UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES AND EXCHANGE COMMISSION
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For transition period from _______________ to _______________
Commission File Number: 0-17953
DIAMOND ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2748019
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Tucker Lane, Walnut California, California 91789 (Address of
principal executive offices)
(909) 839-1989
(Issuer's telephone number, including area code)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
As of December 31, 2000, there were 69,634,029 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 2000
[Unaudited]........................................................ 2-3
Condensed Consolidated Statements of Operations for the three
and nine months ended December 31, 2000 and 1999 [Unaudited]....... 4
Condensed Consolidated Statements of Cash Flows for nine months
ended December 31, 2000 and 1999 [Unaudited]....................... 5-6
Notes to Condensed Consolidated Financial Statements [Unaudited]... 7-9
Item 2: Management's Discussion and Analysis or Plan of Operations... 10-15
Part II. Other Information
Item 1: Legal Proceedings..... ...................................... 16
Item 2: Changes in Securities........................................ 16-17
Item 3: Defaults Upon Senior Securities.............................. 17
Item 4: Submission of Matters to a Vote of Security Holders.......... 17
Item 5: Other Information............................................ 17
Item 6: Exhibits and Reports on Form 8-K............................. 17
Signatures............................................................ 18
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000
[UNAUDITED]
ASSETS
CURRENT ASSETS
Accounts Receivable, net of allowance for
Doubtful accounts of $164,122 $ 547,548
Deferred consulting costs 87,083
Inventory 947,991
Prepaid expenses and other current assets 85,177
-----------
Total Current Assets 1,667,799
FURNITURE AND EQUIPMENT, net 231,837
FILM MASTERS AND ARTWORK, less
Accumulated amortization of $3,928,961 85,821
OTHER ASSETS
Investment in ATRE 50,000
Other assets 62,982
-----------
TOTAL ASSETS $ 2,098,439
===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000
[UNAUDITED]
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts Payable and accrued expenses 1,927,207
Financing payable 662,167
Notes payable - current portion 56,036
Notes payable related party - current portion 566,381
Convertible debentures related party- current portion 809,500
Convertible debentures - current portion 1,048,075
Capital lease obligations - current portion 25,327
-----------
Total Current Liabilities 5,094,693
LONG TERM LIABILITIES
Notes payable, less current portion 40,000
Notes payable related party, less current portion 150,000
Convertible debentures, less current portion 100,000
-----------
Total Liabilities 5,384,693
-----------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' DEFICIENCY
Convertible Preferred Stock - No Par Value,
5,000,000 Shares Authorized, 483,301 Issued
[of which 172,923 are held in Treasury] 809,593
Common Stock - No Par Value, 600,000,000 Shares
Authorized; 69,634,029 Shares Issued and Outstanding 14,466,035
Accumulated Deficit (18,513,079)
Treasury Stock ( 48,803)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY ( 3,286,254)
-----------
TOTAL LIABILITES AND STOCKHOLDERS' DEFICIENCY $ 2,098,439)
===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS [UNAUDITED]
Three months ended Nine months ended
December 31, December 31,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------
SALES - net $ 919,694 $1,521,926 $2,393,260 $ 3,195,037
COST OF GOODS SOLD 523,331 1,345,255 1,444,123 2,505,669
---------- ----------- ---------- -----------
GROSS PROFIT 396,363 176,671 949,137 689,368
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 579,287 606,668 1,493,139 2,168,705
---------- ----------- ---------- -----------
LOSS FROM OPERATIONS (182,924) (429,997) (544,002) (1,479,337)
---------- ----------- ---------- -----------
OTHER INCOME (EXPENSES)
Interest Expense (139,454) ( 78,633) (300,098) ( 385,532)
Other income 12 670 195 8,262
---------- ----------- ---------- -----------
LOSS BEFORE INCOME TAXES (322,366) (507,960) (843,905) (1,856,607)
---------- ---------- ---------- -----------
INCOME TAXES - - - -
---------- ---------- ---------- -----------
NET LOSS (322,366) (507,960) (843,905) (1,856,607)
---------- ---------- ---------- -----------
PREFERRED DIVIDEND ( 7,500) - ( 18,750) -
---------- ---------- ---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES $( 329,866) $ (507,960) $ (862,655) $(1,856,607)
========== =========== ========== ===========
