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 June 30, 2001
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
incorporation or organization) Identification No.)
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 June 30, 2001, there were 81,180,648 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
Consolidated Balance Sheet as of June 30, 2001 [Unaudited]
and March 31, 2001.................................................... 3-4
Consolidated Statements of Operations for the three months
ended June 30, 2001 and 2000 [Unaudited]................................. 5
Consolidated Statements of Cash Flows for three months ended
June 31, 2001 and 2000 [Unaudited]..................................... 6-7
Notes to Consolidated Financial Statements [Unaudited]................ 8-31
Item 2: Management's Discussion and Analysis or
Plan of Operations............................................. 32-35
Part II. Other Information
Item 1: Legal Proceedings..... .......................................... 35
Item 2: Changes in Securities............................................ 35
Item 3: Defaults Upon Senior Securities....................................35
Item 4: Submission of Matters to a Vote of Security Holders............... 35
Item 5: Other Information................................................. 35
Item 6: Exhibits and Reports on Form 8-K...................................35
Signatures................................................................. 36
2
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2001 2001
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 26,146 $ 29,900
Accounts receivable, net of allowance for
doubtful accounts of $115,637 and $144,542 446,941 413,020
Inventory 1,087,270 1,088,951
Due from related party 137,766 101,366
Prepaid expenses and other current assets 53,508 45,714
------------- -------------
Total current assets 1,751,631 1,678,951
PROPERTY AND EQUIPMENT, less
accumulated depreciation of $1,047,120 and $1,030,785 183,152 199,487
FILM MASTERS AND ARTWORK, less
accumulated amortization of $3,922,938 and $3,901,070 181,433 145,817
INVESTMENT IN EQUITY SUBSIDIARY 60,725 60,725
OTHER ASSETS 41,390 62,982
------------ --------------
TOTAL ASSETS $ 2,218,331 $ 2,147,962
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30, March 31,
2001 2001
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 199,248 $ 224,681
Accounts payable and accrued expenses 2,036,881 1,789,523
Due to factor 356,798 319,303
Financing agreement payable 259,777 311,807
Notes payable - current portion 49,843 42,576
Related parties - notes and advances payable
-current portion 1,715,733 1,478,233
Convertible debentures - current portion 1,139,075 1,142,675
Capital lease obligations - current portion 9,454 17,600
Other current liabilities - 10,057
------------- -------------
Total current liabilities 5,766,809 5,336,455
Notes payable, less current portion -
Related parties - notes and advances payable,
less current portion - 150,000
Convertible debentures, less current portion -
Capital lease obligations, less current portion - -
------------- -------------
TOTAL LIABILITIES 5,766,809 5,486,455
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 12) - -
STOCKHOLDERS' DEFICIENCY
Convertible preferred stock, no par value; 4,999,950
and 5,000,000 shares authorized; 483,251 issued
(of which 172,923 are held in treasury) 376,593 376,593
Series A convertible preferred stock, $10,000 per share
stated value; 50 shares authorized; 40 issued and
outstanding 346,400 346,400
Common stock, no par value; 600,000,000 shares
authorized; 81,180,648 and 81,180,648 issued and
outstanding 14,552,635 14,552,635
Accumulated deficit (18,775,303) (18,565,318)
Treasury stock ( 48,803) ( 48,803)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 3,548,478) ( 3,338,493)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,218,331 $ 2,147,962
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
June 30,
2001 2000
------------ -------------
(Restated)
SALES - net $ 737,271 $ 595,545
COST OF GOODS SOLD 466,538 393,699
------------ -------------
GROSS PROFIT 270,733 201,846
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES 397,918 367,199
------------ -------------
LOSS FROM OPERATIONS (127,185) (165,353)
------------ -------------
OTHER INCOME (EXPENSE)
Interest expense ( 88,712) ( 31,437)
Other income (expense) 5,912 ( 3,686)
Income (loss) from equity investment - -
------------ -------------
Total other income (expense) ( 82,800) ( 35,123)
------------ -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (209,985) (200,476)
PROVISION FOR INCOME TAXES - -
--------------------------------
NET LOSS $ (209,985) $ (200,476)
============ =============
LOSS PER SHARE
Basic $ ( -) $ ( -)
============ =============
Diluted $ ( -) $ ( -)
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
June 30,
2001 2000
---------- ----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (209,985) $ (200,476)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 38,204 52,487
Provision for doubtful accounts 9,000 30,000
Non-cash consulting and compensation expense - 45,284
Changes in assets and liabilities
Due from related party (36,400) -
Accounts receivable (42,921) 96,629
Inventory 1,681 58,891
Prepaid expenses and other current assets (7,794) 22,917
Other assets 21,592 -
Increase (decrease)
Accounts payable and accrued expenses 247,358 (265,019)
Deferred costs - (108,376)
Other (10,057) -
--------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 10,678 (267,663)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayment by ATRE - 30,000
Purchase of property and equipment - (37,066)
Purchase of film masters and artwork (57,484) (10,543)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (57,484) (17,609)
------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
6
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(UNAUDITED)
June 30,
2001 2000
---------- ----------
(Restated)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft (25,433) (9,536)
Net repayments of financing agreement (14,535) (173,973)
Proceeds from notes payable 7,266 (33,683)
Proceeds from notes payable (related party) 87,500 -
Payments of notes payable (related party) - (30,400)
Proceeds from convertible debentures (3,600) -
Payment of convertible debentures
Payments on capital leases (8,146) (5,136)
Proceeds from the exercise of options - 105,000
Proceeds from issuance of Series A Preferred Stock - 433,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,052 285,272
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,754) 0
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 29,900 0
--------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 26,146 $ 0
========== ==========
SUPPLEMENTAL INFORMATION
CASH PAID FOR:
Interest $ 23,423 $ 31,437
========== ==========
Income taxes $ - $ -
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the three months ended June 30, 2000, the Company had the following
financing activity:
Issued a $72,000 promissory note in settlement for the 2000 termination of
an operating lease.
