-----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, UZOWYvcPwLJaZlxYCf2cONssRHYdxCP59Y52xhATNkcKXsR15CdS80XagIFejT1j AgjQKUysgSZaf/L+URh5Yg== 0000950147-98-000835.txt : 19981023 0000950147-98-000835.hdr.sgml : 19981023 ACCESSION NUMBER: 0000950147-98-000835 CONFORMED SUBMISSION TYPE: 10KSB40/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981022 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/A SEC ACT: SEC FILE NUMBER: 000-24138 FILM NUMBER: 98728769 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/A 1 AMENDMENT NO. 1 TO FORM 10-KSB F.T.Y.E 6/30/98 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB/A AMENDMENT NO. 1 (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year JUNE 30, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from:____________to:___________ Commission File Number. 0-24138 DIAMOND EQUITIES, INC. ---------------------------------------------- (Name of Small Business Issuer in its Charter) NEVADA 88-0232816 - ------------------------------ ------------------------------------ State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization 2010 E. UNIVERSITY DRIVE, STE. # 3 - TEMPE, ARIZONA 85281 - --------------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (602) 921-2760 ------------------------------------------------ (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: NONE ------- Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.001 PER SHARE CLASS A WARRANTS CLASS B WARRANTS Check whether the issuer: (1) filed all Reports to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check here if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The Issuer's revenues for the year ended June 30, 1998, were $ none. The aggregate market value of the voting stock held by non-affiliates (approximately 1,775,034 shares as of September 27, 1997) based upon the average of the bid and asked prices of such stock as of September 23, 1998, as reported on the Electronic Bulletin Board, was $0.05. The number of shares of Common Stock of the issuer outstanding as of September 23, 1998, was 4,666,099. Transitional Small Business Disclosure Format (check one): Yes No [X] Documents incorporated by Reference: Incorporated by reference to this annual report are Forms 8-K filed by the Registrant on June 19, 1998 and July 29, 1998, respectively, which disclosed acquisitions of two entities engaged in the plastic injection molding industry. One acquisition took place after the Registrant's fiscal year ending June 30, 1998. A Form 8-K was filed on July 17, 1998 regarding a voluntary change of auditors for the Registrant. A Rule 12b-25 Notice of Inability to Timely File was filed on September 28, 1998, and the Form 10-KSB was filed on October 13, 1998. TABLE OF CONTENTS Page No. -------- PART II Item 7. Financial Statements.............................................3 PART III Item 13. Exhibits List and Reports on Form 8-K............................4 2 ITEM 7. FINANCIAL STATEMENTS. The following financial statements are attached hereto and incorporated herein: HEADING PAGE ------- ---- For Fiscal Year Ending June 30, 1997 and 1996 Independent Auditor's Report F-17 Balance Sheets for the Years Ended June 30, 1997 and 1996 F-18 Statements of Operations for the Years Ended June 30, 1997, 1996 and 1995 F-20 Statements of Stockholder's Equity for the years ended June 30, 1997, 1997 and 1995 F-22 Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 F-23 Notes to Financial Statements F-24 3 ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K. (a) The following exhibits are furnished with this Report pursuant to Item 601 of Regulation SB-2. Exhibit No. Description of Exhibit Page - ------- ---------------------- ---- 3(i) Articles of Incorporation as amended * 3(ii) Bylaws of the Company, as currently in effect * 3(iii) Certificate regarding Series A 6% Preferred Stock *** 3(iv) Certificate of Amendment of Articles of Incorporation, dated June 20, 1997 3(v) Articles of Incorporation - Precision Plastics Molding, Inc. E-1 3(vi) Bylaws - Precision Plastics Molding, Inc. E-2 4(a) Form of certificate evidencing shares of Common Stock * 4(b) Form of certificate evidencing shares of Series A 6% Preferred Stock *** 10.1 Assignment and Assumption of Liabilities Agreement ** 10.2 Stock Purchase Agreement dated April 3, 1995 between Oak Holdings and Teletek, Inc. **** 10.3 Consulting Agreement dated April 6, 1995, between the Company and Michael Swan *** 10.4 Consulting Agreement dated January 1, 1995, between the Company and C&N, Inc. 10.5 Severance Agreement dated October 3, 1996 between the Company