LOSS PER SHARE, basic and diluted
NET LOSS $ - $ ( .01) $ ( .01) $ ( .03)
PREFERRED DIVIDEND - - - -
---------- ----------- ---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES $ - $ ( .01) $ ( .01) $ ( .03)
========== =========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 69,634,029 57,959,029 68,011,807 57,231,529
========== ========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS [UNAUDITED]
Nine months ended
December 31,
2000 1999
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (862,655) $(1,856,607)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 233,256 242,902
Bad debt expense 101,001 189,796
Non-cash consulting and compensation expense 149,338 343,530
Non-cash interest expense - 155,000
Increase (decrease)in accounts receivable (126,352) 333,949
Increase in inventory 146,887 881,639
Increase (decrease)in prepaid expense 31,279 (47,836)
Increase (decrease)in Other Assets (2,000) 43,802
Decrease in deferred Cost 87,083 110,880
Increase (decrease)in accounts payable and
accrued expenses 441,065 (302,417)
Decrease (increase)in obligation Payable (110,179) 49,653
---------- -----------
Net cash provided by operating activities 88,723 144,291
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments by ATRE 122,900 159,400
Purchase of property and equipment ( 9,549) (16,189)
Purchases of masters and artwork ( 4,572) (33,369)
---------- -----------
Net cash provided by investing activities $ 108,779 $ 109,842
---------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS [UNAUDITED](continued)
Nine months ended
December 31,
2000 1999
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in book overdraft ( 19,428) (201,918)
Net repayments of financing agreement (246,964) (452,616)
Proceeds from notes payable - -
Payment of notes payable ( 93,598) (128,213)
Proceeds from notes payable related parties 190,000
Payments of notes payable related party (1,270,985) (264,725)
Proceeds from convertible debentures 809,500 150,000
Payments of convertible debentures ( 2,700) (225,000)
Payments on capital leases ( 21,327) (23,104)
Proceeds from sale of preferred convertible stocks 433,000 -
Proceeds from the exercise of options 215,000 653,400
---------- -----------
Net cash used in by financing activities (197,502) (302,176)
---------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 0 ( 48,043)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 0 48,074
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 0 $ 31
=========== ============
SUPPLEMENTAL INFORMATION
Interest paid $ 132,191 $ 230,780
========== ===========
Income taxes paid $ - $ -
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been
prepared by Diamond Entertainment Corporation (the "Company"), pursuant to the
rules and regulations of the Securities and Exchange Commission. The information
furnished herein reflects all adjustments (consisting of normal recurring
accruals and adjustments) which are, in the opinion of management, necessary to
fairly present the operating results for the respective periods. Certain
information and footnote disclosures normally present in annual consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The results
of the nine months ended December 31, 2000 are not necessarily indicative of the
results to be expected for the full year ending March 31, 2001.
NOTE 2 - STOCK OPTION PLAN
On June 9, 2000, the Board of Directors of the Company approved the
Company's 2000 Stock Compensation Plan ("Plan") for the purpose of providing the
Company with a means of compensating selected key employees (including
officers), directors and consultants to the Company and its subsidiaries for
their services rendered in connection with the development of Diamond
Entertainment Corporation with shares of Common Stock of the Company. The plan
authorizes the Board of Directors of the Company to sell or award up to
13,000,000 shares and/or options of the Company's Common Stock, no par value. As
of December 31, 2000, the remaining balance of options to be sold or awarded in
accordance with the Plan was 5,700,000 shares.
NOTE 3 - CONSULTING AGREEMENTS
On June 1, 2000, the Company entered into three consulting agreements that
will terminate on May 31, 2001, whereby the consultants will provide consulting
service for the Company concerning management, marketing, consulting, strategic
planning, corporate organization and financial matters in connection with the
operation of the businesses of the Company, expansion of services, acquisitions
and business opportunities. The consultants received options to purchase a total
of 7,300,000 of the Company's common stock exercisable at $.035 per share in
exchange for services to be rendered and the options shall expire on May 31,
2001.
