As filed with the Securities and Exchange Commission on April 18, 2002
SEC File Number 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB-2
Registration Statement
Under
The Securities Act of 1933
DIAMOND ENTERTAINMENT CORPORATION
(Name of small business issuer in its charter)
New Jersey 7819 22-2748019
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
800 Tucker Lane, Walnut, California 91789
(909) 839-1989
(Address and telephone number of registrant's principal executive offices)
James K.T. Lu
President and Co-Chief Executive Officer
800 Tucker Lane
Walnut, CA 91789
(909) 839-1989
(Name, address and telephone number of Agent for Service)
Copies of communications to:
Owen Naccarato, Esq.
Naccarato & Associates
19600 Fairchild, Suite 260
Irvine, California 92612
(949) 851-9261
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of each class of Amount to be Proposed Proposed Exercise Proceeds to Amount of
securities to be registered maximum maximum price per the Company registration
registered offering aggregate share (1) fee
price per offering
share (1) price
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Common Shares, no par
value, issuable upon
conversion of series B
convertible stock 56,550,000 (2) $.02 $1,131,000 $104.05
Shares underlying warrants 10,950,000 (3) $.02 $ 219,000 $ 20.15
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Total Registration Fee 67,500,000 $124.20
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(1) Estimated solely for the purpose of determining the registration fee (2)
Common stock issuable upon conversion of the Series B convertible preferred
shares (3) Common stock issuable upon conversion of warrants.
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effectiveness date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
PROSPECTUS
April 18, 2002
Diamond Entertainment Corporation
67,500,000 shares of common stock
o The 67,500,000 shares of Common Stock offered by this Prospectus are
being offered for resale by the stockholders listed in the section of
this Prospectus called "Selling Stockholders".
o Our common stock is quoted on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "DMEC."
o April 17, 2002 the closing price of our Common Stock on the OTC
Bulletin Board was $0.0155
o Investors should not buy our common stock unless they can afford to
lose their entire investment.
This investment involves a high degree of risk. See the "Risk Factors" beginning
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on page 6 of this Prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of the prospectus. Any representation to the contrary is a
criminal offense.
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Table of Contents
Section Title Page No.
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Prospectus Summary 5
Risk Factors 6
Use of Proceeds 11
Price Range of Common Stock 11
Our Dividend Policy 11
Summary Financial Information 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Our Business 28
Management 30
Executive Compensation 32
Certain Relationships and Related Transactions 34
Security Ownership of Certain Beneficial Owners and Management 35
Description of Securities 37
Selling Stockholders 38
Plan of Distribution 49
Legal Proceedings 40
Experts 41
Legal Matters 41
Other Available Information 41
Index to Financial Statements F-1
Indemnification 44
We have not authorized anyone to provide you information different from that
contained in this prospectus. The selling stockholders will not make any offer
or sale of these shares in any state where offers and sales are not permitted.
The information contained in this prospectus is accurate as of the date of this
prospectus regardless of the time of delivery of this prospectus or of any sale
of common stock. We will keep this prospectus up to date and accurate.
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Prospectus Summary
This summary contains all material terms of the prospectus. To understand this
offering fully, you should read the entire document carefully. Please pay
particular attention to the section entitled "Risk Factors" and the section
entitled "Financial Statements".
Diamond Entertainment Corporation
Diamond Entertainment Corporation (DMEC), located at 800 Tucker Lane, Walnut,
California 91789, phone number (909) 839-1989, was incorporated under the laws
of the State of New Jersey on April 3, 1986. In April 2000, we registered in the
state of California to do business under the name e-DMEC.
DMEC markets and sells a variety of videocassette and DVD titles to the budget
home video and DVD markets, principally through our New Jersey sales office. We
also purchase and distribute general merchandise including children's toy
products and other sundry items. Additionally, we offer video duplication and
DVD replication services, including packaging and fulfillment services.
Products and Services
The principle product of DMEC is our video and DVD programs which we market to
national and regional mass merchandisers, department stores, drug stores,
supermarkets and other similar retail outlets. Our videocassette products are
generally sold to the public at retail prices ranging from $1.99 to $9.99 per
videocassette and our DVD products are generally sold at retail prices ranging
from $4.99 to $12.99 per DVD. Our videocassette and DVD titles include public
domain and licensed programs. DMEC also provides video duplication and DVD
replication services, including packaging and fulfillment services.
Public domain programs are titles that are not subject to copyright protection.
Licensed programs are programs that have been licensed by us from a third party
for duplication and distribution, generally on a non-exclusive basis. DMEC
products are also offered by consignment arrangements through one large mail
order catalog company and one retail chain.
Furthermore, DMEC also manufactures one toy product, the Woblong Double Wing
Flier (R) (subsequently renamed the Zoombie (R)) a bi-wing aerodynamic flying
toy, and distributes other toy products to certain mass merchandisers in the
U.S.
THE OFFERING
Common stock 67,500,000 offered by Selling Shareholders
Common stock outstanding: Prior to the Offering: 457,595,650 shares (1)
as of March 31, 2002
After the Offering: 525,095,650 shares will be
outstanding
Offering Price The selling shareholders can sell the shares at
any price.
Use of proceeds This prospectus relates to shares of our common
stock that may be offered and sold from time to
time by the selling stockholders. We will not
receive any proceeds from the sale of shares by
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the selling shareholders. However, we will use
the proceeds upon the exercise of any warrants
that may be exercised by the selling
shareholders. These funds will be used for
ongoing operations.
Market for our Common Stock: Our common stock trades on the Over the Counter
Bulletin Board, also called OTCBB, under the
trading symbol "DMEC". The market for our
common stock is highly volatile.
We can provide no assurance that there will be a market in the future for our
Common Stock.
RISK FACTORS
An investment in shares of DMEC's common stock involves a high degree
of risk. You should carefully consider the following information about these
material risks, together with other information contained in this prospectus,
before deciding to buy DMEC's common stock. If any of the following risks
actually occur, DMEC's business would likely suffer. In these circumstances, the
market price of DMEC's common stock could decline, and you may lose all or part
of the money you paid to buy DMEC's common stock.
RISKS RELATING TO OUR BUSINESS:
DMEC has sustained continuing losses making it a risky investment.
DMEC incurred a loss for the year ending March 31, 2001 of $914,894 and a loss
of $3,937,358 in the year ending March 31, 2000. DMEC also incurred a loss for
the nine months ended December 31, 2001 and 2000 of $146,505 and $862,655,
respectively.
DMEC will require at least $500,000 in order to meet our working capital
requirements for the next 12 months. A "going concern" opinion was rendered by
our auditors in connection with our financial statements for the years ended
March 31, 2001, and 2000 as a result of our capital short fall. Therefore
investment in DMEC is at risk of being lost.