The accompanying notes are an integral part of these consolidated financial
statements.
7
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have
been included.
For further information, refer to the financial statements and footnotes
included in Form 10-KSB for the year ended March 31, 2001.
The accompanying consolidated financial statements include the accounts of
Diamond Entertainment Corporation (the "Company"), organized under the laws
of the State of New Jersey on April 3, 1986 and its wholly owned
subsidiaries:
1) Jewel Products International, Inc. ("JPI") incorporated under the
laws of the state of California on November 25, 1991;
2) Grand Duplication ("Grand"), incorporated under the laws of the
state of California on August 13, 1996; and
3) Galaxy Net ("Galaxy"), incorporated under the laws of the state
of Delaware on July 15, 1998.
All intercompany transactions and balances have been eliminated in
consolidation.
Nature of Business
------------------
The Company is in the business of distributing and selling videocassettes,
DVD's, general merchandise, toys, and Cine-Chrome gift cards, through
normal distribution channels throughout the United States and through a web
site. As of March 31, 2001 and 2000, the Company's management evaluated its
operations by two separate product lines to assess performance and the
allocation of resources. These product lines have been reflected as two
reportable segments, video products and general merchandise, described as
follows:
8
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Nature of Busines (continued)
-----------------------------
VIDEO PROGRAMS AND OTHER LICENSED PRODUCTS
The Company distributes and sells videocassette and DVD titles,
including certain public domain programs and certain licensed
programs. The Company markets its video programs to national and
regional mass merchandisers, department stores, drug stores,
supermarkets and other similar retail outlets. Also, in September of
1998, the Company entered into a distribution agreement for a new
product called Cine-Chrome, utilizing classic images of licensed
properties.
GENERAL MERCHANDISE
The Company, through its wholly owned subsidiary, JPI, purchases and
distributes toy products to mass merchandisers in the U.S., which
commenced in fiscal 1999. The Company offers the toy products for
limited sales periods and as demand for products change, the Company
switches to newer and more popular products.
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 revenue and expenses
during the periods presented. Actual results could differ from those
estimates.
Revenue Recognition
-------------------
The Company records sales when products are shipped to customers and are
shown net of estimated returns and allowances.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
9
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of Credit Risk
-----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and accounts
receivable arising from Company's normal business activities. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk, establishes an allowance for
uncollectible accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is limited. The
Company places its cash with high quality financial institutions and at
times may exceed the FDIC $100,000 insurance limit. The Company had no
deposits as of June 30, 2001 and March 31 2001, with financial institutions
subject to a credit risk beyond the insured amount.
Inventory
---------
Inventory is stated at the lower of cost or market utilizing the first-in,
first-out method. Inventory consists primarily of videocassettes, general
merchandise, patented toys, furniture, and Cine-Chrome gift cards.
Property and Equipment
----------------------
Property and equipment is presented at historical cost less accumulated
depreciation. Depreciation is computed utilizing the straight-line method
for all furniture, fixtures, and equipment over a five-year period, which
represents the estimated useful lives of the respective assets. Leasehold
improvements are being amortized over the lesser of their estimated useful
lives or the term of the lease.
Film Masters and Artwork
------------------------
The cost of film masters and related artwork is capitalized and amortized
using the straight-line method over a three-year period. Film masters
consist of original "masters", which are purchased for the purpose of
reproducing videocassettes that are sold to customers.
10
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
-------------------------------
In accordance with Statement of Financial Accounting Standard ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", long-lived assets to be held and used are
analyzed for impairment whenever events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. The
Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. If there are
indications of impairment, the Company uses future undiscounted cash flows
of the related asset or asset grouping over the remaining life in measuring
whether the assets are recoverable. In the event such cash flows are not
expected to be sufficient to recover the recorded asset values, the assets
are written down to their estimated fair value. Long-lived assets to be
disposed of are reported at the lower of carrying amount or fair value of
asset less cost to sell.
Bank Overdraft
--------------
The Company maintains overdraft positions at certain banks. Such overdraft
positions are included in current liabilities.
Offering Costs
--------------
Offering costs consist primarily of professional fees. These costs are
charged against the proceeds of the sale of Series A convertible preferred
stock in the periods in which they occur.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising costs were
approximately $0 and $814 for the three months ended June 30, 2001, and
2000, respectively.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including accounts
receivable, bank overdraft and accounts payable and accrued expenses, the
carrying amounts approximate fair value, due to their relatively short
maturities. The amounts owed for long-term debt also approximate fair value
because current interest rates and terms offered to the Company are at
current market rates.
11
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees". Under APB 25, the Company does not recognize
compensation expense related to options issued under the Company's employee
stock option plans, unless the option is granted at a price below market
price on the date of grant.
In 1996, SFAS No. 123 "Accounting for Stock-Based Compensation", became
effective for the Company. SFAS No. 123, which prescribes the recognition
of compensation expense based on the fair value of options on the grant
date, allows companies to continue applying APB 25 if certain pro forma
disclosures are made assuming hypothetical fair value method, for which the
Company uses the Black-Scholes option-pricing model.