and Michael Swan *2 10.6 Form 12b-25 dated September 27, 1997 ***** 10.7 Stock Purchase Agreement between Teletek, Inc. and Dingaan Holdings, S.A. dated December 1, 1996 (change in control of registrant) ****** 10.8 Asset Purchase Agreement between the Company, Precision and Premier Plastics Corp, dated June 15, 1998. *3 10.9 Asset Purchase Agreement between the Company, Precision and Accurate Thermoplastics, Inc., dated July 15, 1998 *3 10.10 Preferred Stock Exchange Agreement *3 23 Consent of Independent Certified Public Accountants *3 27 Financial Data Schedule *3 - ------------- * Incorporated by reference to the exhibits with the Company's registration statement on Form 10-SB (Commission File No. 0-24138) filed with the Securities and Exchange Commission on May 13, 1994. ** Incorporated by reference to the exhibits filed with the Company's 1994 annual report on Form 10-KSB (Commission File No. 0-24138) filed with the Securities and Exchange Commission on October 13, 1994. *** Incorporated by reference to the exhibits filed with the Company's registration statement on Form SB-2 (Commission File No. 33-85884). **** Incorporated by reference to the exhibits filed with the Company's Current Report on form 8-K (Commission File No. 0-24138) filed with the Securities and Exchange Commission on December 1, 1996. ***** Incorporated by reference to the Company's Form 12b-25 dated September 27, 1997. ****** Incorporated by reference to the Company's current Report on Form 8-K (Commission File No. 0-24138) filed with the Securities and Exchange Commission on March 15, 1997. *1 Incorporated by reference to the exhibits filed with Annual Report on January 26, 1998 on Form 10-KSB. *2 Incorporated by reference to the exhibits filed with the Company's 1996 Annual Report on Form 10-KSB (Commission file No. 0-24138) filed with the Securities and Exchange Commission on October 11, 1996. *3 Incorporated by reference to the exhibits filed with the Company's 1998 Annual Report on Form 10-KSB (Commission file No. 0-24138) filed with the Securities and Exchange Commission on October 13, 1998. b) Form 8-Ks were filed electronically by the Company on June 19, 1997 (amended July 17, 1998) and July 29, 1998 disclosing the acquisition of the assets of Premier Plastics Corp and Accurate Thermoplastics, Inc., respectively. It also filed a Form 8-K to report a voluntary change in accountants, on July 17, 1998. A Rule 12b-25 Notice of Inability to Timely File was made on September 28, 1998 and the Annual Report form 10-KSB for fiscal year ending June 30, 1998 was filed on October 13, 1998. 4 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAMOND EQUITIES, INC. Registrant By /s/ David D. Westfere ------------------------------------- David D. Westfere, President Date: October , 1998 ----------------- By: /s/ Todd D. Chisholm ------------------------------------- Todd D. Chisholm, Chief Financial Officer Date: October , 1998 ----------------- In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ David D. Westfere ------------------------------------- David D. Westfere, Director Date: October , 1998 ----------------- By: /s/ Todd D. Chisholm ------------------------------------- Todd D. Chisholm, Director Date: October , 1998 ----------------- 5 DIAMOND EQUITIES, INC. FINANCIAL STATEMENTS JUNE 30, 1997, AND 1996 C O N T E N T S Page INDEPENDENT AUDITORS' REPORT ............................................F-17 BALANCE SHEETS...........................................................F-18 STATEMENTS OF OPERATIONS ................................................F-20 STATEMENTS OF STOCKHOLDERS' EQUITY.......................................F-22 STATEMENTS OF CASH FLOWS.................................................F-23 NOTES TO FINANCIAL STATEMENTS ...........................................F-24 INDEPENDENT AUDITORS' REPORT OFFICERS AND DIRECTORS DIAMOND EQUITIES, INC. TEMPE, ARIZONA We have audited the accompanying balance sheets of Diamond Equities, Inc. as of June 30, 1997 and 1996, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Diamond Equities, Inc. for the year ended June 30, 1995, were audited by other auditors whose report dated August 28, 1995, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diamond Equities, Inc. as of June 30, 1996 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note 14 to the financial statements, an error in the recording of a severance agreement as of June 30, 1997, was discovered. The error resulted in the understatement of liabilities and the overstatement of net income. Accordingly, the June 30, 1997 financial