The per unit weighted-average fair value of unit options granted on June 1,
2000 was $0.029 at the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions: weighted-average
risk-free interest rate of 5.86; dividend yield of 0%; weighted-average
volatility factor of the expected market price of the Company's common stock of
178%; and a weighted average expected life of the option was 2 months. In June
and July of 2000, the Company received $215,500 in cash for the issuance of the
6,157,143 shares upon the exercise of these options and the remaining options of
1,142,857 were exercised for consulting services incurred and owed by the
Company to one of the consultants totaling $30,000 and from the cancellation of
an obligation of $10,000 in principal and interest owed to the same consultant.
The options had an aggregate fair value at the date of grant of approximately
$211,000.
7
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 24, 2000, the Company engaged a consulting firm for a period of one
year to provide advice to undertake for and consult with the company concerning
management, marketing, consulting, strategic planning, corporate organization
and structure, financial matters in connection with the operation of the
businesses of the Company, expansion of services, acquisitions and business
opportunities, and shall review and advise the Company regarding its overall
progress, needs and conditions. The consulting firm was granted options to
purchase 600,000 shares of the Company's Common Stock with an exercise price at
$0.05 per share and the options shall expire on July 24, 2003. These options
were not exercised as of December 31, 2000.
NOTE 4 - SERIES A CONVERTIBLE PREFERRED STOCK
On May 11, 2000, the Company entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with eight investors. Pursuant to the
Securities Purchase Agreement, the Company issued and sold 50 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") for total consideration
of $500,000, or $10,000 per share. The May Davis Group, Inc. ("May Davis"),
acted as placement agent for the offering. May Davis received a placement fee of
$40,000 and the Company issued warrants to purchase 1,500,000 shares of Common
Stock to May Davis and certain designees of May Davis and warrants to purchase
25,000 shares of Common Stock to Butler Gonzalez, LLP, counsel to May Davis.
Such warrants are exercisable at a price of $.08 per share.
Commencing August 9, 2000, the Series A Preferred Stock is convertible, at
the investors' option, into shares of the Company's common Stock and
automatically converts into Common Stock on April 12, 2002. The conversion price
of the Series A Preferred Stock is the lower of $.08 per share or 80% of the
average of the closing bid prices of the Company's Common Stock on any five
trading days in the ten trading day period preceding the date of conversion. The
conversion price of the Series A Preferred Stock is also adjusted in the event
of stock dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. The Series A Preferred stock also
provides for a dividend upon conversion of the Series A Preferred Stock at the
rate of 6% per annum payable in additional shares of the Company's Common Stock.
An accrual was recorded as a dividend expense for approximately $18,750 during
the nine month period ended December 31, 2000. In no event can the Series A
Preferred Stock be converted into more than 11,875,000 shares of Common Stock.
Additional features of the Series A Preferred Stock include, among other
things, i) a redemption feature at the option of the Company commencing
September 8, 2000, of shares of Series A Preferred Stock having a stated value
of up to $100,000, ii) a mandatory redemption feature upon the occurrence of
certain events such as a merger, reorganization, restructuring, consolidation or
similar event, and a liquidation preference over the Common Stock in the event
of a liquidation, winding up or dissolution of the Company. The Series A
Preferred Stock does not provide any voting rights, except as may be required by
law.
8
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - SERIES A CONVERTIBLE PREFERRED STOCK (continued)
Under Registration Rights Agreements the Company entered into with the
purchasers of the Series A Preferred Stock, the Company is required to file a
registration statement to register the Common Stock issuable upon conversion of
the Series A Preferred Stock under the Securities Act to provide for the resale
of such Common Stock. The registration statement was declared effective by the
Securities and Exchange Commission at 10:00 AM on January 4, 2001. The Company
is required to keep such registration statement effective until all of such
shares have been resold.
NOTE 5 - AUTHORIZED SHARES
In July 2000, the Company amended its Articles of Incorporation to increase
the number of authorized common stock from 100,000,000 shares to 600,000,000
shares.