For non-employee stock based compensation, the Company recognizes an
expense in accordance with SFAS No. 123 and values the equity securities
based on the fair value of the security on the date of grant. For
stock-based awards, the value is based on the market value for the stock on
the date of grant and if the stock has restrictions as to transferability,
a discount is provided for lack of tradability. Stock option awards are
valued using the Black-Scholes option-pricing model.
Income Taxes
------------
Income taxes are provided for based on the asset and liability method of
accounting pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes". The asset and liability method
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the
reported amount of assets and liabilities and their tax basis.
Net Loss Per Share
------------------
SFAS No. 128, "Earnings Per Share" requires presentation of basic loss per
share ("Basic LPS") and diluted loss per share ("Diluted LPS"). The
computation of basic loss per share is computed by dividing loss available
to common stockholders by the weighted average number of outstanding common
shares during the period. Diluted loss per share gives effect to all
dilutive potential common shares outstanding during the period. The
computation of diluted LPS does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect
on losses.
12
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss Per Share (continued)
------------------------------
The shares used in the computation of loss per share were as follows:
June 30,
2001 2000
----------- ----------
Basic 81,180,648 63,667,382
============ ===========
Diluted 81,180,648 63,667,382
============= ===========
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
the reporting of comprehensive income and its components in the financial
statements. As of June 30, 2001 and 2000, the Company has no items that
represent comprehensive income and, therefore, has not included a schedule
of comprehensive income in the accompanying consolidated financial
statements.
Recent Accounting Pronouncements
--------------------------------
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information" was issued, which changes the way public companies report
information about segments. SFAS No. 131, which is based on the selected
segment information, requires quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which
the entity holds assets and reports revenues. The Company adopted SFAS No.
131 during 1999.
In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Investments and Hedging Activities," and SFAS
No. 137, which delayed the effective date of SFAS No. 133. In June 2000,
the FASB issued SFAS No. 138, which provided additional guidance for the
application of SFAS NO. 133 for certain transactions. Although, the Company
has adopted the statement in January 2001, SFAS No. 133 does not apply to
its current operations and management does not expect the adoption of this
statement to have a material impact on the Company's financial position or
results of operations.
13
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
--------------------------------------------
In December 1999, the Securities and Exchange Commissions (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB No. 101
provides additional guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company has reviewed
this bulletin and believes that its current recognition policy is
consistent with the guidance of SAB No. 101.
NOTE 2 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the
Company has incurred recurring losses from operations, negative cash flows
from operations, a working capital deficit and is delinquent in payment of
certain accounts payable. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon continued operations of the
Company, which, in turn, is dependent upon the Company's ability to
continue to raise capital and generate positive cash flows from operations.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or amounts and classifications of liabilities that might be necessary
should the Company be unable to continue its existence.
To mitigate the effects of the uncertainties, the Company has implemented a
plan to increase its overall market share of its core business and to
expand into the contract replication, duplication and packaging business.
The Company expects to reach positive cash flow at the end of its second
fiscal quarter has implemented the following goals and strategies to
achieve its plan:
Retailers and Mass Merchandisers
o Attain leadership in the market segment of high quality budget
priced distribution of videocassettes and DVD titles.
o Avoid direct competition with larger competitors who sell in the
same product categories as the Company, by offering higher
quality budgeted price products.
o Attain leadership in pricing and packaging innovations.
o Maintain efficiency in quick turnaround of product shipments.
14
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - GOING CONCERN (Continued)
o Continue to build the reputation as a leader in the high quality
budget priced arena to have other potential second and third tier
customers emulate the purchasing habits of the Company's national
chain stores and mass merchandisers.
o Continue to acquire new videocassette and DVD titles for
distribution.
Internet e-Commerce
o Maintain and improve our service through fast turnaround.
o Keep pricing competitive.
o Maintain and improve customer service procedures.
o Complete thorough search for the most effective marketing and
promotional tools and methods for the Company's web-site.
o Continuously maintain and update the Company's web-site to keep
up with current products.
o Continue to seek viable new products to be added to the web-site.
Contract Replication and Contract Packaging Service
o Establish a reputation of being most efficient and speedy
provider of DVD high quality replication and packaging services
and becoming a leader in this market segment, by selling to large
corporate accounts.
o Capitalize on the experience and know-how of the Company's
alliance company, to deliver the highest quality replication
service available on a consistent basis.
o Use the Company's association with its alliance company to
penetrate this market segment by broadcasting to the Company's
potential contract customers the unique capabilities, experience
and consistency of production capabilities provided.
15
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - GOING CONCERN (Continued)
The Company believes it has adequate cash resources to sustain its
operations through the second quarter of fiscal 2002, when it expects to
generate a positive cash flow. The Company is continuing to negotiate with
several reliable investors to provide the Company with debt and equity
financing for working capital purposes and to convert debt to equity. The
principal objective of the Company is to implement the above items in
fiscal 2002, which will lead to a profitable operation if the items are
successfully implemented, and 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.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable as of June 30, 2001 and March 31, 2001, net of
allowance for doubtful accounts were approximately $446,941 and $413,020,
respectively. Substantially all of the accounts receivable as of June 30,
2001 and March 31, 2001 have been factored and pledged as collateral under
a factoring agreement (see Note 8).
The Company reviews accounts receivable periodically during the year for
collectability. An allowance for bad debt is established for any
receivables whose collection is in doubt or for returns and a reserve is
also established for an estimate of the remaining accounts.
As of June 30, 2001 and March 31, 2001, the Company had an allowance for
doubtful accounts of $115,637 and $144,542, respectively.