statements have been restated to correct the error. Wisan, Smith, Racker & Prescott, LLP, Certified Public Accounts. Salt Lake City, Utah August 6, 1997 except for Note 14, as to which the date is September 28, 1998 F-17 DIAMOND EQUITIES, INC. BALANCE SHEETS JUNE 30, 1997, AND 1996 1997 1996 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $1,586,983 $ 694,293 Receivables: Trade accounts receivable 20,292 29,524 Interest receivable 1,900 -- Note receivable - current portion 41,123 -- Prepaid expenses -- 5,000 ---------- ---------- TOTAL CURRENT ASSETS 1,650,298 728,817 PROPERTY AND EQUIPMENT 20,980 707,204 OTHER ASSETS Deposits -- 2,106 Note receivable - noncurrent portion 770,127 -- TOTAL ASSETS $2,441,405 $1,438,127 ========== ========== CERTAIN 1996 ITEMS HAVE BEEN RECLASSIFIED TO CONFORM TO THE 1997 PRESENTATION. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-18 DIAMOND EQUITIES, INC. BALANCE SHEETS JUNE 30, 1997, AND 1996 1997 1996 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 112,812 $ 106,997 Accrued expenses 107,723 32,212 Sales tax payable 88,098 -- Accrued preferred dividends 194,023 84,967 Current portion of long-term liabilities -- 770 ----------- ----------- TOTAL CURRENT LIABILITIES 502,656 224,946 LONG-TERM LIABILITIES -- 173,201 CONTINGENT LIABILITIES -- 132,442 ----------- ----------- TOTAL LIABILITIES 502,656 530,589 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, par value $.001, 6% cumulative convertible, non-voting Authorized 100,000 shares, issued 727 shares at stated value 1,817,591 1,817,591 Common stock, par value $.001 Authorized 50,000,000 shares, issued 4,666,099 and 5,277,099 shares, respectively 4,666 5,277 Capital in excess of par value 2,582,282 3,039,921 Retained earnings (deficit) (2,465,790) (3,955,251) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 1,938,749 907,538 ----------- ----------- TOTAL LIABILITIES AND EQUITY $ 2,441,405 $ 1,438,127 =========== =========== CERTAIN 1996 ITEMS HAVE BEEN RECLASSIFIED TO CONFORM TO THE 1997 PRESENTATION. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-19 DIAMOND EQUITIES, INC. STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 1997 1996 1995 ---- ---- ---- INCOME Revenues $ -- $ -- $ -- Cost of sales -- -- -- ----------- --------- --------- GROSS PROFIT -- -- -- EXPENSES General and administrative expenses 225,042 -- -- Depreciation and amortization 4,979 -- -- ----------- --------- --------- 230,021 -- -- ----------- --------- --------- OPERATING LOSS (230,021) -- -- ----------- --------- --------- OTHER INCOME (EXPENSE) Miscellaneous income 896 -- -- Interest income 57,514 2,995 4,041 ----------- --------- --------- 58,410 2,995 4,041 ----------- --------- --------- Income (loss) from continuing operations before income taxes (171,611) 2,995 4,041 Income tax expense 50 -- -- ----------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS (171,661) 2,995 4,041 ----------- --------- --------- DISCONTINUED OPERATIONS Loss from discontinued operations, net of applicable income taxes of $0, $50 and $50 (78,101) (95,524) (194,204) Gain on disposal of discontinued operations, net of applicable income taxes of $11,740 1,848,279 -- -- ----------- --------- --------- 1,770,178 (95,524) (194,204) ----------- --------- --------- NET INCOME (LOSS) 1,598,517 (92,529) (190,163) Preferred dividends 109,056 109,056 109,278 ----------- --------- --------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK $ 1,489,461 $(201,585) $(299,441) =========== ========= ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-20 DIAMOND EQUITIES, INC. STATEMENTS OF OPERATIONS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995 1997 1996 1995 ---- ---- ---- PRIMARY EARNINGS (LOSS) PER COMMON SHARE Loss before discontinued operations $ (0.06) $ (0.02) $ (0.02) Discontinued operations 0.36 (0.02) (0.04) ---------- ---------- ---------- PRIMARY EARNINGS (LOSS) PER SHARE $ 0.30 $ (0.04) $ (0.06) ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN PRIMARY CALCULATION 4,971,878 4,734,544 4,666,099 ========== ========== ========== FULLY-DILUTED EARNINGS (LOSS) PER COMMON SHARE Loss before discontinued operations $ (0.02) $ -- $ -- Discontinued operations 0.18 -- -- ---------- ---------- ---------- FULLY-DILUTED EARNINGS PER SHARE $ 0.16 $ -- $ -- ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN FULLY-DILUTED CALCULATION 9,818,787 -- -- ========== ========== ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-21 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-22 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-23 