NOTE 6 - SUBSEQUENT EVENTS
During January and February 2001, seven shareholders converted an
aggregate of ten shares or $100,000.00 of the Company's Series A Preferred Stock
into the common stock of the Company at an average conversion price of
approximately $0.008. Upon conversion, the Company issued in January and
February 2001, an aggregate of 11,546,619 shares of its common stock to the
seven shareholders.
9
Item 2: Management's Discussion and Analysis or Plan of Operations
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes for the year
ended March 31, 2000 included in its Annual Report on Form 10KSB. The discussion
of results, causes and trends should not be construed to imply any conclusion
that such results or trends will necessarily continue in the future.
Overview
- --------
During the nine months ended December 31, 2000, we continued to implement our
operational changes to meet our plan to position the Company as a going concern
to generate positive cash flow starting the fourth quarter of fiscal year 2001.
We have made substantial gains towards converting our video products sales to
higher margin DVD format sales during fiscal year 2001. During the nine months
ended December 31, 2000, DVD product sales accounted for approximately 24% of
total sales. We have also reduced operating expenses by approximately $676,000
during the nine month period ended December 31, 2000 when compared to the same
period a year earlier.
Although the Company believes that the outlook is favorable, there can be no
assurance that market conditions will continue in a direction favorable to the
Company.
NINE MONTHS ENDED DECEMBER 31, 2000 COMPARED WITH THE NINE MONTHS ENDED DECEMBER
31, 1999:
Results of Operations
- ---------------------
The Company's net loss before preferred dividend for the nine months ended
December 31, 2000 was approximately $844,000 as compared to a net loss of
approximately $1,857,000 for the same period last year. The primary reason for
the net loss was the Company's operating loss of approximately $544,000.
The Company's operating loss for the nine months ended December 31, 2000 was
$544,000 as compared to an operating loss of approximately $1,479,000 for the
same period last year. The decrease in the Company's operating loss of
approximately $935,000 arose primarily from decreased operating expenses of
approximately $676,000, and an increase in gross profit of approximately
$260,000.
10
The Company's sales for the nine months ended December 31, 2000 and 1999, were
approximately $2,393,000 and $3,195,000 respectively. The Company's sales
decreased by approximately $802,000 from the same period a year earlier with
decreased video product sales and toy products of approximately $1,143,000 and
$230,000, respectively, offset by an increase in DVD product sales of
approximately $571,000. The lower video and toy product sales when compared to
the same period a year earlier was attributable to lower demand from our major
customers resulting from primarily, the lack of new products. The Company plans
to acquire new titles for videocassette and DVD products over the remainder of
fiscal year 2001. Sales of the Company's products are generally seasonal
resulting in increased sales starting in the third quarter of the fiscal year.
Cost of sales for the nine months ended December 31, 2000 and 1999 were
$1,444,000 and $2,506,000 or 60% and 78% of sales, respectively. The decrease in
cost of goods of approximately $1,062,000 was due to lower sales volume of video
and toy products offset by lower DVD product cost. The decrease in the cost of
sales percentage to sales of approximately 18% when compared the same period a
year earlier, was primarily the result of recording in the previous year's
period, toy product sales with lower margins coupled with the cost associated
with the write-down of video related inventory.
Gross profit for the nine months ended December 31, 2000 and 1999 was
approximately $949,000 and $689,000, or 40% and 22% of sales, respectively. The
higher gross margin of approximately $949,000 was partially the result of the
product mix moving towards the higher margin DVD product line offset by lower
sales volume. Also contributing to the increased percentage for gross profit of
18%, as a percent of sales, was caused by the recording of sales of lower margin
toy products and duplication service revenues, together with the write-down of
the Company's inventory in the same period a year earlier.
Selling, General and Administrative expenses for the nine months ended December
31, 2000 and 1999 were approximately $1,493,000 and $2,169,000, respectively.
The decrease of approximately $676,000 was primarily the result of the
implementation of the Company's cost reduction plan.
General Administrative expenses for the nine months ended December 31, 2000
and 1999 were approximately $1,135,000 and $1,515,000, respectively. The
decrease in general administrative expenses of approximately $380,000 was
primarily the result of lower expense levels of office rent, legal
expenses, bad debt expenses and non-cash consulting and financing costs.