NOTE 4 - INVENTORY
Inventory consisted of the following as of:
June 30, March 31,
2001 2000
------------- -----------
Raw materials $ 948,201 $ 944,215
Finished goods 821,827 844,895
------------- -----------
1,770,028 1,789,110
Less: valuation allowance (682,758) (700,159)
------------- -----------
Inventory, net $ 1,087,270 $ 1,088,951
============= ===========
16
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 4 - INVENTORY (Continued)
Allowance
---------
An allowance has been established for inventory of $682,758 and $700,159 as
of June 30, 2001 and March 31, 2001. This reserve is primarily for the
anticipated reductions in selling prices (which are lower than the carrying
value) for inventory which has been:
(a) restricted to specified distribution territories as a result
of legal settlements; and
(b) inventory which has passed its peak selling season.
NOTE 5 - DUE FROM RELATED PARTIES
As of June 30, 2001, and March 31, 2001 the Company advanced $137,766 and
$101,366 to an officer of the Company. Simple interest is accrued monthly
at an annual rate of 10% on the outstanding balance. The loan is due in
December 2002.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
June 30, March 31,
2001 2001
------------ -----------
Furniture and equipment $ 1,165,610 $ 1,165,610
Automobile 24,487 24,487
Leasehold improvements 40,175 40,175
------------ -----------
1,230,272 1,230,272
Less: accumulated depreciation and
amortization (1,047,120) (1,030,785)
------------ -----------
Furniture and equipment, net $ 183,152 $ 199,487
============ ===========
Depreciation expense for the three months ended June 30, 2001 and 2000 was
approximately $16,335 and $21,107, respectively.
17
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 7 - INVESTMENT IN EQUITY SUBSIDIARY
During 1989, the Company paid $50,000 for 50% of the issued and outstanding
common stock of American Top Real Estate ("ATRE"). Since the Company does
not have greater than a 50% investment or exercise control in the day to
day operations, this investment is accounted for using the equity method.
The operations of ATRE are not considered to be significant to the
Company's operations; therefore the Company has not included a summary of
ATRE's assets and liabilities.
For the three months ended June 30, 2001 and 2000, there were no investment
income or loss from ATRE.
As of June 30, 2001 and March 31, 2000, the investment in ATRE totaled
$60,725 and $60,725, respectively.
NOTE 8 - DUE TO FACTOR/FINANCING AGREEMENT PAYABLE
On August 30, 1996, the Company entered into a financing agreement with a
financial institution for a maximum borrowing of up to $2,500,000. The
agreement called for a factoring of the Company's accounts receivable, and
an asset-based note related to the Company's inventories. Subsequently, on
October 29, 1999, the financial institution sold its financing agreement
covering the factoring of the Company's accounts receivable to a factoring
institution located in Dallas, Texas. The original financial institution
retained the asset-based note related to the Company's inventories.
Substantially all assets of the Company have been pledged as collateral for
the borrowings.
The cost of funds for the accounts receivable portion of the borrowings
with the new factor is a 1.5% discount from the stated pledged amount of
each invoice for every 30 days the invoice is outstanding. The asset-based
portion of the borrowings is determined by the lesser of i) $800,000, ii)
25% of the client's finished toy inventory or iii) 55% of the clients
finished videotape inventory. The cost of funds for the inventory portion
of the borrowings is at 1.4% per month on the average loan balance each
month. The agreement stipulated an $8,000 per week payment against the
asset-based note payable, which was modified on June 5, 2000, to $4,000 per
week. The term of asset-based note was extended to November 15, 2001. The
Company paid interest of approximately $23,000 and $31,000 for the three
months ended June 30, 2001 and 2000, respectively. The financing agreement
and factor advances were as follows:
June 30, March 31,
2001 2001
-------------- -------------
Due to factor payable $ 356,798 $ 319,303
Financing agreement payable -
inventory 259,777 311,807
---------------- --------------
$ 616,575 $ 631,110
============== =============
18
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 9 - NOTES PAYABLE
Notes payable represents the following as of:
June 30, March 31,
2001 2001
------------- -----------
a) Waring Investments $ - $ 4,585
b) Automobile 3,840 5,905
c) Other 46,002 32,086
------------- -----------
49,842 42,576
Less current (49,842) (42,576)
-------------- ----------
Long term $ - $ -
============= ==========
a) Waring Investments
------------------
Note payable bearing interest at the rate of 16% per annum with twelve
monthly installments of principal of $2,292. This note is guaranteed
by the President of the Company and is subordinated to the financing
agreement payable. Since, the Company did not pay-off the note on the
scheduled maturity date, the lender has extended the maturity date and
assessed an additional interest charge of 20% per annum as a penalty
on the unpaid balance each month. As of June 30, 2001 and March 31,
2001, the balance of $0 and $4,585 was due and payable May 2001.
b) Automobile
----------
The Company has a vehicle financing agreement with monthly payments of
$562 for principal and interest at 9.75% per annum. The balance as of
June 30, 2001 and March 31, 2001 was $3,840 and $5,905 respectively.
c) Other
-----
As of June 30, 2001 and March 31, 2001, the Company had various
payables aggregating $46,002 and $32,085, due on demand.
