do not believe any sales or transfer taxes will be due as a result of the sale and transfer of the Assets as contemplated in this Agreement. Precision shall, however, pay any sales or transfer taxes which may become due on the sale or transfer of the Assets under this Agreement. 10. RISK OF LOSS. The risk of loss or destruction of all or any part of the Assets prior to the Closing from any cause (including, without limitations fire, theft, acts of God or public enemy) shall be upon the Company and the Selling Shareholder. Such risk shall be upon Precision if such loss occurs after the Closing. 11. NODFICATION OF CLAIMS. Each party will promptly notify the other of any third party claims against any party relating to the Company or the Assets of which it receives knowledge or notice so as to permit such party an opportunity to prepare a timely defense to such claim or to attempt settlement. 12. MISCELLANEOUS. 12.1 BINDING AGREEMENT. The parties covenant and agree that this Agreement, when executed and delivered by the parties, will constitute a legal, valid and binding agreement between the -15- parties and will be enforceable in accordance with its terms. 12.2. ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto, their legal representatives, successors and assigns. 12.3. ENTIRE AGREEMENT. This Agreement and its exhibits and schedules constitute the entire contract among the parties hereto with respect to the subject matter thereof, superseding all prior communications and discussions and no party hereto shall be bound by any communication on the subject matter hereof unless such is in writing signed by any necessary party thereto and bears a date subsequent to the date hereof. The exhibits and schedules shall be construed with and deemed as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. Information set forth in any exhibit, schedule or provision of this Agreement shall be deemed to be set forth in every other exhibit, schedule or provision of this Agreement and therefore shall be deemed to be disclosed for all purposes of this Agreement. 12.4. MODIFICATION. This Agreement may be waived, changed, amended, discharged or terminated only by an agreement in writing signed by the party against whom enforcement of any waiver, change, amendment, discharge or termination is sought. 12.5. NOTICES. All notices, requests, demands and other communications shall be deemed to have been duly given three (3) days after postmark of deposit in the United States mail, if mailed, certified or registered mail, postage prepaid: ` If to the Company or the Selling Shareholder: Roy L. Thompson 1121 Gold Nugget Lane Payson, Arizona 85541 With copy to: Timothy D. Ronan Ronan & Firestone, PLC 649 North Second Avenue Phoenix, Arizona 85003 Michael Barry Meyer, Hendricks, Bivens & Moyes, P.A. 3003 North Central Avenue, Suite 1200 Phoenix, Arizona 85012-2200 If to Diamond or Precision: Diamond Equities, Inc. 2010 E. University Drive, Suite #3 Tempe, Arizona 85281 Attn: David D. Westfere, President -16- With a copy to: Christian J. Hoffnann, III Streich Lang, P.A. Renaissance One Two N. Central Avenue Phoenix, Arizona 85004-2391 or to such other address as any party shall designate to the other in writing. The parties shall promptly advise each other of changes in addresses for such notices. 12.6. CHOICE OF LAW. This Agreement shall be governed by, construed, interpreted and enforced according to the laws of the State of Arizona. 12.7. SEVERABILITY. If any portion of this Agreement shall be finally determined by any court or governmental agency of competent jurisdiction to violate applicable law or otherwise not to conform to requirements of law and, therefore, to be invalid, the parties will cooperate to remedy or avoid the invalidity, but, in any event, will not upset the general balance of relationships created or intended to be created between them as manifested by this Agreement and the instruments referred to herein. Except insofar as it would be an abuse of the foregoing principle, the remaining provisions hereof shall remain in full force and effect. 12.8. OTHER DOCUMENTS. The parties shall upon reasonable request of the other, execute such documents as may be necessary or appropriate to carry out the intent of this Agreement. 12.9. HEADINGS AND THE USE OF PRONOUNS. The paragraph headings hereof are intended solely for convenience of reference and shall not be construed to explain any of the provisions of this Agreement. All pronouns and any variations thereof and other words, as applicable, shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or matter may require. 12.10. TIME IS OF THE ESSENCE. Time is of the essence of this Agreement. 12.11. NO WAIVER AND REMEDIES. No failure or delay on a parties part to exercise any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by a party of a right or remedy hereunder preclude any other or further exercise. No remedy or election hereunder shall be deemed exclusive but it shall, where ever possible, be cumulative with all other remedies in law or equity. 12.12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, and by the different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -17- 12.13. FURTHER ASSURANCES. Each of the parties hereto shall use commercially practicable efforts to fulfill all of the conditions set forth in this Agreement over which it has control or influence (including obtaining any consents necessary for the performance of such party's obligations hereunder) and to consummate the transactions contemplated hereby, and shall execute and deliver such further instruments and provide such documents as necessary to effect this Agreement. 