Bad debt expense for the nine months ended December 31, 2000 and 1999 was
approximately $101,000 and $190,000, respectively.
Selling expenses for the nine months ended December 31, 2000 and 1999 were
approximately $358,000 and $654,000, respectively. The decrease in selling
expenses of approximately $296,000 was attributable mainly to lower expense
levels in freight costs, advertising and sales promotion related expenses.
11
Interest expense for the nine months ended December 31, 2000 and 1999 was
$300,000 and $385,000 respectively. The decrease in interest expense of
approximately $85,000 was primarily the result of lower non-cash interest
expenses associated with issuance of stock options. As of December 31, 2000, the
outstanding debt of the Company was approximately $3,457,000 of which
approximately $3,167,000 is classified as current.
The Company's auditors issued a going concern report for the year ended March
31, 2000. There can be no assurance that management's plans to reduce operating
losses will continue or the Company's efforts to obtain additional financing
will be successful.
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 1999:
Results of Operations
- ---------------------
The Company's net loss before preferred dividend for the three months ended
December 31, 2000 was approximately $322,000 as compared to a net loss of
approximately $508,000 for the same period last year. The primary reason for the
net loss was the Company's operating loss of approximately $183,000.
The Company's operating loss for the three months ended December 31, 2000 was
$183,000 as compared to an operating loss of approximately $430,000 for the same
period last year. The decrease in the Company's operating loss arose primarily
from reduced operating expenses of approximately $27,000 and an increase in
gross profit of approximately $220,000.
The Company's sales for the three months ended December 31, 2000 and 1999, were
approximately $919,000 and $1,522,000 respectively. The Company's sales
decreased by approximately $603,000 from the same period a year earlier with
lower video product and toys sales of approximately $798,000 and $69,000,
respectively, offset by increased DVD product sales of approximately $264,000.
The lower video and toy product sales when compared to the same period a year
earlier was attributable to lower demand from our major customers resulting from
primarily, the lack of new products. The Company plans to acquire new titles for
videocassette and DVD products over the remainder of fiscal year 2001. Sales of
the Company's products are generally seasonal resulting in increased sales
starting in the third quarter of the fiscal year.
Cost of sales for the three months ended December 31, 2000 and 1999 was $523,000
and $1,345,000 or 57% and 88% of sales, respectively. The decrease in cost of
goods of approximately $822,000 was attributable primarily to lower sales
volume.
12
Gross profit for the three months ended December 31, 2000 and 1999 were
approximately $396,000 and $177,000, or 43% and 12% of sales, respectively. The
higher gross margin of approximately $219,000 was partially the result of the
product mix moving towards the higher margin DVD product line offset by lower
sales volume. Also contributing to the increased percentage for gross profit of
31%, as a percent of sales, was the result of the recording of sales of lower
margin toy products and duplication service revenues, together with the
write-down of the Company's inventory in the same period a year earlier.
Selling, General and Administrative expenses for the three months ended December
31, 2000 and 1999 were approximately $579,000 and $607,000, respectively. This
decrease in operating expenses of approximately $28,000 was the result primarily
of the Company's lower expense levels in rent and bad debt expense of
approximately $177,000, offset primarily by higher salaries and depreciation
expense totaling approximately $149,000. Bad debt expense for the three months
ended December 31, 2000 and 1999 were approximately $10,000 and $124,000,
respectively.
Interest expense for the three months ended December 31, 2000 and 1999 was
$139,000 and $79,000 respectively. The increase in interest expense of
approximately $60,000 was the result of higher levels of borrowings offset by
lower non-cash interest expenses associated with issuance of stock options.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit at December 31, 2000 was approximately
$3,427,000 as compared with a working capital deficit of $2,702,000 at December
31, 1999. This increase in the working capital deficit of approximately $725,000
is primarily the result of lower levels of inventory and prepaid expenses,
offset by increased borrowings.
Operations
- -------------
For the nine months ended December 31, 2000, cash provided by operations was
approximately $89,000 as compared to $144,000 for the nine months ended December
31, 1999. Net cash utilized in financing activities during the nine months ended
December 31, 2000, and 1999 were approximately $198,000 and $302,000,
respectively.