19
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE
Related parties - notes and advances payable consist of the following
as of:
June 30, March 31,
2001 2001
----------- ------------
a) Convertible note payable - ATRE $ 809,500 $ 809,500
b) Note payable - ATRE 691,500 576,300
c) Note payable - Jeffrey Schillen 53,300 71,300
d) Convertible note payable -
Jeffrey Schillen 100,000 100,000
d) Convertible note payable - James Lu 50,000 50,000
e) Note payable - Golden Gulf 11,433 21,133
----------- ------------
1,715,733 1,628,233
Less: current portion 1,715,733 (1,478,233)
----------- -------------
Long term $ - $ 150,000
=========== ============
a) Convertible Note Payable - ATRE
-------------------------------
As of June 30, 1999, the Company had $809,500 due to a related party
for payment of trade payables. In October 1999, the outstanding
balance was converted into a convertible debenture at 7% per annum due
and payable on or before September 30, 2000. At the option of the
lender all or part of the balance can be paid with shares of the
Company's common stock. The number of shares is determined by dividing
the principal being converted by the average twenty-day bid price,
prior to the date of such payment request, for the Company's common
stock. As of June 30, 2001 and March 31, 2001, the outstanding balance
was $809,500 and $809,500.
b) Note Payable - ATRE
-------------------
As of June 30, 2001 and March 31, 2001 and 2000, the Company was
advanced $691,500 and $576,300, from ATRE (see Note 7), bearing
interest at the rate of 14% per annum, and due on demand.
c) Note Payable - Jeffrey Schillen
-------------------------------
As of June 30, 2001 and March 31, 2001, the Company has a $53,300 and
$71,300 note payable, due to an officer, bearing interest at the rate
of 10% per annum, and due on demand.
20
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE (Continued)
d) Convertible Debentures - Related Parties
----------------------------------------
During March and June 1999, the Company entered into two convertible
debentures for $50,000 and $100,000, respectively. The debentures bear
interest at 10% per year with principal and interest due on the first
anniversary of the date of issuance. Each note has been extended for
an additional year. The notes also call for any amount of the
outstanding principal to be converted into restricted shares of the
Company's common stock at the option of the lender's at a conversion
rate of $0.05 per share. As of June 30, 2001, neither of the
debentures was converted. Since the debentures are convertible into
restricted shares of the Company's common stock at a rate below
market, the first 20% of the below market amount was attributed to the
lack of tradability of the shares due to restriction on sale and the
remainder was attributed to additional interest.
e) Note Payable - Golden Gulf
--------------------------
As of June 30, 2001 and March 31, 2001, the Company has a $11,433 and
$21,133 note payable, due to Golden Gulf Capital Group, bearing
interest at the rate of -0-%, and due on demand.
NOTE 11 - CONVERTIBLE DEBENTURES
Convertible debentures consisted of the following as of:
June 30 March 31
2001 2001
----------- -----------
a) Balmore Fund $ 100,000 $ 100,000
b) GJ Products Corporation 1,039,075 1,042,675
------------ -----------
1,139,075 1,142,675
Less: Current (1,139,075) (1,142,675)
------------ -----------
Long Term $ - $ -
============ ===========
a) During February and March 1999, the Company entered into
convertible debentures for $175,000 and $100,000, respectively.
The debentures bear interest at 10% with principal and interest
due on the first anniversary of the date of issuance. The notes
also call for any amount of the outstanding principal to be
converted into restricted shares of the Company's common stock at
the option of the lender at a conversion rate of $0.05 per share.
As of March 2000, one investor converted the $175,000 note into
3,500,000 shares of the Company's common stock. As of June 30,
2001 and March 31, 2001, the outstanding balance of convertible
debentures was $100,000, for which the lender extended the due
date to March 2001.
21
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 11 - CONVERTIBLE DEBENTURES (Continued)
b) As of March 31, 1999, the Company had $1,118,425 due to a related
party for payment of trade payables. In October 1999, the Company
ceased to have a relationship with the party, so the outstanding
balance of $1,050,775 was converted into a convertible debenture.
The debenture bears interest at 10% with principal and interest
due on the first anniversary of the date of issuance. At the
option of the holder, all or part of the balance can be paid with
shares of the Company's common stock. The number of shares is
determined by dividing the principal being converted by the
average twenty-day bid price, prior to the date of such payment
request, for the Company's common stock. As of June 30, 2001 and
March 31, 2001, the outstanding balance was $1,039,075 and
$1,042,675, respectively.
NOTE 12 - COMMITMENTS AND CONTIGENCIES
Royalty Commitments
-------------------
The Company has entered into various royalty agreements for licensing
of titles with terms of one to seven years. Certain agreements include
minimum guaranteed payments. For the three months ended June 30, 2001
and 2000, royalty expense was $6,171 and $2,865, respectively,
pursuant to these agreements.
Video Agreements
----------------
The Company has entered into various agreements to manufacture,
duplicate and distribute videos. Commissions are paid based upon the
number of videos sold.
Employment Agreements
---------------------
In 1991, two employment agreements were executed for two officers for
annual compensation totaling $240,000. These agreements terminate in
the year 2001 and are adjusted annually in accordance with the
Consumer Price Index. The Board of Directors agreed on April 23, 1996
to reserve 1,000,000 shares of common stock for distribution to two
officers of the Company. The officers at current market prices in
installment payments with a five-year promissory note with interest
can purchase the common stock at 6% per annum. As of June 30, 2001 and
March 31, 2001, the officers did not purchase these shares.
Lease Commitments
-----------------
The Company leases office and storage facilities under operating
leases, which expire in 2003. Also, the Company leases equipment under
capital leases, which expire through 2002.