12.14. RULES OF CONSTRUCTION. The normal rules of construction which require the terms of an agreement to be construed most strictly against the drafter of such agreement are hereby waived since each party have been represented by counsel in the drafting and negotiation of this Agreement. 12.15 THIRD PARTY BENEFICIARIES. Each party hereto intends this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK] -18- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: PRECISION: ACCURATE THERMOPLASTICS, INC. PRECISION PLASTICS, INC. a Florida Corporation a Nevada corporation /s/ Roy Thompson /s/ David D. Westfere - ------------------------------- --------------------------------- By Roy Thompson By David D. Westfere Its President Its President Diamond: SELLING SHAREHOLDER: DIAMOND EQUITIES, INC. a Nevada corporation /s/ Roy Thompson /s/ David D. Westfere - ------------------------------- --------------------------------- Roy L. Thompson By David D. Westfere Its President -19- EX-10.10 4 PREFERRED STOCK EXCHANGE AGREEMENT PREFERRED STOCK EXCHANGE AGREEMENT This Agreement is entered into as of this 28th day of October, 1997 between Diamond Equities, Inc. ("DEI"), a Nevada Corporation, and Dingaan Holdings, S.A. ("Dingaan"). RECITALS WHEREAS, Dingaan holds 727 shares of Series A 6% Preferred Stock ("Series A Stock") of DEI and, WHEREAS, DEI desires to exchange a new series of preferred stock without dividends for the Series A Stock and, WHEREAS, Dingaan has agreed to such an exchange, NOW THEREFORE, in consideration of the premises contained in the recitals, the parties agree as follows: AGREEMENT SECTION 1. SERIES A STOCK. 1.1 The Series A Stock presently held by Dingaan have a stated value of $1,817,591.00 (one million eight hundred seventeen thousand, five hundred ninety one dollars). 1.2 Cumulative Dividends are at 6% payable annually, and are presently in arrears in the amount of $194,023.00 (one hundred ninety three thousand and twenty three dollars). 1.3 The Series A Stock is convertible at the option of the holder at a rate equal to 75% (seventy five percent) of the average bid price of the common shares for the ten (10) days prior to the conversion date. 1.4 The Series A Stock is redeemable by DEI at the cash price paid for the shares plus the amount of any dividends accumulated and unpaid as of the date of the redemption. SECTION 2. OWNERSHIP. 2.1 Dingaan confirms that its ownership of the Series A Stock is unencumbered and that it is able to pass clear title to the shares to DEI on the Closing Date. SECTION 3. AUTHORIZATION AND EXCHANGE OF SERIES A STOCK FOR NEW SERIES B PREFERRED STOCK. 3.1 The Board of Directors of DEI has, by resolution dated September 24, 1997, authorized the issuance and exchange of a new Series B Preferred Stock for its existing Series A Stock. 3.2 Twenty thousand (20,000) shares of the Series B Stock shall be valued at $1,817,591.00 (one million, eight hundred seventeen thousand, five hundred and ninety one dollars), plus the Series A stock dividends in arrears in the amount of $194,023.00, for a total value of $2,011, 614.00 (two million, eleven thousand, six hundred fourteen dollars). 3.3 The twenty five thousand (25,000) shares of the Series B Stock shall be convertible into 20,000,000 (twenty million) shares of common stock of DEI. 3.4 Other specific terms and conditions of the Series B Preferred Stock shall be determined between the parties and represented in a Series B Preferred Stock Certificate. SECTION 4. CLOSING. 4.1 The Closing of the Exchange of Shares hereunder shall be held at offices of DEI on November 1 ,1997 or such other place or date as the parties may agree. 4.2 At the Closing, DEI shall deliver a definitive certificate registered in Dingaan's name representing 20,000 shares of Series B Preferred Stock and the value thereof being exchanged, signed by the President of DEI. 4.3 At the Closing, Dingaan shall deliver its certificate, representing ownership of 727 shares of the Series A Preferred Stock, duly endorsed or accompanied by a duly executed stock power in blank with a signature guaranteed by a bank, trust company or a member firm of the NASD. SECTION 5. REPRESENTATIONS AND WARRANTIES OF DEI. DEI hereby represents and warrants to Dingaan as set forth below. Page 2 of 7 5.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. DEI is a corporation duly incorporated and validly existing and in good standing under the laws of the State of Nevada. DEI has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. DEI is duly qualified and authorized to do business, and is in good standing as a foreign corporation, in each jurisdiction where the nature of its activities and of its properties (both owned and leased) makes such qualification necessary and where a failure to do so qualify would have a material adverse effect on its business or properties. 5.2 CORPORATE POWER. DEI will have at the Closing Date all requisite legal and corporate power and authority to execute and deliver this Agreement, to sell and issue the Shares hereunder, to issue the Common Stock issuable upon conversion of the Preferred Stock ("Underlying Common Stock") and to carry out and perform its obligations under the terms of this Agreement. 