The Company has also been experiencing difficulties in paying its vendors on a
timely basis. These factors create uncertainty as to whether the Company can
continue as a going concern.
13
The Company is currently implementing an alternative cash flow plan to react to
this situation. The principal objective of the Company is to have the above
back-up plan and required financing implemented by the end of fiscal 2001, which
can lead to a profitable operation if they are successfully implemented, and
will be subject to market and other conditions. Although the Company believes
that the outlook is favorable, there can be no assurance that market conditions
will continue in a direction favorable to the Company.
Investing
- ----------
For the nine months ended December 31, 2000 and 1999, investments in masters and
artwork were approximately $5,000 and $33,000, respectively. Management
continues to seek to acquire new titles to enhance its product lines.
American Top Real Estate, Inc. ("ATRE") was formed in March 1989 for the
purposes of acquiring, owning and holding real property for commercial
development. ATRE does not engage in any other business operations. The Company
paid $50,000 for a 50% interest in ATRE. The Company's arrangement with its
partners in ATRE requires that all parties contribute capital or loans pro rata
according to their interests whenever required by ATRE for land acquisition,
principal or interest payments, property taxes or other expenses.
On June 2, 1999, ATRE entered into a real estate sale agreement for
approximately $600,000 and in September 1999, entered into a sales agreement for
another parcel of the remaining acres for approximately $550,000. During June
2000, the sales agreement for $600,000 entered into on June 2, 1999 was canceled
by the buyer who forfeited the $25,000 purchase deposit to ATRE. On September
19, 2000, ATRE closed the sale for one parcel of the remaining acres for
$550,000. The net proceeds of this sale was applied against ATRE'S outstanding
mortgage loan which was collateralized by the property sold. ATRE had previously
repaid the Company all past loans it borrowed from the Company including all
applicable interest and at December 31, 2000, the Company owed ATRE $602,400 in
accumulated loans it received, consisting of proceeds from ATRE's mortgage loans
and partial proceeds from parcels previously sold. ATRE believes the remaining
parcels will be sold and continues to list the properties with its real estate
agent. Future sales are contingent on market conditions and there can be no
assurance that ATRE will sell the remaining parcels within the next one to three
years.
Financing
- -----------
On May 11, 2000, the Company entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with eight investors. Pursuant to the
Securities Purchase Agreement, the Company issued and sold 50 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") for total consideration
of $500,000, or $10,000 per share. The May Davis Group, Inc. ("May Davis"),
acted as placement agent for the offering. May Davis received a placement fee of
$40,000 and the Company issued warrants to purchase 1,500,000 shares of Common
Stock to May Davis and certain designees of May Davis and warrants to purchase
25,000 shares of Common Stock to Butler Gonzalez, LLP, counsel to May Davis.
Such warrants are exercisable at a price of $.08 per share.
14
Commencing August 9, 2000, the Series A Preferred Stock is convertible, at the
investors' option, into shares of the Company's common Stock and automatically
converts into Common Stock on April 12, 2002. The conversion price of the Series
A Preferred Stock is the lower of $.08 per share or 80% of the average of the
closing bid prices of the Company's Common Stock on any five trading days in the
ten trading day period preceding the date of conversion.
The conversion price of the Series A Preferred Stock is also adjusted in the
event of stock dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. The Series A Preferred stock also
provides for a dividend upon conversion of the Series A Preferred Stock at the
rate of 6% per annum payable in additional shares of the Company's Common Stock.
An accrual was recorded as a dividend expense for $18,750 during the nine month
period ended December 31, 2000. In no event can the Series A Preferred Stock be
converted into more than 11,875,000 shares of Common Stock.
Additional features of the Series A Preferred Stock include, among other things,
i) a redemption feature at the option of the Company commencing September 8,
2000, of shares of Series A Preferred Stock having a stated value of up to
$100,000, ii) a mandatory redemption feature upon the occurrence of certain
events such as a merger, reorganization, restructuring, consolidation or similar
event, and a liquidation preference over the Common Stock in the event of a
liquidation, winding up or dissolution of the Company. The Series A Preferred
Stock does not provide any voting rights, except as may be required by law.
