-----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, FAnqhH7J4m8TjpYziQvMi6ZnFTLpfWrQP1YVd4E3v3MQMHrOEwlYqF3nPpCOtuPY qv2P5Ehe1XL9He05K6TgEg== 0000950147-98-000837.txt : 19981027 0000950147-98-000837.hdr.sgml : 19981027 ACCESSION NUMBER: 0000950147-98-000837 CONFORMED SUBMISSION TYPE: 10KSB40/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981026 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: 98730525 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. 2 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. 2 (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year JUNE 30, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from:____________to:___________ Commission File Number. 0-24138 DIAMOND EQUITIES, INC. ---------------------------------------------- (Name of Small Business Issuer in its Charter) NEVADA 88-0232816 - ------------------------------ ------------------------------------ State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization 2010 E. UNIVERSITY DRIVE, STE. # 3 - TEMPE, ARIZONA 85281 - --------------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (602) 921-2760 ------------------------------------------------ (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: NONE ------- Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.001 PER SHARE CLASS A WARRANTS CLASS B WARRANTS Check whether the issuer: (1) filed all Reports to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check here if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] 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: For Fiscal Years Ending June 30, 1998 and 1997 HEADING PAGE ------- ---- Independent Auditor's Report F-1 Consolidated Balance Sheet for the Year Ended June 30, 1998 F-2 Consolidated Statements of Operations for the Years Ended June 30, 1998 and 1997 F-3 Consolidated Statements of Changes in Stockholder's Equity for the years ended June 30, 1998 and 1997 F-4 Consolidated Statements of Cash Flows for the years ended June 30, 1998 and 1997 F-5 Notes to Financial Statements F-7 3 ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K. (a) The following exhibits are furnished with this Report pursuant to Item 601 of Regulation SB-2. Exhibit No. Description of Exhibit Page - ------- ---------------------- ---- 3(i) Articles of Incorporation as amended * 3(ii) Bylaws of the Company, as currently in effect * 3(iii) Certificate regarding Series A 6% Preferred Stock *** 3(iv) Certificate of Amendment of Articles of Incorporation, dated June 20, 1997 *1 3(v) Articles of Incorporation - Precision Plastics Molding, Inc. *3 3(vi) Bylaws - Precision Plastics Molding, Inc. *3 4(a) Form of certificate evidencing shares of Common Stock * 4(b) Form of certificate evidencing shares of Series A 6% Preferred Stock *** 10.1 Assignment and Assumption of Liabilities Agreement ** 10.2 Stock Purchase Agreement dated April 3, 1995 between Oak Holdings and Teletek, Inc. **** 10.3 Consulting Agreement dated April 6, 1995, between the Company and Michael Swan *** 10.4 Consulting Agreement dated January 1, 1995, between the Company and C&N, Inc. *** 10.5 Severance Agreement dated October 3, 1996 between the Company and Michael Swan *2 10.6 Form 12b-25 dated September 27, 1997 ***** 10.7 Stock Purchase Agreement between Teletek, Inc. and Dingaan Holdings, S.A. dated December 1, 1996 (change in control of registrant) ****** 10.8 Asset Purchase Agreement between the Company, Precision and Premier Plastics Corp, dated June 15, 1998. *3 10.9 Asset Purchase Agreement between the Company, Precision and Accurate Thermoplastics, Inc., dated July 15, 1998 *3 10.10 Preferred Stock Exchange Agreement *3 23 Consent of Independent Certified Public Accountants *3 27 Financial Data Schedule *3 - ------------- * Incorporated by reference to the exhibits with the Company's registration statement on Form 10-SB (Commission File No. 0-24138) filed with the Securities and Exchange Commission on May 13, 1994. ** Incorporated by reference to the exhibits filed with the Company's 1994 annual report on Form 10-KSB (Commission File No. 0-24138) filed with the Securities and Exchange Commission on October 13, 1994. *** Incorporated by reference to the exhibits filed with the Company's registration statement on Form SB-2 (Commission File No. 33-85884). **** Incorporated by reference to the exhibits filed with the Company's Current Report on form 8-K (Commission File No. 0-24138) filed with the Securities and Exchange Commission on December 1, 1996. ***** Incorporated by reference to the Company's Form 12b-25 dated September 27, 1997. ****** Incorporated by reference to the Company's current Report on Form 8-K (Commission File No. 0-24138) filed with the Securities and Exchange Commission on March 15, 1997. *1 Incorporated by reference to the exhibits filed with the Company's 1997 Annual Report on Form 10-KSB (Commission file No. 0-24138) filed with the Securities and Exchange Commission on October 9, 1997. *2 Incorporated