The Company's future minimum annual aggregate rental payments for
capital and operating leases that have initial or remaining term in
excess of one year are as follows:
22
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 12 - COMMITMENTS AND CONTIGENCIES (Continued)
Lease Commitments (continued)
-----------------------------
Capital Operating
Leases Leases
----------- -----------
Quarter Ending June 30,:
2002 $ 10,500 $ 126,000
2003 - 73,500
----------- -----------
Total minimum lease payments 10,500 $ 199,500
===========
Less: amount representing interest ( 1,000)
-----------
Present value of minimum lease payments 9,500
Less: current portion (9,500)
-----------
Long-term portion $ -
===========
Rent expense for the three months ended June 30, 2001 was
approximately $27,626.
The following is a summary of property held under the capital leases
as of June 30, 2001:
Furniture and equipment $ 87,081
Less: accumulated depreciation (45,500)
-----------
Total $ 41,581
===========
Litigation
----------
The Company has in the past been named as defendant and co-defendant
in various legal actions filed against the Company in the normal
course of business. All past litigation has been resolved without
material adverse impact on the Company.
23
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 13 - STOCKHOLDERS' EQUITY
Common Stock
------------
During the year ended March 31, 2001, the Company amended its Articles
of Incorporation to increase the number of authorized shares of common
stock from 100,000,000 shares to 600,000,000.
During the year ended March 31, 2001, the Company had the following
significant issuances of its common stock:
As of March 31, 2001, 11,546,619 shares of common stock were issued
for the conversion of Series A convertible preferred stock (see Series
A Convertible Preferred Stock).
During June and July of 2000, the Company received $215,500 in cash
for the issuance of the 6,157,143 shares of common stock upon the
exercise of these options and the remaining options of 1,142,837 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 totaling $10,000 in principal and interest, owed to the
same consultant.
Convertible Preferred Stock
---------------------------
As of March 31, 2000, the Company had authorized 5,000,000 shares of
no par value, convertible preferred stock. The preferred stock has:
i) voting rights upon all matters upon which common
stockholders have at a 1.95 vote for each share of preferred
stock,
ii) conversion rights at 1.95 shares of common stock for each
share of preferred,
iii) no rights of redemption and
iv) no dividend preferences, but entitled to a preference of
$0.01 per share in the event of liquidation.
Series A Convertible Preferred Stock
------------------------------------
On May 11, 2000, the Company amended its articles of incorporation to
authorize the issuance 50 shares of no par value, Series A Convertible
Preferred Stock with a stated value of $10,000 per share. This new
issuance was created out of the 5,000,000 shares of authorized, no par
value, preferred stock.
24
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
Series A Convertible Preferred Stock (continued)
------------------------------------------------
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 for total
consideration of $500,000, or $10,000 per share.
Commencing August 9, 2000, the Series A Preferred Stock is
convertible, at the investor's 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. In no event can the
Series A Preferred Stock be converted into more than 11,575,000 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; and
iii) 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 Company is
required to keep such a registration statement effective until all of
such shares have been resold.
25
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
Series A Convertible Preferred Stock (continued)
------------------------------------------------
As of March 31, 2001, 10 shares of Series A Convertible Preferred
Stock with a stated value of $10,000 per share were converted into
11,546,619 shares of common stock at a price per share equaling 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 prices ranged from $0.00832 to $0.00920.
Warrants
--------
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 $.07
per share.
NOTE 14 - COMMON STOCK OPTIONS
2000 Stock Compensation 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. The Plan
expired on May 31, 2001.
o On June 1, 2000, the Company entered into three consulting
agreements that will terminate on May 31, 2001, whereby the
consultants will provide consulting services 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 $0.035 per share in
exchange for services to be rendered and the options shall
expired on May 31, 2001. Such options were exercised as of March
31, 2001.
26
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 14 - COMMON STOCK OPTIONS (Continued)
2000 Stock Compensation Plan (continued)
----------------------------------------
o 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 options pricing model with the following
weighted-average assumptions: weighted-average risk-free interest
rates of 5.86%; dividend yields of 0%; weighted-average
volatility factors 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 $209,000.
o 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 June 30, 2001, and the Company
believes the firm has not performed under the agreement.
The following summarizes the common stock options issued for
consulting services through the period ended June 30, 2001:
27
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 14 - COMMON STOCK OPTIONS (Continued)
Weighted
Average
Exercise
Employees Consultants Price
---------- ------------ ---------
Options outstanding, March 31, 1999 7,000,000 3,454,000 $ 0.10
Granted 4,500,000 9,965,000 $ 0.06
Exercised - (8,215,000) $ 0.05
Expired/cancelled - (1,000,000) $ 0.25
---------- ------------
Options outstanding, March 31, 2000 11,500,000 4,204,000 $ 0.10
Granted - 7,900,000 $ 0.35
Exercised - (7,300,000) $ 0.35
Expired/cancelled - - $ 0.01
---------- ------------
Options exercisable, March 31, 2001 11,500,000 4,804,000 $ 0.35
=========== ============ ========
Granted - - -
Exercised - - -
Expired/cancelled - - -
---------- ------------ ---------
Options exercisable, June 30, 2001 11,500,000 4,804,000 $ 0.35
=========== =========== ========
The Company applies SFAS No. 123, and related interpretations, for
stock options issued to consultants in accounting for its stock
options. Compensation expense has been recognized for the Company's
stock-based compensation for consulting services in the amount of $0
and $17,417 for the quarters ended June 30, 2001 and 2000,
respectively.