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES The Company's accounting policies conform to generally accepted accounting principles. The following policies are considered to be significant: NATURE OF OPERATIONS The Company was incorporated on July 24, 1987 as a Nevada corporation under the name KTA Corporation. In February, 1989 the Company began operating pay telephones in the Reno, Nevada area. On September 25, 1989 the Company changed its name to United Payphone Services, Inc. The Company moved its operations to Arizona where it operated pay-telephones in the Phoenix and Tucson areas. On November 15, 1996 the Company sold all of its pay-telephone assets to Tru-Tel Communications, LLC. On June 20, 1997 the Company changed its name to Diamond Equities, Inc. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. In these financial statements, assets, liabilities, and earnings involve extensive reliance on management's estimates. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of less than three months. ACCOUNTS RECEIVABLE Accounts receivable balances considered uncollectible are written off and bad debt expense is recognized using the direct write-off method. No allowance for uncollectible accounts is recognized. The difference between the direct write-off method and the allowance method is not considered material. REVENUE RECOGNITION Revenue from the discontinued pay-telephone operation was recognized upon receipt of coin and rendering of telephone service. DEPRECIATION Depreciation expense is computed using the straight-line method in amounts sufficient to write off the cost of depreciable assets over their estimated useful lives. F-24 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION (CONTINUED) Normal maintenance and repair items are charged to costs and expenses as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts and gain or loss on disposition is reflected in net income in the period of disposition. INCOME TAXES Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of income taxes currently due plus deferred income tax charges and credits. Deferred tax assets are evaluated for their potential future benefit to the Company and valuation allowances are established based on such analysis. EARNINGS (LOSS) PER COMMON SHARE Net earnings (loss) per common share is calculated by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding. The calculation of fully diluted earnings per share assumes conversion of the preferred stock and the elimination of the preferred stock dividend. Fully diluted earnings per share were not reported in 1996 and 1995 because they were greater than primary earnings per common share. NOTE 2 - CASH AND CASH EQUIVALENTS The Company maintains cash balances at banks in Arizona. Accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. At June 30, 1997, the Company's uninsured bank balances total $1,368,674 ($358,550 for 1996). NOTE 3 - NOTE RECEIVABLE On November 15, 1996 the Company sold all of its assets related to the operation of the pay-telephone business (see Note 9). In connection with the sale of the assets, the Company received a note receivable totaling $811,250. The note is payable to the Company in monthly installments of $14,000 including interest at 8% per annum, beginning February 15, 1997, with the balance due January 15, 2002. F-25 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 3 - NOTE RECEIVABLE (CONTINUED) As discussed in Note 7, no payments have been received on the note and the Company has commenced legal proceedings to collect the amount. The Company reports impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan". This accounting standard defines an impaired loan as any loan where the creditor is unable to collect all the amounts due according to the contractual interest payments and contractual principal payments as scheduled in the loan agreement. The note receivable discussed above meets this definition for an impaired loan. Management is unable to estimate the amount of the impairment and therefore the Company has no valuation allowance against the note receivable. Interest income on impaired loans is recognized only when payments are received. NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment as of June 30, 1997 and 1996 are detailed in the following summary: ACCUMULATED NET BOOK 1997 COST DEPRECIATION VALUE ---- ---- ------------ ----- Furniture and fixtures $ 21,368 $7,295 $ 14,073 Office equipment 7,367 2,323 5,044 Automobiles 2,192 329 1,863 ---------- ------ -------- $ 30,927 $9,947 $ 20,980 ========== ====== ======== ACCUMULATED NET BOOK 1996 COST