The following will be considered in obtaining funds:
o Future sales of our products.
o Conversion of outstanding debt into equity.
o Proceeds of future financings or borrowings, including public and/or
private offerings of debt or equity securities.
There can be no assurance that funds from these or any other sources will be
forthcoming. For these reasons there is a substantial question about our ability
to operate as a going concern.
DMEC may not be able to obtain sufficient capital to fund our operations and, as
a result, we may cut back or discontinue operations or limit our business
strategies.
Future financing may be difficult to obtain due to such factors as our
unfavorable operating history and results, the level of risk associated with our
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business and business plans, increases in our vulnerability to general economic
conditions, and increased stockholder dilution. While we will need significant
additional capital in the near future to fund programs, we may be unable to
obtain such funding for our operations on favorable terms, or at all. If
adequate funds are not available, we may be required to cut back on our
production location, as well as sales, marketing, distribution programs,
distribution plans, reduce operating expenses, or attempt to obtain funds
through strategic alliances that may require us to relinquish rights to our
technologies or products.
Our need for future capital requirements will depend on many factors, including:
o the future of our product sales, marketing and distribution efforts;
o cost increases in the progress of filing for and obtaining regulatory
approvals;
o any market rejection of our products;
o decreases in the levels of administrative and legal expenses
In addition, if debt financing is available, it may have several negative
effects on our future operations, including:
o a portion of our cash flow from operations will be dedicated to
payment of principal and interest and this would reduce the funds
available for operations and capital expenditures;
o increased debt burdens will substantially increase our vulnerability
to adverse changes in general economic and competitive conditions; and
o we may be subject to restrictive debt covenants and other conditions
in our debt instruments that may limit our capital expenditures, limit
our expansion or future acquisitions, and restrict our ability to
pursue our business strategies.
DMEC has experienced a substantial decrease in sales revenues, which may result
in a curtailment of operations, putting any investors money at risk.
DMEC's sales revenues were approximately $3.2 million in fiscal 2001, $3.8
million in fiscal 2000, and $4.4 million in 1999, for an overall decrease in
sales revenue of 27.3%. These sales declines were primarily the result of lower
purchases from certain of our major customers. Furthermore, sales revenues were
approximately $3.2 million for the nine months ended December 31, 2001 and $2.4
million for the nine months ended December 31, 2000, an increase of
approximately 33%. However, this increase may not be indicitive of the final
sales results for fiscal year 2002. The following factors will contribute to
DMEC's effort of improving sales:
o By converting 50% or more of our sales to DVD products
o Increasing the number of our major customers
o Acquiring new video and DVD titles
o Adding new products to our general merchandise and sundry line of
products
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There are no assurances that a decline in our revenues will not continue.
DMEC faces intense competition, which may hamper our ability to stay in
business, thus putting the investors money at risk.
The videocassette and DVD distribution industry is intensely competitive and
highly fragmented. We compete with many other distributors and manufacturers in
the budget home video and DVD markets. We also face intense competition from
other distributors of toy products. Most of our competitors have significantly
greater financial, manufacturing and marketing resources than we do.
DMEC's ability to produce revenue is dependent on certain significant customers,
a loss of any of these customers would adversely affect DMEC's operation
DMEC's two largest customers, Walgreens and Musicland, accounted for an
aggregate of approximately 45% of our revenues for the year ended March 31,
2001, and 43% of our revenues during the nine months ended December 31, 2001,
plus approximately 28% of our revenues, for the year ended March 31, 2000. We
expect these customers to continue to account for a significant portion of our
business. The loss of any of these customers could have a material adverse
effect on our results of operations.
DMEC's business is seasonal in that approximately 48% of sales is associated
with the Christmas holiday season, therefore a down holiday season would have a
significant negative impact on the company
We customarily derive approximately 48% of our annual gross revenues from sales
of programs and other videos during the period from September through January
due primarily to the increased volume associated with the Christmas holiday
season. Accordingly, the results of operations for each three month period
ending December 31, are not necessarily indicative of the results that may be
expected for the full fiscal year.
We have a "Going-Concern Qualification" in our certifying accountant's financial
statement report, which may make capital raising more difficult and may require
us to scale back or cease operations.
The report of our auditors includes a going concern qualification, which
indicates an absence of obvious or reasonably assured sources of future funding
that will be required by us to maintain ongoing operations. To date we have
successfully funded DMEC by attracting additional equity investments and issues
of debt. We believe that our ongoing efforts will continue to successfully fund
operations until positive cash flow is attained. However, there is no guarantee
that our efforts will be able to attract additional necessary equity and/or debt
investors. If we are unable to obtain this additional funding, we may not be
able to continue operations. To date we have been able to obtain funding and
meet our obligations in a timely manner. However, if in the future we are
unsuccessful in attracting new sources of funding then we will be unable to
continue in business.
RISKS RELATING TO OUR STOCK:
There are a large number of shares underlying our convertible notes and warrants
that may be available for future sale and the sale of these shares may depress
the market price of our common stock and may cause substantial dilution to our
existing stockholders.
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"Dilution" refers to the reduction in the voting effect and proportionate
ownership interest of a given number of shares of common stock as the total
number of outstanding shares increases. Our issuance of additional stock,
convertible preferred stock and convertible debt may result in dilution to the
interests of shareholders and may also result in the reduction of our stock
price. The sale of a substantial number of shares into the market, or even the
perception that sales could occur, could depress the price of our common stock.
We have issued a substantial number of convertible series "B" Preferred Shares
to various investors (see selling shareholders). When we issue shares of common
stock upon conversion of our Series B Convertible Preferred Stock, such shares
will be issued at a discount to their then-prevailing market price. These
discounted sales could cause the market price of our common stock to drop. We
may find it more difficult to raise additional equity capital if it should be
needed for our business while options, warrants and convertible securities are
outstanding. At any time at which holders of the options, warrants or
convertible securities might be expected to exercise them, we would probably be
able to obtain additional capital on terms more favorable than provided by those
securities. Also, Mr. Schillen a holder of a convertible debt security, has the
right to require registration under the Securities Act of the shares of common
stock that are issuable upon conversion of the convertible securities. The cost
of effecting any required registration may be substantial.
The following table sets forth our capitalization as of December 31, 2001:
Stockholders' deficiency:
Convertible Preferred Stock, no par value: 4,999,850 shares
authorized, 483,251 shares outstanding $ 376,593
Series A Convertible preferred stock; $10,000 per share stated
value; 50 shares authorized; 40 issued and outstanding 346,400
Series B Convertible preferred stock; $10,000 per share stated
value; 87 shares authorized; 58 issued and outstanding 508,985
Common Stock, no par value; 600,000,000 shares authorized,
457,595,650 shares outstanding 16,956,618
Accumulated deficit (18,711,823)
Treasury stock (48,803)
Total stockholders' deficiency (572,030)
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Total capitalization $ 572,030
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Short selling common stock by warrant and debenture holders may drive down the
market price of our stock.