by reference to the exhibits filed with the Company's 1996 Annual Report on Form 10-KSB (Commission file No. 0-24138) filed with the Securities and Exchange Commission on October 11, 1996. *3 Incorporated by reference to the exhibits filed with the Company's 1998 Annual Report on Form 10-KSB (Commission file No. 0-24138) filed with the Securities and Exchange Commission on October 13, 1998. b) Form 8-Ks were filed electronically by the Company on June 19, 1997 (amended July 17, 1998) and July 29, 1998 disclosing the acquisition of the assets of Premier Plastics Corp and Accurate Thermoplastics, Inc., respectively. It also filed a Form 8-K to report a voluntary change in accountants, on July 17, 1998. A Rule 12b-25 Notice of Inability to Timely File was made on September 28, 1998 and the Annual Report form 10-KSB for fiscal year ending June 30, 1998 was filed on October 13, 1998. 4 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIAMOND EQUITIES, INC. Registrant By /s/ David D. Westfere ------------------------------------- David D. Westfere, President Date: October 26, 1998 ----------------- By: /s/ Todd D. Chisholm ------------------------------------- Todd D. Chisholm, Chief Financial Officer Date: October 26, 1998 ----------------- In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ David D. Westfere ------------------------------------- David D. Westfere, Director Date: October 26, 1998 ----------------- By: /s/ Todd D. Chisholm ------------------------------------- Todd D. Chisholm, Director Date: October 26, 1998 ----------------- 5 DIAMOND EQUITIES, INC. FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 C O N T E N T S Page ---- CONSOLIDATED INDEPENDENT AUDITORS' REPORT ...............................F-1 CONSOLIDATED BALANCE SHEET...............................................F-2 CONSOLIDATED STATEMENTS OF OPERATIONS ...................................F-3 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY...............F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS....................................F-5 NOTES TO FINANCIAL STATEMENTS ...........................................F-7 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Diamond Equities, Inc.: We have audited the accompanying consolidated balance sheet of Diamond Equities, Inc. (the "Company"), as of June 30, 1998 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamond Equities, Inc. at June 30, 1998 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. KING, WEBER & ASSOCIATES, P.C. Tempe, Arizona August 6, 1998 F-1 DIAMOND EQUITIES, INC. CONSOLIDATED BALANCE SHEET JUNE 30, 1998 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 600,231 Certificate of deposit 505,404 Accounts receivable (net of allowance of $35,588) 10,560 Notes receivable - current portion 35,750 Inventories 5,400 Prepaid expenses 5,111 ----------- Total current assets 1,162,456 PROPERTY, MACHINERY AND EQUIPMENT 197,162 OTHER ASSETS 66,000 NOTES RECEIVABLE - noncurrent portion 405,625 ----------- TOTAL ASSETS $ 1,831,243 LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable $ 111,234 Accrued liabilities 8,473 Preferred stock dividends payable 194,023 Capital lease obligations - current portion 21,362 Bank lines of credit 250,200 ----------- Total current liabilities 585,292 CAPITAL LEASE OBLIGATIONS - LONG-TERM PORTION 10,150 ----------- Total liabilities 595,442 MINORITY INTEREST 66,975 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, convertible, 18,000 shares authorized, issued and outstanding 1,817,591 Common stock, $0.001 par value, 50,000,000 shares authorized, 4,666,099 issued and outstanding 4,666 Paid in capital 2,582,282 Accumulated deficit (3,235,713) ----------- Total stockholders' equity 1,168,826 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,831,243 =========== The accompanying notes are an integral part of these consolidated financial statements. F-2 DIAMOND EQUITIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 - -------------------------------------------------------------------------------- 1998 1997 ---- ---- (AS RESTATED) GENERAL AND ADMINISTRATIVE EXPENSES $ 355,100 $ 230,021 ----------- ----------- MISCELLANEOUS (INCOME) AND EXPENSES Allowance for note and related account receivable 441,213 Interest income (53,179) (57,514) Interest expense 2,849 Other income (6,409) (896) ----------- ----------- Total other expense 384,474 (58,410) ----------- ----------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST (739,574) (171,611) INCOME TAX PROVISION 50 50 ----------- ----------- LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (739,624) (171,661) MINORITY INTEREST 5,114 ----------- ----------- LOSS FROM CONTINUING OPERATIONS (734,510) (171,661) DISCONTINUED OPERATIONS Loss from discontinued operations, net of applicable income taxes (35,413) (78,101) Gain on disposal of discontinued operations, net of applicable income taxes of $11,740 1,848,279 ----------- ----------- Total discontinued operations (35,413) 1,770,178 ----------- ----------- NET (LOSS) INCOME ($ 769,923) $ 1,598,517 =========== =========== BASIC NET (LOSS) INCOME PER COMMON SHARE Continuing operations $ (0.16) $ (0.06) Discontinued operations (0.01) 0.36 =========== =========== Total $ (0.17) $ 0.30 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,666,099 4,971,878 The accompanying notes are an integral part of these consolidated financial statements. F-3 DIAMOND EQUITIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 - --------------------------------------------------------------------------------