DEPRECIATION VALUE ---- ---- ------------ ----- Furniture and fixtures $ 22,544 $ 11,569 $ 10,975 Office equipment 92,536 59,578 32,958 Automobiles 64,804 37,785 27,019 Payphones 1,650,865 1,559,959 90,906 Payphone accessories 379,002 179,842 199,160 Payphone installations 475,554 161,004 314,550 Property improvements 32,121 5,084 27,037 Equipment under capital leases 5,410 811 4,599 ---------- ---------- -------- $2,722,836 $2,015,632 $707,204 ========== ========== ======== F-26 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 5 - SALES TAX PAYABLE During March, 1993, the Arizona Department of Revenue assessed a sales tax deficiency of $73,680 against the Company for the period from January 1, 1990 through January 31, 1993 with respect to coin revenues from privately operated pay-telephones. A timely protest was filed with the Department of Revenue seeking abatement of the entire assessment. The basis of the protest is the taxability of coin revenue under the classification of telecommunications which is defined under Arizona law as the transmitting of a signal. The Company's protest was consolidated with those of other private pay telephone operators. A favorable ruling was originally received from a Department of Revenue officer which was overturned by the Director of the Department of Revenue. An appeal was made before the Arizona State Board of Tax Appeals in October, 1995. Previously the Company has recognized a contingent liability of $132,442 for the estimated sales tax due. On January 29, 1997 a preliminary settlement was agreed to whereby the Company will owe $88,098 for sales taxes for the period from January 1, 1990 through November, 1997. The difference in the previously recognized contingent liability and the settlement amount of $44,344 has been recognized as a gain and included in discontinued operations. NOTE 6 - LONG-TERM LIABILITIES 1997 1996 ---- ---- Note payable to related party, principal and interest due September, 1997, bearing interest at 8%, unsecured $ -- $ 55,683 Note payable to related party, principal and interest due September, 1997, bearing interest at 8%, unsecured -- 113,760 Capital lease payable to vendor in monthly installments of $106, due December, 2001, bearing interest at 12%, secured by equipment -- 4,528 ------- -------- -- 173,971 Less current portion -- (770) ------- -------- Long-term portion $ -- $173,201 ======= ======== F-27 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 7 - COMMITMENTS AND CONTINGENCIES CONCENTRATION OF CREDIT RISK In connection with the sale of its pay-telephone operations, the Company received a promissory note in the principal sum of $811,250. Monthly payments of $14,000 on the note were to commence on February 15, 1997. To date no payments on the note have been received. On March 18, 1997 a complaint for breach of contract was filed with the Eighth Judicial District Court. The complaint alleges an anticipatory breach by the defendant, Tru-Tel Communications, LLC, issuer of the promissory note. The complaint also names as party defendants, the principals of Tru-Tel Communications, LLC and Finova Capital Corporation (provider of the financing used to purchase the assets.) The defendants have responded by issuing counterclaims. The counterclaims allege that the revenues of the Company reported to Tru-Tel Communications, LLC and Finova Capital Corporation were purportedly overstated at the time of the asset purchase agreement. The Company intends to vigorously contest the counterclaims and pursue the original claims against all party defendants. While it is not feasible at this time to predict or determine the ultimate financial outcome of the complaint, management does not believe that it will be party to any unfavorable judgments. Other amounts due from Tru-Tel Communications, LLC include $40,562 of interest receivable on the note which has not been accrued. The Company also paid $18,899 of expenses on behalf of Tru-Tel Communications, LLC during the transition to the new ownership. This amount is included in accounts receivable. LEGAL FEES The Company has entered into a contingency fee agreement with the attorneys that are representing the Company in the sales tax issue described in Note 5. The agreement sets the contingent legal fees at one third of the decrease obtained in the sales tax due to the Arizona Department of Revenue. The Company has accrued $38,580 in legal fees and has included such amount in accrued expenses. Management feels that the amount accrued is sufficient to cover the legal fees that will be required upon ultimate settlement of the