Warrant and debenture holders may sell shares of DMEC's common stock on the
market before exercising the warrant or converting the debenture. The stock is
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usually offered at or below market since the warrant and debenture holders
receive stock at a discount to market. Once the sale is completed the holders
exercise or convert a like dollar amount of shares. If the stock sale lowered
the market price, upon exercise or conversion, the holders would receive a
greater number of shares then they would have absent the short sale. This
pattern may result in the spiraling down of our stock's market price.
DMEC's Stock Price is Volatile which could result in the investor selling shares
at a loss
The stock market from time to time experiences significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These broad market fluctuations may cause the market price of our
common stock to drop. In addition, the market price of our common stock is
highly volatile.
Factors that may cause the market price of our common stock to drop include:
o fluctuations in our results of operations;
o timing and announcements of new customer orders, new products, or
those of our competitors;
o changes in stock market analyst recommendations, regarding our common
stock;
o failure of our results of operations to meet the expectations of stock
market analysts and investors;
o acquisition of new products or videocassette or DVD titles;
o increases in the number of outstanding shares of our common stock
resulting from sales of new shares, or the exercise of warrants, stock
options or convertible securities;
o reluctance of any market maker to make a market in our common stock;
o changes in investors' perception of the videocassette and DVD
distribution industry; and
o general stock market conditions.
DMEC's common stock is subject to the "Penny Stock" rules of the SEC and the
trading market in our securities is limited, which makes transactions in our
stock cumbersome and may reduce the value of an investment in our stock.
Our shares of Common Stock are "penny stocks" as defined in the Exchange Act,
which are traded in the over-the-counter market on the OTC Bulletin Board. As a
result a investor may find it more difficult to dispose of or obtain accurate
quotations as to the price of the shares of the Common Stock being registered
hereby. In addition, the "penny stock" rules adopted by the Commission under the
Exchange act subject the sale of the shares of the Common Stock to certain
regulations which impose sales practice requirements on broker-dealers. For
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example, broker-dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document that discloses the risks of
investing in such securities.
Included in this document are the following:
o The bid and offer price quotes for the penny stock, and the number of
shares to which the quoted prices apply
o The brokerage firm's compensation for the trade
o The compensation received by the brokerage firm's salesperson for the
trade
In addition, the brokerage firm must send the investor:
o Monthly account statement that gives an estimate of the value of each
penny stock in your account
o A written statement of your financial situation and investment goals
Legal remedies which may be available to you are as follows:
o If penny stocks are sold to you in violation of your rights listed
above, or other federal or securities laws, you may be able to cancel
your purchase and get your money back
o If the stocks are sold in a fraudulent manner, you may be able to sue
the persons and firms that caused the fraud for damages
o If you have signed an arbitration agreement, however, you may have to
pursue your claim through arbitration
If the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker-dealer, the broker-dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of the common stock.
Resale restrictions on transferring "penny stocks" are sometimes imposed by some
states, which may make transactions in our Common Stock cumbersome and may
reduce the value of an investment in our stock.
Various state securities laws impose restrictions on transferring "penny stocks"
and as a result, investors in the Common Stock may have their ability to sell
their shares of the Common Stock impaired. For example, the Utah Securities
Commission prohibits brokers from soliciting buyers for "penny stocks", which
makes selling them more difficult.
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INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements, which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified because the context of the statement includes words such
as "believes," "expects," "may," "will," "intends, "plans," "should," "seeks,"
"pro forma," "anticipates," "estimates," "continues," or other similar words.
Similarly, this prospectus also contains forward-looking statements about our
future.
Forward-looking statements include statements about our:
Plans, Objectives, Goals, Strategies, Expectations for the future, Future
performance and events, underlying assumptions for all of the above and other
statements which are not statements of historical facts.
These forward-looking statements involve risks and uncertainties, which could
cause our actual results to materially differ from our forward-looking
statements. We make these forward-looking statements based on our analysis of
internal and external historical trends, but there can be no assurance that we
will achieve the results set forth in these forward-looking statements. Our
forward-looking statements are expressed in good faith and we believe that there
is a reasonable basis for us to make them.
In addition to other factors discussed in this prospectus, the following are
important factors that could cause our actual results to materially differ from
our forward-looking statements:
o Our ability to respond to changes in the marketplace
o Competitive factors
o The availability of financing on terms and conditions acceptable to us
o The availability of personnel with the appropriate technical skills
We have no obligation to update or revise these forward-looking statements to
reflect future events.
USE OF PROCEEDS
DMEC will not receive any of the proceeds from the sale of the shares of common
stock offered by the selling stockholders under this prospectus. No proceeds
will be received by us from the sale of the shares offered hereby.
The proceeds, if any, that DMEC receives from the exercise of warrants, or
$219,000 (exercise price of the warrants is $.02 per share), will be used for
general working capital purposes.
PRICE RANGE OF COMMON STOCK
DMEC's common stock is quoted on the NASD's OTC Bulletin Board under the symbol
"DMEC." The following table set forth, the high and low bid prices for the
Common Stock for each quarterly period during our last three fiscal years. The
source of the quotes is NASD's OTC Bulletin Board quarterly quote summaries.
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Common Stock
Bid Price
Low High
Fiscal Year 2000
First Quarter 0.06 0.24
Second Quarter 0.06 0.19
Third Quarter 0.02 0.11
Fourth Quarter 0.05 0.20
Fiscal Year 2001
First Quarter 0.045 0.125
Second Quarter 0.024 0.067
Third Quarter 0.009 0.039
Fourth Quarter 0.007 0.020
Fiscal Year 2002
First Quarter 0.010 0.020
Second Quarter 0.006 0.010
Third Quarter 0.004 0.030
Fourth Quarter 0.010 0.025
On April 17, 2002, the closing price for our common stock was $.016. As of the
same date, there were 2,485 holders of record of our common stock.
The transfer agent for our common stock is Continental Stock Transfer & Trust
Company, New York, New York.
OUR DIVIDEND POLICY
DMEC anticipates that for the foreseeable future, earnings will be retained for
the development of its business. Accordingly, DMEC does not anticipate paying
dividends on the Common Stock in the foreseeable future. The payment of future
dividends will be at the sole discretion of DMEC's Board of Directors and will
depend on the Company's general business condition.