1988 Stock Option Plan
----------------------
On October 12, 1988, the Company's directors and stockholders approved
the Company's 1988 Stock Option Plan (the "Option Plan") authorizing
the granting of incentive options and non-qualified options. The
incentive options are intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended. Pursuant to the Option
Plan, options to purchase up to 10,000 shares of common stock may be
granted to officers, directors and key employees of the Company. The
Stock Option Committee, consisting of Messrs. Lu and Schillen, is
responsible for determining the individuals who will be granted
options, the number of shares to be subject to each option, the option
price per share, and the exercise period of each option. The option
price will not be less than the fair market value of the Company's
common stock on the date the option is granted. Options may be
exercised by payment of cash. No option will have a term in excess of
ten years.
28
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 14 - COMMON STOCK OPTIONS (Continued)
The following summarizes the Company's stock option transactions under
the stock option plan:
Weighted
Average
Stock Options Exercise
Outstanding Price
------------- --------
Options Outstanding, March 31, 1999 550,000 $ 0.10
Granted 300,000 $ 0.10
Expired ( 550,000) $ 0.10
------------- --------
Options, Exercisable and Outstanding, March 31, 2000 300,000 $ 0.10
============ ========
Granted - $ 0.00
Expired - $ 0.00
------------- --------
Options, Exercisable and Outstanding, March 31, 2001 300,000 $ 0.10
============ ========
Granted - $ 0.00
Expired - $ 0.00
------------- --------
Options, Exercisable and Outstanding, June 30, 2001 300,000 $ 0.10
=========== ========
The weighted average remaining contract lives of stock options
outstanding are 1.42 years.
The Company has adopted only the disclosure provisions of SFAS No. 123
for stock options issued to employees for services rendered. It
applies APB 25 and related interpretations in accounting for its plan
and does not recognize compensation expense for its stock-based
compensation plan other than for stock and options issued under
compensatory plans and to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at
the grant date for awards vested under the plan consistent with the
methodology prescribed by SFAS 123, the Company's net loss would not
have changed for the three month period ended June 30, 2001.
29
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 15 - MAJOR CUSTOMERS
For the three month period ended June 30, 2001, the Company had net
sales to 4 customers that accounted for approximately 22%, 17%, 15%
and 12%, respectively.
For the three month period ended June 30, 2000, the Company had net
sales to 2 customers that accounted for approximately 51% and 13%,
respectively.
NOTE 16 - SUBSEQUENT EVENTS
Consulting Agreements. On July 24, 2001, the Company entered into
----------------------
three consulting agreements that will terminate on July 23, 2002,
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 27,000,000 of the Company's
common stock exercisable at $0.005 per share in exchange for services
to be rendered and the options shall expire on July 23, 2002. As of
August 15, 2001, Company received $135,000 for the issuance of
27,000.000 shares of the Company's common stock upon the exercise of
these options.
Financing. On June 4, 2001 and June 26, 2001, the Company borrowed
---------
$25,000 and $15,000, respectively, from a consulting firm and issued a
promissory notes which were payable on or before August 5, 2001 and
August 25, 2001, respectively. The notes bore interest at 2.5% per
month and a loan fee of 5% of the principal amounts. The notes were
personally guaranteed by James Lu. On August 15, 2001, the aggregate
unpaid principal balance of the notes, interest and loan fees totaling
$44,000 was paid to the consulting firm by the Company to satisfy the
obligations.
Stock Option Plan. The Company's 2000 Stock Compensation Plan
-------------------
terminated on May 31, 2001, and the outstanding balance of options of
5,700,000 shares to be sold or awarded in accordance with this plan
was canceled. On July 24, 2001, the Board of Directors of the Company
approved the Company's 2001 Stock Compensation Plan ("Plan") for the
purpose of providing the Company with a means of compensating selected
key employees (including officers), and directors of 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 50,000,000 shares and/or options of
the Company's common stock, no par value at a purchase price of
$0.006.
30
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 16 - SUBSEQUENT EVENTS (Continued)
Related Parties Convertible Notes Payable. On July 24, 2001, the Board
-----------------------------------------
of Directors of the Company authorized and approved 1) the issuance of
140,343,755 shares of the company's common stock to American Top Real
estate, Inc. ("ATRE") upon the conversion by ATRE of the entire unpaid
principal amount of $809,500 of its note and all accrued interest
thereon in the amount of $102,734.41 as of July 23, 2001 at the
conversion price of $0.0065 per share as of the close of business on
July 23, 2001, and 2) the issuance of 12,343,150 shares of the
Company's common stock to Mr. Lu, the President of the Company, upon
conversion of his $50,000.00 note and accrued interest thereon in the
amount of $11,715.75 as of July 23, 2001.
Convertible Debentures. On July 24, 2001, the Board of Directors of
-----------------------
the Company authorized and approved the issuance of 180,928,097 shares
of the Company's common stock to GJ Products Corporation upon the
conversion of the entire unpaid principal amount of $1,037,775.00 of
its note and all accrued interest thereon in the amount of $138,257.63
as of July 23, 2001 at the conversion price of $0.0065 per share as of
the close of business on July 23, 2001.
Stock Options. On July 24, 2001, the Board of Directors of the Company
-------------
authorized and approved, that it was in the best interest of the
Company the that exercise rate ranging from $0.05 to $0.25 of
outstanding options granted to the Company's key employees, officers
and directors during the period from April 1996 through May 1999 in
the aggregate amount of 11,675,000 shares be amended and lowered to
$0.005 and further authorized and approved the extension of such
options granted to James Lu and Jeffrey Schillen in the amount 600,000
and 400,000 shares, respectively, to April 22, 2004.
31
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, 2001 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.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2000:
Results of Operations
- ---------------------
The Company's net loss for the three months ended June 30, 2001 was
approximately $210,000 as compared to a net loss of approximately $201,000 for
the same period last year. The primary reason for the net loss was the Company's
operating loss of approximately $127,000.