sales tax issue. F-28 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 8 - CAPITAL STOCK PREFERRED STOCK The Company has outstanding 727 shares of cumulative, convertible, preferred stock at June 30, 1997 and 1996. Cumulative dividends at 6% are payable annually. Dividends are in arrears to the amount of $194,023. Each share of preferred stock is convertible at the option of the holder at a rate equal to 75% of the average bid price of the common shares for the ten days prior to the conversion date. The preferred stock is redeemable by the Company at the cash price paid for the shares plus the amount of any dividends accumulated and unpaid as of the date of redemption. WARRANTS Stock purchase warrants were issued in connection with the May, 1996 issuance of common stock. The offering was made in units consisting of two shares of common stock, one class A warrant and one class B warrant. As a result of the sale of the operations of the Company, the May, 1996 stock issuance, including warrants, was rescinded. NOTE 9 - DISCONTINUED OPERATIONS On November 15, 1996 the Company entered into an asset purchase agreement with Tru-Tel Communications LLC whereby all of the assets related to the operation of the pay-telephone business were sold. Proceeds from the sale included $1,688,750 cash and a promissory note (see Note 3) for $811,250. Tru-Tel Communications, LLC assumed the Company's capital lease on equipment and operating leases on facilities. The Company recorded a gain on the sale of the assets of $1,848,279 after taxes. Revenues from the discontinued operations totaled $835,858, $2,127,574 and $2,074,244 for the years ended June 30, 1997, 1996 and 1995, respectively. NOTE 10 - INCOME TAXES The Company uses an asset and liability approach to financial accounting and reporting for income taxes. The difference between the financial statement and income tax bases of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those differences that have future income tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce the deferred income tax asset to the amount that will more likely than not be realized. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities. F-29 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 10 - INCOME TAXES (CONTINUED) Income taxes payable as of June 30, 1997 and 1996 are detailed in the following summary: 1997 1996 ---- ---- Currently payable $ 11,790 $ 50 ========= =========== Deferred income tax liability $ 324,000 $ -- Deferred income tax asset 725,000 1,257,000 Valuation allowance (401,000) (1,257,000) --------- ----------- Net deferred income tax asset 324,000 -- --------- ----------- Net deferred income tax liability $ -- $ -- ========= =========== The deferred tax assets result from net operating loss carryforwards available and carryforwards of credits resulting from alternative minimum taxes paid. At June 30, 1997, the Company had net operating loss carryforwards available to offset future income taxes totaling $1,742,141 expiring from 2003 and 2011. The net change in the valuation allowance for deferred income tax assets was a decrease of $856,000, related to the utilization of net operating loss carryforwards. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30 are as follows: 1997 1996 ---- ---- Deferred income tax assets: Net operating loss carryforwards $ 713,260 $ 1,257,000 Credit for alternative minimum taxes paid 11,740 -- --------- ----------- Total gross deferred income tax assets 725,000 1,257,000 Less valuation allowance (401,000) (1,257,000) --------- ----------- Net deferred income tax asset 324,000 -- --------- ----------- Deferred income tax liabilities: Difference on note receivable 324,000 -- --------- ----------- Total gross deferred income tax liability 324,000 -- --------- ----------- Net deferred income tax liability $ -- $ -- ========= =========== F-30 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 10 - INCOME TAXES (CONTINUED) The reconciliation of the differences between the statutory U.S. federal income tax rate and the Company's effective tax rate is as follows: 1997 1996 1995 ---- ---- ---- U.S. Statutory Rate 34.0% (34.0%) (34.0%) State income tax, net of federal benefit -- -- -- Effect of net operating loss carryforward and valuation allowance (34.0%) 34.0% 34.0% ----- ---- ---- Effective tax rates -- -- -- ===== ==== ==== NOTE 11 - CASH FLOWS FROM OPERATING ACTIVITIES The following schedule reconciles net income (loss) as reported in the accompanying statements of operations with net cash flows from operating activities in the statements of cash flows: 1997 