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SUMMARY FINANCIAL INFORMATION
The summary historical financial data should be read in conjunction with the
financial statements (and notes thereto) of our Company and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
Year ended March 31 Nine Months Ended December 31
2000 2001 2000 2001
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Revenues $ 3,828 $ 3,181 $ 2,393 $ 3,179
Cost of Goods Sold 3,348 1,797 1,444 1,976
Selling, General and
Administrative 4,056 1,939 1,493 1,150
Profit (Loss) from (3,576) (555) (544) 53
Operations
Other income (expense) (361) (360) (319) (200)
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Net Loss $ (3,937) $ (915) $ (863) (147)
Weighted average Common
Shares outstanding 59,375,234 69,359,016 68,011,807 285,033,427
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Basic loss per share $ (.01) $ (.07) $ (.00) $ (.01)
======================== =============================
Current Assets $ 1,633 $ 1,679 $ 1,668 $ 1,973
Total Assets 2,125 2,148 2,098 2,472
Current Liabilities 5,164 5,337 5,095 3,044
Total Liabilities 5,446 5,487 5,385 3,044
Shareholders' equity (deficit) $ (3,321) $ (3,339) $ (3,286) $ (572)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
DMEC's primary goal is to generate an operating profit in fiscal 2002 and to be
recognized primarily as a DVD and related product company specializing in
educational, children and film classic titles.
The short-term objectives of DMEC are the following:
o Increase DMEC's percentage in the market segment of high quality
budget price distribution of videocassettes and DVD titles by
minimizing the affect of direct competition with larger competitors
who sell the same product categories by offering higher quality
budgeted price products.
o Continue expanding the overall market share of its core business by
acquiring new videocassette and DVD titles for distribution.
o Maintain and improve our service through improving turnaround time.
o Improve communications with our customer base by frequently
maintaining and updating our web-site to keep up with current
products.
DMEC's long-term objectives are as follows:
o Continue expanding into contract replication, duplication and
packaging business.
o Expand its general merchandise and sundry line by introducing new
products such as train cases (cosmetic boxes), photo albums and
frames.
o Implementing marketing and sales programs on its web-site products
using its new promotional campaigns to increase its revenue and profit
margins.
o Introducing new products during fiscal 2002, such as DVD tickets, DVD
ID card and DVD credit card implanted with a smart chip.
The Company has implemented the following strategies in its effort to reach
profitability:
A. Retailers and Mass Merchandisers Client Base
1. Improve pricing and packaging innovations,
2. Improve efficiency in quick turnaround of product shipments, and
3. Increase sales by expanding its general merchandise and sundry line of
products.
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B. Internet e-Commerce Customer Base
1. Keep our pricing competitive.
2. Improve customer service procedures.
3. Complete thorough search for a cost effective method for marketing and
promoting our web-site (www.e-dmec.com).
4. Continue to seek viable new products to be added to our web-site.
C. Contract Replication and Contract Packaging Service
1. Improve efficiency and speed in DVD high quality replication and
packaging services.
2. Use our association with our alliance company, Everbright Chung Cheong
DVD Co., Ltd., to penetrate into the DVD replication market by
broadcasting to our potential contract customers the unique
capabilities, experience and consistency of production capabilities
provided and to penetrate into the large corporate segment.
3. Capitalize on the experience and know-how of Everbright Chung Cheong
DVD Co., Ltd., to deliver the highest quality replication service
available on a consistent basis.
We believe we have adequate cash resources to sustain our operations through the
second quarter of fiscal 2002, when we expect to generate a positive cash flow.
We are continuing to negotiate with several reliable investors to provide us
with debt and equity financing for working capital purposes and to convert debt
to equity. Our principal objective 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 we believe
that the outlook is favorable, there can be no assurance that market conditions
will continue in a direction favorable to our Company.
RESULTS OF OPERATION
Nine Months Ended December 31, 2001 vs. Nine Months Ended December 31, 2000
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DMEC's net loss for the nine months ended December 31, 2001 was approximately
$147,000 as compared to a net loss of approximately $863,000 for the same period
last year. The primary reason for the net loss was our operating profit of
approximately $53,000 offset by other income and expenses of approximately
$200,000.
Profit for the nine months ended December 31, 2001 were approximately $53,000 as
compared to an operating loss of approximately $544,000 for the same period last
year. Our operating profit arose primarily from decreased operating expenses of
approximately $343,000 and an increase in gross profit of approximately
$254,000.
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Sales for the nine months ended December 31, 2001 and 2000, were approximately
$3,179,000 and $2,393,000 respectively. Our sales increased by approximately
$786,000 from the same period a year earlier with increased videocassette and
DVD product sales of approximately $96,000 and $690,000, respectively. The
higher videocassette product sales when compared to the same period a year
earlier was attributable to increased orders placed by several of our larger
customers. The strategy of shifting its videocassette products to DVD products
and the wider acceptance of DVD product line contributed to the increase in DVD
sales. We plan to acquire new titles for videocassette and DVD products over the
remainder of fiscal year 2002. Sales of our products are generally seasonal
resulting in increased sales starting in the third quarter of the fiscal year.
Cost of sales was approximately $1,976,000 and $1,444,000 or 62% and 60% of
sales for the nine months ended December 31, 2001 and 2000, respectively. The
increase in cost of goods of approximately $532,000 was primarily the result of
increased sales volume.
Our gross profit was approximately $1,203,000 and $949,000, or 38% and 40% of
sales for the nine months ended December 31, 2001 and 2000, respectively. The
increase of approximately $254,000 was the mainly the result of increased sales
volume.
Gross margin for videocassette products as a percentage to sales for the nine
months ended December 31, 2001 and 2000 was 35% and 35%, respectively. DVD
product gross margin was 42% and 54%, respectively. The decrease in DVD product
gross margin of 12% when compared the same period a year earlier was mainly the
result of sales price erosion.
Selling, General and Administrative expenses for the nine months ended December
31, 2001 and 2000 were approximately $1,150,000 and $1,493,000, respectively.
The decrease of approximately $343,000 was the result of increases in selling
expense of approximately $67,000, offset by a decrease of approximately $410,000
in general and administrative expenses.
General Administrative expenses for the nine months ended December 31,2001 and
2000 were approximately $725,000 and $1,135,000, respectively. The decrease in
general administrative expenses of approximately $410,000 was primarily the
result of lower rent, bad debt expenses, depreciation expense, consulting
expense and non-cash consulting and financing costs. Bad debt expense for the
nine months ended December 31, 2001 and 2000 was approximately $27,000 and
$101,000, respectively.
Selling expenses for the nine months ended December 31, 2001 and 2000 were
approximately $425,000 and $358,000, respectively. The increase in selling
expenses of approximately $67,000 was attributable mainly to higher expense
levels in freight expense, commission expense, royalty expense and advertising
and promotional expenses.
Interest expense for the nine months ended December 31, 2001 and 2000 was
approximately $250,000 and $300,000 respectively. The decrease in interest
expense of approximately $50,000 was the result of lower levels of borrowing. As
of December 31, 2001, our outstanding debt was approximately $1,404,000 of which
the entire amount is classified as current.