The Company's operating loss for the three months ended June 30, 2001 was
$127,000 as compared to an operating loss of approximately $165,000 for the same
period last year. The decrease in the Company's operating loss of approximately
$38,000 arose primarily from increased operating expenses of approximately
$31,000, and an increase in gross profit of approximately $69,000.
The Company's sales for the three months ended June 30, 2001 and 2000, were
approximately $737,000 and $596,000 respectively. The Company's sales increased
by approximately $141,000 from the same period a year earlier with decreased
videocassette product sales of approximately $237,000 offset by increased DVD
product and other product sales of approximately $360,000 and $18,000,
respectively. The lower videocassette product sales when compared to the same
period a year earlier was attributable to the Company's strategy of shifting its
videocassette products to DVD products. The Company plans to acquire new titles
for videocassette and DVD products over the remainder of fiscal year 2002. 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 June 30, 2001 and 2000 were
approximately $467,000 and $393,000 or 63% and 66% of sales, respectively. The
increase in cost of goods of approximately $74,000 was primarily the result of
increased sales volume. The decrease in the cost of sales as a percentage to
sales of approximately 3% when compared to the same period a year earlier, was
primarily the result of lower videocassette product costs incurred when compared
to the same period a year earlier.
Gross profit for the three months ended June 30, 2001 and 2000 was approximately
$270,000 and $202,000, or 37% and 34% of sales, respectively. The higher gross
margin of approximately $67,000 was primarily the result of lower average unit
cost of videocassette product sales.
32
Selling, General and Administrative expenses for the nine months three months
ended June 30, 2001 and 2000 were approximately $398,000 and $367,000,
respectively. The increase of approximately $31,000 was the result of increases
in selling and general administrative expenses of approximately $17,000 and
$14,000, respectively.
General Administrative expenses for the three months ended June 30, 2001 and
2000 were approximately $306,000 and $292,000, respectively. The increase in
general administrative expenses of approximately $14,000 was primarily the
result of higher salaries and legal expenses offset by lower rent, consulting
expense, bad debt expenses and non-cash consulting and financing costs. Bad debt
expense for the three months ended June 30, 2001 and 2000 was approximately
$9,000 and $30,000, respectively.
Selling expenses for the three months ended June 30, 2001 and 2000 were
approximately $92,000 and $75,000, respectively. The increase in selling
expenses of approximately $17,000 was attributable mainly to higher expense
levels in salaries, offset by lower general selling expenses.
Interest expense for the three months ended June 30, 2001 and 2000 was
approximately $89,000 and $31,000 respectively. The increase in interest expense
of approximately $58,000 was primarily the result from the failure to accrue
interest expense for convertible debentures during the three month period ended
June 30, 2000. Such interest was accrued in the subsequent quarter. As of June
30, 2001, the outstanding debt of the Company was approximately $3,500,000 of
which the entire amount is classified as current.
The Company's auditors issued a going concern report for the year ended March
31, 2001. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit at June 30, 2001 was approximately
$4,015,000 as compared with a working capital deficit of $3,658,000 at June 30,
2000. This increase in the working capital deficit of approximately $357,000 is
primarily the result of increased borrowings and long term notes shifting to
short term.
During August of 2001, certain holders of the Company's convertible notes
exercised their conversion rights to convert their outstanding convertible notes
balances and unpaid interest totaling $1,897,275 and $252,708, respectively,
into the common stock of the Company. Such conversion of the aggregate
convertible note balances and unpaid interest will contribute $2,149,983 towards
the reduction of the Company's working capital deficit during the second fiscal
quarter ending September 30, 2001.
33
Operations
- -------------
For the three months ended June 30, 2001, net cash provided by operations was
approximately $11,000 as compared to net cash used in operations of $268,000 for
the three months ended June 30, 2000. Net cash provided by financing activities
during the three months ended June 30, 2001 and 2000 were approximately $43,000
and $285,000, 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.
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 required
financing implemented by the end of fiscal 2002, which can lead to a profitable
operation if it is 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 three months ended June 30, 2001 and 2000, investments in masters and
artwork were approximately $58,000 and $11,000, respectively. Management
continues to seek to acquire new titles to enhance its product lines.
Financing
- -----------
In January 2001, the Company borrowed $80,000 as a short term loan from one of
its suppliers and the loan was retired in April 2001, when the Company made its
final weekly installment payment of $10,000. On June 6, 2001, the Company
received a new loan in the amount of $80,000 from the same supplier. This loan
bears no interest and is payable in sixteen (16) weekly installments beginning
on August 1, 2001. James Lu, the President of the Company, has personally
guaranteed the loan.
On June 4, 2001 and June 26, 2001 the Company borrowed $25,000 and $15,000,
respectively, from a consulting firm and issued a promissory note which is
payable on or before August 5, 2001 and August 25, 2001, respectively. The notes
bears interest at 2 1/2% per month and a loan fee of 5% of the principal amount.
The notes were personally guaranteed by James Lu. The total outstanding
principal balance, interest and loan fee for these promissory notes were paid in
full, by the Company, on August 15, 2001.
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.
34
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
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
None
(b) Reports on Form 8-K
None
35
SIGNATURES
In accordance with Section 13 or 15(A) 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: August 20, 2001 By: /s/ James K.T. Lu
----------------------------------------
James K.T. Lu
President and Chief Executive Officer
Dated: August 20, 2001 By: /s/ Fred U. Odaka
---------------------------------------
Fred U. Odaka
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
36