1996 1995 ---- ---- ---- Net income (loss) $ 1,598,517 $(92,529) $(190,163) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Loss from discontinued operations 78,101 95,524 194,204 Gain on sale of discontinued operations (1,848,279) -- -- Depreciation and amortization expense 4,979 -- -- (Increase) decrease in assets: Accounts receivable 9,232 -- -- Interest receivable (1,900) Prepaid expenses and deposits 8,742 -- -- F-31 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 11 - CASH FLOWS FROM OPERATING ACTIVITIES (CONTINUED) 1997 1996 1995 ---- ---- ---- Increase (decrease) in liabilities: Accounts payable 5,815 -- -- Accrued expenses (22,592) -- -- --------- -------- -------- Net cash flows from (used by) continuing activities (167,385) 2,995 4,041 Net cash flows from discontinued operations 49,157 218,730 384,437 --------- -------- -------- Net cash flows from operating activities $(118,228) $221,725 $388,478 ========= ======== ======== NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosure about Fair Value of Financial Instruments". The carrying amounts and fair value of the Company's financial instruments at June 30, 1997 and 1996 are as follows: CARRYING FAIR 1997 AMOUNTS VALUES ---- ------- ------ Cash and cash equivalents $1,586,983 $1,586,983 Note receivable including current maturities 811,250 724,320 Preferred stock 1,817,591 2,682,152 CARRYING FAIR 1996 AMOUNTS VALUES ---- ------- ------ Cash and cash equivalents $ 694,293 $ 694,293 Long-term debt including current maturities 173,971 173,971 Preferred stock 1,817,591 2,536,744 Warrants, Class A - 3,055 Warrants, Class B - 3,055 F-32 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. CASH AND CASH EQUIVALENTS The carrying amounts reported on the balance sheet for cash and cash equivalents approximate their fair value. NOTE RECEIVABLE The fair value of the note receivable was determined based on discounted cash flow analysis using a discount rate similar to financial instruments with similar risk. LONG-TERM DEBT At June 30, 1997, the Company had no long-term debt. At December 31, 1996, the fair values of long-term debt are estimated using discounted cash flow analysis based on the Company's incremental borrowing rate as the discount rate. PREFERRED STOCK The Company's preferred stock is not publicly traded and therefore a fair value is not readily available. Based on the conversion ratio of the preferred stock and the current market value of the common stock, a fair value estimate was determined. WARRANTS At June 30, 1997, the Company had no warrants issued or outstanding. At June 30, 1996, the fair value of the stock purchase warrants was estimated based on the redemption value of the warrants. During the first 30 days after the issuance of the warrants the Company had the right to redeem the warrants at $.01 per warrant. This is the basis of the fair value estimate. NOTE 13 - RELATED PARTY TRANSACTIONS As described in Note 6, the Company had notes payable to a related party. The related party is a significant shareholder in the Company. As described in Note 14, the Company has entered into a severance agreement with an individual. The individual is a related party by virtue of stock ownership in the Company. F-33 DIAMOND EQUITIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 NOTE 14 - SUBSEQUENT DISCOVERY OF AN ERROR In September, 1998 an error was discovered in the June 30, 1997 financial statements. The Company had a long-term consulting agreement with a shareholder. The agreement called for the payment of a monthly consulting fee of $5,000. For the years ended June 30, 1995 and 1996 the total consulting fees were $60,000 and $60,000. Such amounts have been included in discontinued operations. During October 1996, the Company modified the agreement to be a severance agreement. The severance agreement called for the same payments of $5,000 per month. At June 30, 1996 there was $47,783 remaining to be paid on the agreement, which was not accrued. This resulted in an understatement of liabilities by $47,783, an understatement of the loss before discontinued operations of $35,000 and an overstatement of income from discontinued operations of $82,783. The net effect of the error on the net income amount was an overstatement of $47,783. The financial statements have been restated to reflect the proper treatment of the modification of the agreement. The total fee associated with the consulting/severance agreement for the year ended June 30, 1997 was $107,783, all of which was included in discontinued operations. F-34 -----END PRIVACY-ENHANCED MESSAGE-----