15
Year Ended March 31, 2001 vs. Year Ended March 31, 2000
- -------------------------------------------------------
Revenues for the years ended March 31, 2001 and 2000 were $3,181,079 and
$3,828,261 respectively. Our sales decreased by approximately $647,000 from the
prior year with decreased video, toy product sales and custom duplication sales
of approximately $760,000, $239,000 and $618,000, respectively, offset by
increased DVD product sales of approximately $970,000. We recorded minimal toy
product and custom duplication sales during the year ended March 31, 2001. The
lower video product sales for the year ended March 31, 2001, were primarily the
result of our shifting its video product sales to DVD product sales and to the
lower demand for video products from our major customers. The lower toy product
sales when compared to the prior year were primarily attributed to lower volume
purchases from the Company's major toy customer. Sales of our products are
generally seasonal resulting in increased sales starting in the third quarter of
the fiscal year. We expect the sales to increase in fiscal year ending March 31,
2002 resulting from increased DVD product sales.
Our net loss for the year ended March 31, 2001 was approximately $915,000 versus
a net loss of approximately $3,937,000 for the same period last year. The
primary reason for the net loss was our operating loss of approximately
$555,000.
Our operating loss for the year ended March 31, 2001 was approximately $555,000
versus an operating loss of approximately $3,576,000 for last year. The decrease
in our operating loss of approximately $3,021,000 was the result primarily from
increased gross profit of approximately $904,000 and decreased operating
expenses of approximately $2,117,000.
Cost of sales for the years ended March 31, 2001 and 2000 were approximately
$1,797,000 and $3,348,000 or 57% and 88% of sales, respectively. The decrease in
cost of sales of approximately $1,551,000 was primarily due to lower sales
volume of video, toy products and custom duplication sales partially offset by
increased sales volume of DVD product. Also contributing significantly to the
decrease in the cost of sales percentage to sales of approximately 31% when
compared the same period a year earlier, was the change in the sales product
mix, whereby we made a shift in sales from higher cost video, toy product, and
custom duplication sales to lower cost DVD products.
During the year ending March 31, 2001, we recorded minimal toys and custom
duplication sales. The previous year's toy products sales of approximately
$223,000 were sold at approximately 43% below cost which contributed to the
higher cost of sales for fiscal year 2000. Also contributing to the higher cost
of sales for fiscal year 2000 were custom duplication sales of approximately
$618,000 which had a cost of sales percentage of 89% when compared to the such
sales for the period.
For the years ended March 31, 2001 and 2000, video product cost of sales
percentages when compared to sales were 64% and 77%, respectively. Contributing
to our reduction in video cost of sales percentage of 13%, were the higher
average sales prices charged to customers and the lower write-downs of slow
moving inventory during fiscal year 2001.
16
Gross profit for the years ended March 31, 2001 and 2000 were approximately
$1,384,000 and $480,000, or 43% and 12% of sales, respectively. The significant
increase in the gross profit as a percentage of sales was primarily result of
our shifting its sales to higher profit margins DVD product line from lower
margin video, toy product and custom duplication sales. We had minimal lower
margin toy product and custom duplication sales for the year ended March 31,
2001. The gross profit as a percentage to sales for Video Products and DVD
products for the period ended March 31, 2001 and 2000, were 36% and 61%,
respectively.
Selling and general and administrative expenses for the years ended March 31,
2001 and 2000 were approximately $1,939,000 and $4,056,000, respectively. The
decrease of approximately $2,117,000 was primarily the result of decreases in
non-cash expenses in connection with the issuance of equity instruments as
compensation and other fees of approximately $1,089,000, and lower selling and
general administrative expenses of approximately $1,028,000.
Selling expenses for the years ended March 31, 2001 and 2000 were approximately
$454,000 and $709,000, respectively. The decrease in selling expenses of
approximately $255,000 was attributable mainly to lower expense levels in
freight costs, royalty, and sales promotion related expenses.
General Administrative expenses for the years ended March 31, 2001 and 2000 were
approximately $1,485,000 and $3,347,000, respectively. The decrease in general
administrative expenses of approximately $1,862,000 was primarily the result of
lower expense levels of non-cash expenses in connection with the issuance of
equity instruments as compensation and other fees of approximately $1,089,000
and lower expense levels of approximately $773,000 primarily in office rent,
legal expenses, salaries, consulting expense and general corporate expenses.
Interest expense for the years ended March 31, 2001 and 2000 were approximately
$456,000 and $419,000 respectively. The increase in interest expense in fiscal
2001 over fiscal 2000 of approximately $37,000 was primarily the result of
higher interest rates on accounts receivable financing and other loans. As of
March 31, 2001, our outstanding debt was approximately $3,312,000 of which
approximately $150,000 is classified as long term.
Other income for the year ended March 31, 2001 of approximately $80,000 consist
of management income in connection with its real estate investment and other
miscellaneous income of approximately $96,000 and $10,000, respectively, offset
by dividend expense of approximately $26,000.
Our 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 our efforts to obtain additional financing will be successful.
Management's plans are discussed under "Liquidity and Capital Resources -
Operations."
17
Year Ended March 31, 2000 vs. Year Ended March 31, 1999
- -------------------------------------------------------
Restatement and Correction of Errors
- ------------------------------------
Our consolidated balance sheet and related consolidated statements of
operations, stockholders' deficiency and cash flows for the year ended March 31,
1999, were re-audited. As the result of this re-audit, we have restated our
fiscal year 2000 financial statements to expense $255,000 of deferred costs,
which were incurred due to the issuance of stock options. Also, the 2000
financial statements have been adjusted to reflect cumulative adjustments of
$308,209 for 1999 restatements, which have decreased the net loss.
We have restated our March 31, 1999 financial statements to reflect adjustments
increasing our net loss by approximately $1,123,000. Management's discussion and
analysis set forth in this section are based upon the restated financials for
the two years ended March 31, 2000.
The financial statements for the period ended March 31, 1999, were restated as a
result of the following:
1. In 1999, we issued convertible debentures for $175,000 and $100,000 to an
unrelated third party and a $50,000 convertible debenture to our President.
Since the debentures are convertible into restricted shares of our common stock
at a rate below market price of our common stock on the date of issuance of the
debentures, the first 20% of the below market price was attributed to the lack
of tradability of the shares, due to restrictions on sale and the remainder of
the below market price was attributed to financing costs. The additional amount
of financing cost for such debentures was calculated to be $105,000, $73,600 and
$37,600, respectively. We did not record the effect of this matter in our
financial statements. The effect on the financial statements was a $216,200
increase in common stock and a corresponding increase in selling, general and
administrative expense.
2. In 1999, we converted $145,959 of accrued interest into 3,445,011 shares of
our common stock at a conversion rate below the market price of our common
stock. We recorded additional interest expense of $157,987 for the difference
between the conversion price and the market price of our common stock. The
effect on the financial statements was a $157,987 increase in common stock and a
corresponding increase in selling, general and administrative expense.