ACCUMULATED COMMON STOCK ADDITIONAL PREFERRED DEFICIT TOTAL SHARES AMOUNT PAID-IN STOCK (AS RESTATED) (AS RESTATED) ------ ------ ------- ----- ------------- ------------- BALANCE JULY 1, 1996 5,277,099 $ 5,277 $3,039,921 $1,817,591 ($3,955,251) $ 907,538 Recision of common stock issuance (611,000) (611) (457,639) -- -- $ (458,250) Preferred dividends -- -- -- -- (109,056) $ (109,056) Net income (AS RESTATED) -- -- -- -- 1,598,517 $ 1,598,517 ---------- ------- ---------- ---------- ----------- ----------- BALANCE JUNE 30,1997 4,666,099 4,666 2,582,282 1,817,591 (2,465,790) 1,938,749 Net loss -- -- -- -- (769,923) (769,923) ---------- ------- ---------- ---------- ----------- ----------- BALANCE JUNE 30, 1998 4,666,099 $ 4,666 $2,582,282 $1,817,591 ($3,235,713) $ 1,168,826 ========== ======= ========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 DIAMOND EQUITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 - -------------------------------------------------------------------------------- 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: (AS RESTATED) Net (loss) income $ (769,923) $ 1,598,517 Adjustments to reconcile net (loss) income to net cash used in operating activities: Undistributed minority interest (5,114) Loss from discontinued operations 35,413 78,101 Gain on sale of discontinued operations (1,848,279) Depreciation and amortization 8,458 4,979 Allowance on note and accounts receivable 441,213 Loss on disposal of equipment 1,425 Changes in assets and liabilities (net of acquisitions): Accounts receivable (9,697) 9,232 Interest receivable 316 (1,900) Inventories (5,400) Prepaid expenses (5,111) 8,742 Other assets (6,000) Accounts payable (8,068) 5,815 Accrued liabilities (99,250) (22,592) ----------- ----------- Net cash flows used in continuing activities (421,738) (167,385) Net cash flows (used in) provided from discontinued operations (123,511) 49,157 ----------- ----------- Net cash used in operating activities (545,249) (118,228) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, machinery and equipment (8,345) (4,994) Cash loaned for notes receivable (35,750) Purchase of certificates of deposit (505,404) Purchase of business assets (80,000) Cash committed and paid under investment agreement (60,000) Capital expenditures of discontinued operations (40,617) Proceeds from the sale of discontinued operations 1,688,750 ----------- ----------- Net cash (used in) provided by investing activities (689,499) 1,643,139 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on lines of credit 250,200 Payments on long-term liabilities (173,971) Cash used to rescind stock issuance (458,250) Principal payments on capital leases (2,204) ----------- ----------- Net cash provided by (used in) financing activities 247,996 (632,221) ----------- ----------- (DECREASE) INCREASE IN CASH (986,752) 892,690 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,586,983 694,293 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 600,231 $ 1,586,983 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-5 DIAMOND EQUITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 - -------------------------------------------------------------------------------- 1998 1997 ---- ---- SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 1,634 $ 17,838 ======== ======== Income taxes paid $ 11,840 $ 50 ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: 1998 Accounts payable assumed in asset purchase $ 6,490 ======== Capital leases assumed in asset purchase $ 33,716 ======== Value of subsidiary common stock issued in asset purchase $ 75,000 ======== 1997 Note receivable from sale of equipment $811,250 ======== The accompanying notes are an integral part of these consolidated financial statements. F-6 DIAMOND EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1998 AND 1997 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts and activity of Diamond Equities, Inc. and its majority owned subsidiary Precision Plastics, Inc. (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation. The Company was previously in the business of locating sites and installing pay telephone equipment. The Company would pay commissions to the owners of the sites where its equipment was located and earned its revenue based on pay telephone charges to customers. On November 15, 1996, the Company sold all of its pay-telephone assets, its only business