Under Registration Rights Agreements the Company entered into with the
purchasers of the Series A Preferred Stock, the Company is required to file a
registration statement to register the Common Stock issuable upon conversion of
the Series A Preferred Stock under the Securities Act to provide for the resale
of such Common Stock. The registration statement was declared effective by the
Securities and Exchange Commission at 10:00 AM on January 4, 2001. The Company
is required to keep such registration statement effective until all of such
shares have been resold.
Impact of Inflation
- -------------------
The Company does not believe that inflation had an impact on sales or income
during the past several years. Increases in supplies or other operating costs
could adversely affect the Company's operations; however, the Company believes
it could increase prices to offset increases in costs of goods sold or other
operating costs.
Forward Looking Statements
- --------------------------
Forward looking statements are 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. Stockholders are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
ability of us to implement our new plan to attain our primary goals as discussed
above under "Operations." Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements contained in the report will prove to be
accurate.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
On June 1, 2000, the Company entered into three consulting agreements that
will terminate on May 31, 2001, whereby the consultants will provide consulting
service for the Company concerning management, marketing, consulting, strategic
planning, corporate organization and financial matters in connection with the
operation of the businesses of the Company, expansion of services, acquisitions
and business opportunities. The consultants received options to purchase a total
of 7,300,000 of the Company's common stock exercisable at $.035 per share in
exchange for services to be rendered and the options shall expire on May 31,
2001.
The per unit weighted-average fair value of unit options granted on June 1,
2000 was $0.029 at the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions: weighted-average
risk-free interest rate of 5.86; dividend yield of 0%; weighted-average
volatility factor of the expected market price of the Company's common stock of
178%; and a weighted average expected life of the option was 2 months. In June
and July of 2000, the Company received $215,500 in cash for the issuance of the
6,157,143 shares upon the exercise of these options and the remaining options of
1,142,857 were exercised for consulting services incurred and owed by the
Company to one of the consultants totaling $30,000 and from the cancellation of
an obligation of $10,000 in principal and interest owed to the same consultant.
The options had an aggregate fair value at date of grant of approximately
$211,000.
On May 11, 2000, the Company entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with eight investors. Pursuant to the
Securities Purchase Agreement, the Company issued and sold 50 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") for total consideration
of $500,000, or $10,000 per share. The May Davis Group, Inc. ("May Davis"),
acted as placement agent for the offering. May Davis received a placement fee of
$40,000 and the Company issued warrants to purchase 1,500,000 shares of Common
Stock to May Davis and certain designees of May Davis and warrants to purchase
25,000 shares of Common Stock to Butler Gonzalez, LLP, counsel to May Davis.
Such warrants are exercisable at a price of $.08 per share.
16
Commencing August 9, 2000, the Series A Preferred Stock is convertible, at
the investors' option, into shares of the Company's common Stock and
automatically converts into Common Stock on April 12, 2002. The conversion price
of the Series A Preferred Stock is the lower of $.08 per share or 80% of the
average of the closing bid prices of the Company's Common Stock on any five
trading days in the ten trading day period preceding the date of conversion. The
conversion price of the Series A Preferred Stock is also adjusted in the event
of stock dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. The Series A Preferred stock also
provides for a dividend upon conversion of the Series A Preferred Stock at the
rate of 6% per annum payable in additional shares of the Company's Common Stock.
An accrual was recorded as a dividend expense for approximately $18,750 during
the nine month period ended December 31, 2000. In no event can the Series A
Preferred Stock be converted into more than 11,875,000 shares of Common Stock.
During January and February 2001, seven shareholders converted an
aggregate of ten shares or $100,000.00 of the Company's Series A Preferred Stock
into the common stock of the Company at an average conversion price of
approximately $0.008. Upon conversion, the Company issued in January and
February 2001, an aggregate of 11,546,619 shares of its common stock to the
seven shareholders.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
17
SIGNATURES
In accordance with Section 13 of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
DIAMOND ENTERTAINMENT CORPORATION
Dated: March 5, 2001 By: /s/ Fred U. Odaka
---------------------------------------
Fred U. Odaka
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
18