3. Our equity investment was recorded at a value of $50,000 when the book value
was approximately $7,500. The effect on the financial statements was a $42,500
decrease in the investment and a corresponding decrease in the valuation
adjustment for the investment.
4. We had $175,000 of deferred costs associated with a loan fee, which was being
amortized over the life of the loan. The amortization expense for 1999 was
understated by $16,468. The effect on the financial statements was a $16,468
decrease in total assets and a corresponding increase in selling, general and
administrative expense.
18
5. In 1999, we had approximately $176,000 of consignment sales recorded as
accounts receivable. The effect on the financial statements was a $176,000
decrease in sales and $86,000 decrease in cost of goods sold for a $90,000
decrease in the gross profit.
6. In 1999, we issued 1,524,523 shares of common stock for services rendered.
The shares were valued at $34,500. However, the market value of the common stock
on the date of issuance was $49,905. The effect on the financial statements was
a $15,405 increase in common stock and a corresponding increase in selling,
general and administrative expense.
7. In 1999, we granted an option to purchase 7,150,000 shares of our common
stock to consultants. The options were valued at $39,000. However, the estimated
market value of the options was $430,426. The effect on the financial statements
was a $391,426 increase in common stock and a corresponding increase in selling,
general and administrative expense.
8. In 1999, we granted an option to purchase 4,000,000 shares of our common
stock to employees. We have elected to account for employee stock options under
APB 25 and recorded an intrinsic expense of $15,000 for these options since the
option price was below the market price of our common stock on the date of
grant. However, the actual expense had been calculated to be $160,000. The
effect on the financial statements is a $145,000 increase in common stock and a
corresponding increase in selling, general and administrative expense.
9. As of March 31, 1999, we had $48,180 of deferred costs, which were incurred
due to the issuance of stock options to consultants. Since the consultants were
100% vested in the options, we have determined that the associated cost of the
options have no future value to us. The effect on the financial statements was a
$48,180 decrease in total assets and a corresponding increase in selling,
general and administrative expense.
Results of Operations
- ---------------------
DMEC's loss for the year ended March 31, 2000 was approximately $3,937,000 as
compared to a net loss of approximately $2,714,000 for the same period the prior
year. The primary reason for the net loss was our operating loss of
approximately $3,576,000.
Our operating loss for the year ended March 31, 2000 was $3,576,000 as compared
to an operating loss of approximately $2,448,000 for the prior year. The
increase in our operating loss of approximately $1,128,000 arose primarily from
reduced gross profit of approximately $959,000, and increased non-cash expenses
in connection with the issuance of equity instruments as compensation and other
fees of approximately $450,000, offset by a reduction in other operating
expenses of approximately $281,000.
Revenues for the years ended March 31, 2000 and 1999, were $3,828,261 and
$4,373,303 respectively. Our sales significantly decreased by approximately
$545,000 from the prior year with decreased video and toy product sales of
19
approximately $351,000 and $194,000, respectively. The lower video product sales
for the year ended March 31, 2000, were primarily the result of our suspending
most of our acquisition of new video titles until January of 2000, which is when
we received favorable responses substantiating market acceptance for certain
video titles in DVD, and the cancellation of a significant holiday order from a
major chain store during October 1999. The lack of new video titles and the
cancellation of the major holiday order forced us to sell our existing inventory
at much reduced prices to generate cash for our operation, which also
contributed the lower sales dollar volume during the fiscal year ended March 31,
2000. The lower toy product sales when compared to the prior year were primarily
attributed to lower volume purchases from our major toy customer and sales of
slower moving toy products at sales prices below previous year's market prices.
Sales of our products are generally seasonal resulting in increased sales
starting in the third quarter of the fiscal year. We expect the sales to
increase in fiscal year ending March 31, 2001. Our sales for the quarter ended
March 31, 2000, were approximately $633,000 as compared to the prior two
quarters which averaged approximately $1,248,000 a quarter. This decrease in the
last quarter was primarily attributable to the lack of new video titles
mentioned above and the sale of video and toy product inventories at reduced
selling prices.
Cost of sales for the years ended March 31, 2000 and 1999 were approximately
$3,348,000 and $2,934,000 or 88% and 67% of sales, respectively. The significant
increase in cost of sales as a percentage of sales of 21% was primarily the
result of lower sales prices charged to customers for video and toy products and
the reduction of certain video and slow moving toy inventory down to its net
realizable value. During fiscal year 2000, we generated custom duplication sales
of approximately $618,000 having cost of sales 89% of sales which also
contributed to the increase in cost of sales as a percentage of sales.
Gross profit for the years ended March 31, 2000 and 1999 were approximately
$480,000 and $1,439,000, or 12% and 33% of sales, respectively. The significant
decrease in the gross profit as a percentage of sales was primarily due to the
reduction in our selling prices on video and toy products, lower margin custom
duplication sales and the write-down of certain video and toy inventory.
Operating expenses for the years ended March 31, 2000 and 1999 were
approximately $4,056,000 and $3,887,000, respectively. This increase in
operating expenses of approximately $169,000 was primarily the result of
increases in non-cash expenses in connection with the issuance of equity
instruments as compensation and other fees of approximately $450,000, and offset
by lower selling and general administrative expenses of approximately $215,000
and $66,000, respectively. The lower general and administrative expenses of
approximately $66,000 was primarily the result of higher expense levels in
facility rent of approximately $147,000, offset by a decrease in bad debt of
approximately $213,000. The lower level of selling expenses of approximately
$215,000 was primarily attributable to lower expenses in marketing and sales
salaries and sales commissions of approximately $123,000 and $80,000,
respectively.
Bad debt expense for the years ended March 31, 2000 and 1999 were approximately
$99,000 and $312,000, respectively, a decrease of approximately $213,000.
20
Interest expense for the years ended March 31, 2000 and 1999 were $418,524 and
$463,905, respectively. The decrease in interest expense in fiscal 2000 over
fiscal 1999 of approximately $45,000 was primarily the result of lower levels of
accounts receivable and asset based borrowings. As of March 31, 2000, our
outstanding debt was approximately $3,940,000 of which approximately $282,000 is
classified as long term.
Our 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 our efforts to obtain additional financing will be successful.
Management's plans are discussed under "Liquidity and Capital Resources -
Operations."
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit as of December 31, 2001 was approximately
$1,070,000 as compared with a working capital deficit of $3,658,000 at December
31, 2000. This decrease in the working capital deficit of approximately
2,588,000 was primarily the result of decreased borrowings.
During August of 2001, certain holders of our 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 our common
stock. Such conversion of the aggregate convertible note balances and unpaid
interest contributed approximately $2,100,000 towards the reduction of our
working capital deficit during the nine months ended December 31, 2001.