segment, to Tru-Tel Communications, LLC. The discontinued operations were located in the southwestern United States. The Company changed its name to Diamond Equities, Inc. on June 20, 1997 and has since been seeking acquisition targets. On June 15, 1998 the Company's wholly owned subsidiary, Precision Plastics Molding, Inc. ("Precision"), purchased the assets of a plastic injection molding business. The new business is located in Arizona and its business is generated in the southwestern United States. Operations of Precision are included for the period June 15, 1998 through June 30, 1998 in the accompanying statement of operations for the year ended June 30, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS include all short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. INVENTORIES consist of finished goods, work in process and raw materials and are stated at the lower of cost (specific identification) or market. PROPERTY, MACHINERY AND EQUIPMENT are stated at cost and are depreciated on the straight-line method over their respective estimated useful lives ranging from 3 to 10 years. Property, machinery and equipment under capitalized leases are stated at the lesser of fair market value or the present value of future minimum lease payments as of the date placed in service, and amortized on the straight-line method over the term of the lease. REVENUE RECOGNITION - The Company recognizes revenue upon shipment of product and recognized revenue from the discontinued pay-telephone operation upon receipt of coin and rendering of telephone service. INCOME TAXES - The Company provides for income taxes based on the provisions of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, which among other things, requires that recognition of deferred income taxes be measured by the provisions of enacted tax laws in effect at the date of financial statements. F-7 FINANCIAL INSTRUMENTS - Financial instruments consist primarily of cash and cash equivalents, notes receivable, investments and obligations under accounts payable, accrued expenses, debt, and capital lease instruments. The carrying amounts of cash and cash equivalents, accounts payable, accrued expenses and short-term debt approximate fair value because of the short maturity of those instruments. The carrying value of the Company's capital lease arrangements approximates fair value because the instruments were valued at the retail cost of the equipment at the time the Company entered into the arrangements. Fair value of officer notes receivable cannot be estimated because of the nature of the relationship with the creditor. The fair value of the note receivable related to the business segment disposal is discussed in Note 5. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS (LOSS) PER COMMON SHARE - Net earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The Company adopted SFAS No. 128 EARNINGS PER SHARE for the year ended June 30, 1997. There was no effect of adopting SFAS No. 128 on net income per common share other than because SFAS No. 128 requires the use of income from continuing operations as the "control number" for determination of whether to include potentially dilutive securities, diluted earnings per share for the year ended June 30, 1997 is not presented because the effect of including the convertible preferred stock would be antidilutive since there is a loss from continuing operations. 3. CASH AND CASH EQUIVALENTS The Company maintains cash balances at banks in Arizona. Accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. At June 30, 1998, the Company's uninsured bank balances total $954,872. 4. INVESTMENT The Company entered into an investment agreement in March 1998 to purchase 120,000 shares of common stock of a company at $0.50 per share or $60,000. The agreement stipulates that the funds are to be held in a separate account and used by the investee to pay agreed upon expenditures. The shares are being held by a transfer agent and are to be issued ratably as expenditures are paid. At June 30, 1998, $10,763 had been advanced and the balance of $49,237 remains in the special restricted account. The total investment balance of $60,000 is included in other assets in the accompanying balance sheet. F-8 5. NOTES RECEIVABLE Notes receivable consist of the following at June 30, 1998: Note receivable, sale of assets $ 811,250 Loans to officers 20,000 Other receivables 15,750 Allowance for possible losses (405,625) --------- Total 441,375 Less current portion 35,750 ========= Long-term portion $ 405,625 ========= On November 15, 1996 the Company sold all of its assets related to the operation of the pay-telephone business. In connection with the sale of the assets, the Company received a note receivable of $811,250. The note is payable to the Company in monthly installments of $14,000 including interest at 8% per annum, which were to commence February 15, 1997, with the balance due January 15, 2002. No payments have been received on the note and the Company has commenced legal proceedings to collect the amount. Management has estimated the discounted value of the note based on probabilities it has established for collection and timing of such collections including any receipt of collateral from the guarantor. However, management believes there is significant uncertainty regarding the timing of any future payments as well as the value of personal assets available from the guarantor of the note. No payments have been received and there is uncertainty as to the outcome of the litigation. Management believes that an allowance for loss of $405,625 is reasonable. Interest income on the impaired loan will be recognized only when payments are received. 