5.4 CAPITALIZATION. The authorized capital stock of DEI immediately prior to the Closing consists of (a) [NUMBER] shares of Common Stock, of which [NUMBER] shares are or will be issued and outstanding, and (b) [NUMBER] shares of preferred stock ("Preferred Stock"), of which [NUMBER] shares are or will be issued and outstanding prior to the Closing. The outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable and were issued in compliance with all applicable federal and state securities laws. DEI has reserved [NUMBER] shares of Common Stock for issuance upon conversion of the Preferred Stock. There are (i) no options, warrants or other rights to purchase any of DEI's authorized and unissued capital stock, or any security directly or indirectly convertible into or exchangeable for shares of capital stock of DEI, (ii) so far as known to DEI, no voting trust or voting agreements among, or irrevocable proxies executed by, stockholders of the Company, (iii) so far as known to DEI, no agreements among stockholders providing for the purchase or sale of DEI's capital stock, and (iv) no obligations (contingent or otherwise) of DEI to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. All such issued and outstanding options and warrants have been duly and validly issued in compliance with applicable federal and state securities laws. 5.5 AUTHORIZATION. All corporate action on the part of DEI, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement by DEI, the authorization, issuance and delivery of the Shares and the Underlying Common Stock and the performance of all of DEI's obligations hereunder has been taken or will be taken prior to Closing. This Agreement constitutes a valid and binding obligation of DEI, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other general principles of equity, whether such enforcement is considered in a proceeding in equity or law. The Shares, when issued in compliance with the provisions of this Agreement, and the Underlying Common Stock, when issued, will be validly issued, will be fully paid and nonassessable, will be free of any duties or other governmental charges and will be free of any liens, encumbrances or restrictions, other than any liens, encumbrances or restrictions created by or imposed upon the holders under the documents relating to this transaction; provided, however, that the Shares and the Underlying Common Stock may be subject to Page 3 of 7 restrictions on transfer under state and/or federal securities laws. Except as contemplated herein, the Shares and the Underlying Common Stock are not subject to any preemptive rights or rights of first refusal. 5.6 LIABILITIES. Except as set forth in DEI's financial statements as of June 30, 1997], copies of which have been heretofore delivered to Dingaan, DEI has no liabilities or obligations, absolute or contingent, except liabilities and obligations which have been incurred in the ordinary course of business none of which, in the aggregate, exceeds $10,000. 5.7 COMPLIANCE WITH OTHER INSTRUMENTS. Company is not in violation of any term of its Articles or Bylaws, or in any material respect of any term or provision of the mortgages, indebtedness, indentures, contracts, agreements, or instruments set forth on Exhibit D or any other material agreement, or any judgment or decree. The best of its knowledge, DEI is not in violation of any order, statute, rule or regulation applicable to DEI where such violation would materially and adversely affect DEI; to DEI's actual knowledge, DEI is not in violation of any order, statute or regulation applicable to DEI. The execution, delivery and performance of and compliance with this Agreement and the issuance of the Shares and the Underlying Common Stock have not resulted and will not result in any material violation of, or conflict with, or constitute a material default under, DEI's Articles or Bylaws or any of such material agreements nor result in the creation of, or mortgage, pledge, lien, encumbrance or charge upon any of the material properties or assets of DEI. 5.8 LITIGATION, ETC. There are no actions, suits, proceedings or investigations pending against DEI or its properties or in which DEI is the plaintiff, before any court or governmental agency (nor, to DEI's knowledge, is there any threat thereof or any reasonable basis therefor). 5.9 REGISTRATION RIGHTS. DEI is not under any contractual obligation to register with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended ("Securities Act") any of its presently outstanding securities or any of its securities which may hereafter be issued. 5.10 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the party of DEI is required in connection with the valid execution and delivery of this Agreement, or the offer, or issuance of the Shares or the underlying Common Stock or the consummation of any other transaction contemplated hereby. 