Our working capital deficit at March 31, 2001 was $3,658,000 as compared with
working capital deficit of $3,531,000 at March 31, 2000. This increase in the
working capital deficit of approximately $97,000 is primarily the result of our
higher levels of accounts payable and accrued expenses offset by reduced debt
obligations.
Cash Used in Operations
For the nine months ended December 31, 2001, net cash used in operations was
approximately $547,000 as compared to net cash provided by operations of $89,000
for the nine months ended December 31, 2000.
We have implemented an alternative cash flow plan to react to this situation.
The principal objective of the Company is to have the required financing in
place 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 we believe that the outlook is favorable, there can be no assurance
that market conditions will continue in a direction favorable to our Company.
For the year ended March 31, 2001, cash utilized for operations was
approximately $202,000 as compared to $398,000 for the year ended March 31,
2000. Net cash provided by financing activities during the year ended March 31,
2001 and 2000 were approximately $437,000 and $483,000 respectively.
21
We have also been experiencing difficulties in paying our vendors on a timely
basis. These factors create uncertainty whether we can continue as a going
concern.
In fiscal year 2001 we continued to operate at a loss and our working capital
was substantially reduced. During fiscal 2001, we distributed our product
directly to primarily retail chain outlets and mass merchandisers. To improve
our operations, we initiated a marketing strategy to attract more retail
customers in department, drug, electronic music, toy and book stores and made a
shift from our traditional video cassette product line towards DVD program
format.
Investing
For the nine months ended December 31, 2001 and 2000, investments in masters and
artwork were approximately $153,000 and $4,600 respectively. We continue to seek
new titles to enhance its product lines. For the years ended March 31, 2001 and
2000, investments in masters and artwork were $118,866 and $64,419,
respectively.
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. We paid
$50,000 for a 50% interest in ATRE. Our 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.
Upon sale or development of land, proceeds are used to repay all related loans
and other obligations, with the remaining balance distributed among the
shareholders of ATRE pro rata based on their interests.
ATRE has interests in two real estate parcels:
o Parcel 1 consists of approximately 20 undeveloped acres purchased in
two transactions, in 1989 and 1997. ATRE has a 70% interest in Parcel
1, located in Clark County, Washington. The total cost of Parcel 1,
including financing expenses and taxes, was approximately $2,300,000,
additionally ATRE incurred development costs of approximately
$4,500,000 through March 31, 2001.
o Parcel 2 consists of 5.5 acres of undeveloped property, also in Clark
County, Washington. ATRE's interest in Parcel 2 is 25%. Parcel 2 was
purchased in 1989 for $717,000. Approximately 2.5 acres of Parcel 2
were sold in 1996.
In June 1998 we borrowed approximately $809,500 from ATRE to finance certain
purchases of toy products. During the quarter ended December 31, 1999, our Board
of Directors authorized the conversion of the amount borrowed of $809,500 into a
one year 7% Convertible note. All or part of the balance can be paid with shares
of our 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 March 31, 2001,
22
the outstanding balance was $809,500. On July 24, 2001, the our Board of
Directors 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 $102,734as of July 23, 2001 at
the conversion price of $0.0065 per share as of the close of business on July
23, 2001.
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. As the result of
the sale, the Company recorded approximately $15,000, as its share of income
from equity investment for the period ended March 31, 2001.
ATRE had previously repaid all past loans it borrowed from us including all
applicable interest and at December 31, 2001 and March 31, 2001, we owed ATRE
$619,600 and $576,300, respectively, in accumulated loans we received consisting
of proceeds from ATRE's mortgage loans and partial proceeds from parcels
previously sold less management fees we charged ATRE in fiscal 2001 of
approximately $96,000. The loan bears interest at 14% per annum and is due upon
demand. 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
We financed our operation through:
i) Our line of credit with our financing company
ii) The issuance of our Series A & B Preferred Stock
iii) Sales of our common stock and
iv) Debt financing.
On November 16, 2001 and January 30, 2002, we entered into a securities purchase
agreement and replacement securities purchase agreement, respectively, with
certain of the selling stockholders. Under these agreements, we issued and sold
a total of 87 shares of Series B Convertible Preferred Stock for aggregate
consideration of $870,000, or $10,000 per share.
In connection with the sale of the Series B Convertible Preferred Stock, we
issued an aggregate of 10,950,000 warrants to purchase shares of our common
stock to certain selling stockholders. The warrants are exercisable at a price
of $.02 per share for a period of five years.
23
In January 2001, we borrowed $80,000 as a short term loan from one of our
suppliers, Saura Intercontinental Trading, and the loan was retired in April
2001, with final weekly installment payment of $10,000. On June 6, 2001, we
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, our President, has personally guaranteed the loan.
There was no balance owing on such note as of December 31, 2001.
On June 4, 2001 and June 26, 2001 we borrowed $25,000 and $15,000, respectively,
from Bicoastal Consulting Group and issued a promissory note which is payable on
or before August 5, 2001 and August 25, 2001, respectively. The notes bear
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. On August 15, 2001, we paid the
aggregate unpaid principal balance of the notes, interest and loan fees totaling
$44,000 to the consulting firm to satisfy the obligations.
On August 30, 1996, we 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 our accounts receivable, and an asset-based note related to
our inventories. Subsequently, on October 29, 1999, the financial institution
sold its financing agreement covering the factoring of our accounts receivable
to a factoring institution located in Dallas, Texas. The original financial
institution retained the asset-based note related to our inventories.
Substantially all our assets 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
January 1, 2003. We paid interest of approximately $154,000 and $132,000 for the
nine months ended December 31, 2001 and 2000, respectively.
The financing agreement and factor advances were as follows:
December 31, March 31,
2001 2001
----------- -----------
Due to factor payable $ 396,361 $ 319,303
Financing agreement payable -
inventory 151,777 311,807
----------- ------------
$ 548,138 $ 631,110
=========== ===========
24
On May 11, 2000, the we entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with eight investors. Pursuant to the
Securities Purchase Agreement, we 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 we 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.
Commencing August 9, 2000, the Series A Preferred Stock was convertible into
shares of our Common Stock and automatically converts into Common Stock on April
12, 2002. The conversion price of our Series A Preferred Stock is the lower of
$.08 per share or 80% of the average of the closing bid prices of our 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
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, a redemption feature at our option
commencing September 8, 2000, of shares of Series A Preferred Stock having a
stated value of up to $100,000, 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 our Company.
The Series A Preferred Stock does not provide any voting rights, except as may
be required by law. Under our Registration Rights Agreements we entered into
with the purchasers of the Series A Preferred Stock, we are 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. We are required to keep such registration statement
effective until all of such shares have been resold.