6. INCOME (LOSS) PER SHARE
1998 1997 ---- ---- Per (as restated) Per Income Shares Share Income Shares Share ------ ------ ----- ------ ------ ----- Net (Loss) Income $(769,923) 4,666,099 $ 1,598,517 4,971,878 Preferred Stock Dividends -- (109,056) --------- ----------- $(769,923) $ 1,489,461 ========= =========== BASIC EARNINGS PER SHARE (Loss) Income Available to Common Shareholders Continuing operations (734,510) $(0.16) $ (280,717) $(0.06) Discontinued operations (35,413) (0.01) 1,770,178 0.36 --------- ------ ---------- ------ Total $(769,923) 4,666,099 $(0.17) $ 1,489,461 4,971,878 $ 0.30 ========= ====== =========== ====== Effect of Dilutive Securities Preferred Stock N/A N/A DILUTED EARNINGS PER SHARE N/A N/A
Diluted earnings per share are not presented because the effect of such would be antidilutive for both years ending June 30, 1998 and 1997 because the Company has losses from continuing operations. F-9 7. INVENTORIES Inventories consist of the following at June 30, 1998: Raw materials $ 300 Work in process 4,891 Packaging supplies 209 ------ Total inventories $5,400 ====== 8. PROPERTY, MACHINERY AND EQUIPMENT Property, machinery and equipment consisted of the following at June 30, 1998: Equipment $172,320 Furniture and fixtures 33,711 Office equipment 8,769 -------- Total 214,800 Less accumulated depreciation and amortization 17,638 Property, machinery and equipment - net $197,162 ======== Depreciation expense for the years ended June 30, 1998 and 1997 was $8,458 and $4,979, respectively. 9. BUSINESS ACQUISITION In June, 1998, the Company, through its Precision subsidiary, purchased substantially all of the operating assets of Premier Plastics Corporation, a plastic injection molding business in Tempe, Arizona, for an $80,000 cash payment, the assumption of liabilities in the amount of $40,000 and the issuance of 300,000 shares of common stock of the subsidiary valued at $75,000. The acquisition was recorded under the purchase method of accounting. The aggregate purchase price of $195,000 has been allocated to the assets acquired and liabilities assumed based on their respective fair market values. The aggregate consideration paid approximated the fair market value of the net assets acquired and no goodwill was recorded. The operating results of Premier Plastics are included in the accompanying consolidated financial statements for the period June 15, 1998 through June 30, 1998. The following summarizes unaudited pro forma consolidated financial information assuming that the acquisition of Premier Plastics Corporation occurred on July 1, 1997: Net Sales $ 307,601 Net Loss $(693,432) Loss per Share $ ( 0.15) The pro forma financial information is presented for informational purposes only and may not necessarily reflect the results had Premier Plastics Corporation actually been acquired on July 1, 1997, nor is this information indicative of the future consolidated results. F-10 Management determined that is was not practicable to determine results of operations for Premier for the year ended June 30, 1997 10. BANK LINES OF CREDIT Bank line of credit, collateralized by certificate of deposit, interest at prime plus 0.25% (8.75% at June 30, 1998), interest is due monthly, principal due March 1999, credit limit of $200,000 $150,200 Bank line of credit, collateralized by certificate of deposit, interest at prime plus 7.64%, interest is due monthly, principal due April 1999, credit limit of $235,000 100,000 -------- Total current portion $250,200 ======== 11. INCOME TAXES The Company recognizes deferred income taxes for the differences between financial accounting and tax bases of assets and liabilities. Income taxes for the years ended June 30, consisted of the following: 1998 1997 ---- ---- Current tax provision (benefit) $(134,551) $ 11,790 Deferred tax provision 134,501 -0- --------- -------- Total income tax provision $ 50 $ 11,790 ========= ======== A deferred tax liability of $162,000 at June 30, 1998 relates primarily to the difference in the financial accounting and tax bases of the note receivable related to the sale of business assets in fiscal 1997. A deferred tax asset of $882,736 relates primarily to net operating loss carryforwards at June 30, 1998 of $2,064,000 for both federal