5.11 EXEMPTION. The offer, issue and exchange of the Shares and the Underlying Common Stock are and will be exempt from the registration and prospectus delivery requirements of the 1933 Act, pursuant to the exemption 5 provided by Section 4(1) and 4(2) of the Act. Page 4 of 7 SECTION 6. REPRESENTATIONS AND WARRANTIES OF DINGAAN. Dingaan hereby represents and warrants to DEI with respect to the exchange of the Preferred Stock as follows: 6.1 INVESTMENT. Dingaan is acquiring the shares for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. It understands that the shares to be issued have not been, and will not be, registered under the Securities Act of 1933, as amended ("Securities Act") or the securities laws of any state by reason of a specific exemption from the registration provisions of the Securities Act and the securities law of the State of Nevada and other applicable jurisdictions, the availability of which depends upon, among other things, the bona fide nature of the investment intent. 6.2 RULE 144. It acknowledges that the Shares must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. It is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three-month period not exceeding specified limitations. Dingaan acknowledges that, except as specifically set forth in this Agreement, it is not relying on DEI in any way to satisfy the conditions precedent for limited resale of shares pursuant to Rule 144 under the Securities Act. 6.3 NO PUBLIC MARKET. It understands that no public market now exists for any of the Series B Preferred Stock issued by DEI and that DEI has made no assurances that a public market will ever exist for such securities. 6.4 ACCESS TO DATA. It has had an opportunity to discuss the business of DEI, its management and financial affairs with its management and the opportunity to review the Company's financial statements, books and records, facilities and business plan. It has also had an opportunity to ask questions of officers of the company, which questions were answered to its satisfaction. 6.5 POWER AND AUTHORITY. Dingaan will have at the Closing Date all requisite legal and other power and authority to execute and deliver this Agreement and to carry out and perform its obligations under the terms of this Agreement. This Agreement constitutes a valid and legally binding obligation of Dingaan, enforceable in accordance with its terms, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other general principals of equity, whether such enforcement is considered in a proceeding in equity or law. Page 5 of 7 SECTION 7. MISCELLANEOUS PROVISIONS. 7.1 NOTICES. All notices, requests, demands, and other communications required or permitted hereunder will be in writing and will be deemed to have been duly given when delivered by hand or two days after being mailed by certified or registered mail, return receipt requested, with postage prepaid: If to DEI to: If to Dingaan to: David D. Westfere Dingaan Holdings, S.A. 2010 E. University Drive, Enro Canadian Center, First Floor Suite # 3 Marlborough Street Tempe, AZ 85281 P.O. Box N-38-2 Nassau, Bahamas 7.2 TITLES AND CAPTIONS. All section titles or captions contained in this Agreement are for convenience only and shall not be deemed part of the context nor effect the interpretation of this Agreement. 7.3 ENTIRE AGREEMENT. This Agreement contains the entire understanding between and among the parties and supersedes any prior understandings and agreements among them respecting the subject matter of this Agreement. 7.4 AGREEMENT BINDING. This Agreement shall be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto. 7.5 ATTORNEY FEES. In the event an arbitration, suit or action is brought by any party under this Agreement to enforce any of its terms, or in any appeal therefrom, it is agreed that the prevailing party shall be entitled to reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or appellate court. 7.6 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. 7.7 PRESUMPTION. This Agreement or any section thereof shall not be construed against any party due to the fact that said Agreement or any section thereof was drafted by said party. 7.8 FURTHER ACTION. The parties hereto shall execute and deliver all documents, provide all information and take or forbear from all such action as may be necessary or appropriate to achieve the purposes of the Agreement. 7.9 PARTIES IN INTEREST. Nothing herein shall be construed to be to the benefit of any third party, nor is it intended that any provision shall be for the benefit of any third party. Page 6 of 7 7.10 SAVINGS CLAUSE. If any provision of this Agreement, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby. Indicating their agreement to the above, the parties have signed this Agreement below: DIAMOND EQUITIES, INC., A NEVADA CORPORATION: DINGAAN HOLDINGS, S.A. By:/s/ David D. Westfere By: E.P. Toothe & Associates ------------------------ -------------------------- David D. Westfere, President (Print or type full name) Date: 10-28-97 E.P. Toothe & Associates ------------------------ -------------------------- (Signature) Date: 21st October, 1997. ------------------------ Page 7 of 7 EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in the Form 10-KSB for the year ended June 30, 1998 of our report dated August 6, 1997 and September 28, 1998, relating to the financial statements of Diamond Equities, Inc. for the year ended June 30, 1997. /s/ Wisan, Smith, Racker & Prescott, L.L.P. September 28, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 1 600,231 0 46,148 (35,588) 5,400 1,162,456 197,162 (8,458) 1,831,243 585,292 0 0 1,817,591 4,666 (653,431) 1,831,243 0 0 0 355,100 384,474 0 2,849 (739,574) 50 (739,624) (35,413) 0 0 (769,923) (0.17) 0
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