and state purposes and a credit for alternative minimum tax purposes of $11,740. The federal carryforwards expire in fiscal 2009 through 2013. The state carryforwards expire in fiscal 2000 through 2004. The deferred income tax asset is significantly offset by a valuation allowance of $720,736. Deferred income taxes for the year ended June 30, 1998, relate to temporary differences for the recognition of a deferred income tax asset for the net operating loss carryforward. The valuation allowance was increased $300,736 from $420,000 (as restated) to $720,736, reflecting primarily the increase in the 1998 current tax benefit and the $162,000 decrease in the deferred income tax liability related to the allowance recorded on note receivable which was accounted for under an installment method for income tax purposes on the sale of assets in fiscal 1997. F-11 A reconciliation setting forth the differences between the effective and statutory tax rate is as follows: 1998 1997 ---- ---- Federal statutory rates (34.0)% 34.0% State income taxes (8.0) 9.0 Valuation allowance and utilization of operating loss carryforwards 39.2 (42.3) Other, net 2.8 -- ----- ----- Effective rate -0-% 0.7% ===== ===== 12. LEASES OPERATING LEASES The Company leases its administrative office and operations facility under operating leases that expire in 1999 and 1998, respectively. Rent expense under these leases was approximately $12,000 and $11,000 for the years ended June 30, 1998 and 1997. Minimum annual lease payments under these agreements are as follows: Years ended June 30: 1999 $ 15,112 2000 2,190 -------- Total $ 17,302 ======== CAPITAL LEASES The Company assumed capital leases for equipment in the purchase of assets as discussed in Note 7. The following presents future minimum lease payments under capital leases by year and the present value of minimum lease payments as of June 30, 1998: Year ended June 30: 1998 $24,394 1999 10,519 ------ Total minimum lease payments 34,913 Less amount representing interest 3,401 Present value of minimum lease payments 31,512 Current portion 21,362 ------- Long-term portion $10,150 ======= Assets capitalized under the capital leases total approximately $82,000. F-12 13. STOCKHOLDERS' EQUITY PREFERRED STOCK In November 1997, the Company's Board of Directors approved the issuance and exchange of 18,000 shares of a new Series B Preferred Stock for the outstanding 727 shares of Series A Stock. The Series B Preferred Stock was valued at $1,817,591, the stated value of the Series A Stock, and is convertible into 18,000,000 shares of common stock. The Series A Stock 6% cumulative dividends shall remain in arrears in the amount of $194,023 or $266.88 per share. There are no cumulative dividends on the Class B preferred stock. COMMON STOCK Options to purchase 250,000 shares of common stock granted in April 1995 pursuant to a consulting agreement, which was terminated in October 1996, were canceled in November 1997. 14. DISCONTINUED OPERATIONS On November 15, 1996 the Company entered into an asset purchase agreement with Tru-Tel Communications, LLC whereby all of the assets related to the operation of the pay-telephone business were sold. Proceeds from the sale included $1,688,750 cash and a promissory note (see Note 5) for $811,250. Tru-Tel Communications, LLC assumed the Company's capital lease on equipment and operating leases on facilities. The Company recorded a gain on the sale of the assets of $1,848,279 after taxes. Revenues from the discontinued operations totaled $835,858 for the year ended June 30, 1997. The results of discontinued operations for the year ended June 30, 1998 represent the final settlement of an estimated sales tax liability that had been contested by the Company. Because the tax benefit of the loss is offset by a corresponding valuation allowance, there is no tax effect of the loss from discontinued operations for the year ended June 30, 1998. 15. EMPLOYEE STOCK OPTION PLAN The Company adopted an employee stock option plan in June 1998 pursuant to which options may be granted to key employees, including officers, whether or not they are directors, who are selected by the Board of Directors. The exercise price of the options granted pursuant to the Plan shall be determined by the Board of Directors on a case-by-case basis. Options are exercisable over a three year period and only while the optionee remains an employee of the Company, except that, in the event of an optionee's termination of employment by reason of disability or death while an employee. The aggregate number of shares that may be issued under the Plan shall not exceed 900,000 shares. As of June 30, 1998, no options had been granted under the Plan. 16. RELATED PARTY TRANSACTIONS The Company loaned $10,000 each to two officers of the Company in May 1998. The notes receivable bear interest at 5% with principal and interest due May 1999. F-13 The Company pays $3,000 per month to C&N, Inc. ("C&N") for management services. C&N is owned by an officer and director of the Company and his family. The agreement between the Company and C&N commenced on January 1, 1995 and is renewable from year to year. The Company paid C&N $36,000 under this agreement during the years ended June 30, 1998 and 1997. An officer and director of the Company performs accounting services for the Company at a flat fee per month for compilation and payroll services and is paid an hourly fee for any additional work. The Company paid $28,610 to the officer's accounting firm for the year ended June 30, 1998. In October 1996 the Company entered into a Severance Agreement with a former director of the Company pursuant to which the Company agreed to pay $5,000 per month to the individual through April 1998. For the years ended June 30, 1998 and 1997, $2,217 and $107,783 respectively, are included in discontinued operations relating to this agreement. 17. COMMITMENTS AND CONTINGENCIES In connection with the sale of its pay-telephone operations, the Company received a promissory note in the principal sum of $811,250. Monthly payments of $14,000 on the note were to commence on February 15, 1997. No payments on the note have been received. On March 18, 1997 a complaint for breach of contract was filed. The complaint alleges an anticipatory breach by the defendant, Tru-Tel Communications, LLC, issuer of the promissory note. The complaint also names as party defendants, the principals of Tru-Tel Communications, LLC, and Finova Capital Corporation (provider of the financing used to purchase the assets). The defendants have responded by filing counterclaims. The counterclaims allege that the Company failed to disclose accurately the average life of the placement contracts for the pay telephones in the Phoenix and Tucson, Arizona area and that the revenues reported to Tru-Tel Communications, LLC and Finova Capital Corporation were purportedly overstated at the time of the asset purchase agreement. Tru-Tel Communications, LLC is claiming that they have been damaged in an amount in excess of $900,000. The Company intends to vigorously contest the counterclaims and pursue the original claims against all party defendants. A trial date of June 1, 1999 has been scheduled. Although the Company believes that the outcome of this matter will not adversely affect the Company's financial condition or results of operations, if the defendant prevails in this matter, it would be unlikely that the Company would collect on the balance of the note receivable discussed in Note 5. On June 15, 1998, the Company entered into an employment agreement with an employee for an initial term of three years. The employee is to receive a base salary ranging from $65,000 to $95,000 depending on annual sales and shall be adjusted annually by the increase, if any, in the cost of living. For each fiscal year in which the Company has positive earnings before depreciation, interest and taxes (EBDIT) in the amount of $500,000, the employee shall receive a bonus of 5% of EBDIT. The agreement is renewable for additional three year terms. F-14 18. SUBSEQUENT EVENTS The Company's subsidiary, Precision, entered into an asset purchase and sale agreement with a plastic injection molding business on July 15, 1998. Precision acquired the assets for a purchase price of $560,000, consisting of a $375,000 cash payment and a promissory note in the amount of $185,000, and the assumption of specified liabilities totaling $671,603. The note is secured by the assets and bears interest at 8% with the principal and accrued interest payable in two installments of $105,000 due ninety days from the closing and $80,000 due one hundred eighty days from the closing. On July 17, 1998, the Company purchased 2,000,000 shares of common stock of its majority owned subsidiary Precision for $400,000. 19. PRIOR PERIOD ADJUSTMENT The financial statements for the year ended June 30, 1997 have been restated for correction of an error related to a severance agreement entered into by the Company with a former officer. The error relates to failure to accrue the liability incurred under that agreement at June 30, 1997. The effect of the error resulted in reducing net income for the year ended June 30, 1997 by $47,783 representing the unpaid balance of the severance agreement at June 30, 1997. The effect of the restatement is as follows: As previously For the year ended June 30, 1997 reported As restated ------------------------------------------------------------------------ Balance sheet: Accrued expenses $ 59,940 $ 107,723 Accumulated deficit 2,418,007 2,465,790 Statement of operations: Loss from continuing operations (206,661) (171,661) Income from discontinued operations 1,852,961 1,770,178 Net Loss 1,646,300 1,598,517 Net Inocme (Loss) per Common Share: Continuing operations $ (0.06) $ (0.06) Discontinued operations 0.37 0.36 =========== ========== Total $ 0.31 $ 0.30 =========== ========== * * * * * * F-15 -----END PRIVACY-ENHANCED MESSAGE-----