In connection with the sale of our Series A Convertible Preferred Stock, we
issued an aggregate of 1,500,000 warrants to purchase our common stock to The
May Davis Group, Inc., or its designees. May Davis acted as placement agent for
the offering of the Series A Convertible Preferred Stock. We also issued an
aggregate of 25,000 warrants to Butler Gonzalez, LLP, counsel to May Davis. The
warrants are exercisable for five years from the date of issuance, and contain
certain anti-dilution and cashless exercise provisions. The warrants are
exercisable at a price of $.07 per share for a period of five years.
During January and February 2001, seven Series A Preferred shareholders
converted an aggregate of ten shares or $100,000.00 of the Company's Series A
Preferred Stock into our common stock at an average conversion price of
approximately $0.008. Upon conversion, we issued in January and February 2001,
an aggregate of 11,546,619 shares of its common stock to the seven shareholders.
25
These shares were allocated as follows:
Shareholders Amount of Preferred A No. of Shares of Preferred A Date Conversion Request
Conversion Requested Conversion Requested Documentation Complete
- --------------------------------------------------------------------------------------------------------
Holland $20,000 2 01/15/01
Bolliger $20,000 2 01/19/01
Hrulkay $10,000 1 01/24/01
Adkins $10,000 1 01/24/01
Levite $20,000 2 01/29/01
Mongerley $10,000 1 02/02/01
Rakos $10,000 1 02/14/01
- --------------------------------------------------------------------------------------------------------
Totals $100,000 10
Shareholders Date Common Total Common Balance of Common
Stock Issued Shares Issued Stock Issuable
- --------------------------------------------------------------------------------------------------------
Total Common Stock
Issuable 11,875,000
- --------------------------------------------------------------------------------------------------------
Holland 01/17/01 2,403,846 9,471,154
Bolliger 01/23/01 2,252,252 7,218,902
Hrulkay 02/01/01 1,183,438 6,035,464
Adkins 02/01/01 1,183,438 4,852,026
Levite 02/01/01 2,261,823 2,590,203
Mongerley 02/07/01 1,130,911 1,459,292
Rakos 02/20/01 1,130,911 328,381
- --------------------------------------------------------------------------------------------------------
Totals 11,546,619 328,381
These shares were registered on form SB 2/A on 12/22/00, File Number 333-51996.
26
OUR BUSINESS
DMEC was formed under the laws of the State of New Jersey on April 3, 1986. In
May 1999, the Company registered in the State of California to do business under
the name e-DMEC. All references to the Company refer to Diamond Entertainment
Corporation doing business as e-DMEC and its subsidiaries unless the context
otherwise requires. The Company's principle executive offices are located at 800
Tucker Lane, Walnut, California 91789.
DMEC markets and sells a variety of videocassette and DVD (Digital Video Disc)
titles to the budget home video and DVD market. We also purchase and distribute
general merchandise including children's toy products.
Our videocassette and DVD titles include certain public domain programs and
certain licensed programs. Public domain programs are video titles that are not
subject to copyright protection. Licensed programs are programs that have been
licensed by us from a third party for duplication and distribution, generally on
a non-exclusive basis. We market our video programs to national and regional
mass merchandisers, department stores, drug stores, supermarkets and other
similar retail outlets. They generally sell our products to the public at retail
prices ranging from $1.99 to $9.99 per videocassette and $4.99 to $12.99 per DVD
program packs. Our video and DVD products are also offered by consignment
arrangements through one large mail order catalog company and one retail chain.
We are continuing to acquire new licensed video and DVD titles and upgrading the
quality of its packaging and pre-printed materials in order to enhance its
available products. In addition we provide video duplication and DVD replication
services, including packaging and fulfillment services.
In May 1997, DMEC acquired a wholly owned subsidiary known as Jewel Products
International, Inc. ("JPI"). JPI is in the business of manufacturing and
distributing toy products, purchasing various other children's toy products from
U.S.based importers or directly from Asia for distribution, and distributing
toys to mass merchandisers in the United States.
Product and Services
Video Program Line
DMEC's principle product is the video program which consists of a total of
nearly 748 titles appealing to all age groups. The programs include cartoons,
horror films, science fiction, dramas, adventure stories, mysteries, musicals,
comedies, fairy tale adaptations, educational programs, sports highlights, and
computer-literacy. Public domain programs account for approximately 473 titles,
and licensed programs account for approximately 275 titles of our program
inventory.
27
o Motion Pictures - Public Domain. We offer a total of 106 feature
motion picture titles including many film classics, biblical tales,
and a large collection of favorite performers. Titles include "Love
Affair", "Milton Berle" and "Herod the Great".
o Children's Programs - Licensed and Public Domain. Most of our cartoons
are public domain programs, including 21 cartoon programs re-dubbed in
Spanish. These programs are generally 30 minutes in length and consist
of a series of cartoons that we select. We also market approximately
18 children's holiday features, and 49 titles in its Testaments and
Children's Bible series.
o Educational Programs - Licensed. We license approximately 68
educational videos with titles which instruct preschoolers and school
age children on topics such as learning numbers, telling time, simple
mathematics, color identification and other practical skills.
o Sports Programs - Licensed. We have licenses to market 16 sports
videos including five volumes of "Great Sports Memories" and
"Basketball's Fabulous 50 Stars."
o Computer Software Learning Tutorial Programs - Licensed. We have
licensed approximately 45 titles of computer tutorial videos including
titles such as "Family Guide to the Computer," "Family Guide to the
Internet," "Windows`98," "Word for Windows," "Mastering WordPerfect,"
"Mastering Excel for Windows," and "Make Your Own Web Page."
o TV Episodes - Public Domain. Our TV episodes include such favorites as
Red "Skelton" and "Andy Griffith."
DVD Program Line
The DVD program inventory currently consist of 49 titles, which are public
domain feature films and television episodes.
o Motion Pictures - Public Domain. We offer titles in DVD format
covering many film classics in various categories including drama,
horror, westerns, action, and comedy.
o Television Episodes - Inventory currently consist of 6 public domain
titles.
We continuously seek to expand our program inventory by identifying titles,
which appeal to children and those which include popular performers, characters
or themes. We also identify video and DVD programs which are classic films,
educational, instructional, or those which have been requested by distributors.
We enter into a licensing agreement with respect to those programs that are
subject to copyright protection or obtain documentation confirming public domain
status from various unaffiliated program suppliers.
28
During the year ended March 31, 2001, and the nine months ended December 31,
2001, we acquired approximate 49 new titles. As of March 31, 2001, the net book
value of our film masters and artwork was approximately $145,817. We believe
that our film masters and artwork are significant assets since we derive the
majority of our revenue from their use. Contract Replication and Duplication
Services
In January 2001, we commenced offering our video duplication and DVD
replication, together with packaging and fulfillment services to corporate
customers. There can be no assurance that we will be able to market and
distribute successfully its contract replication and duplication services to
corporate customers or to its other customers.
Toy Product
In May 1997, we acquired by way of merger, Beyond Design Corporation.
Subsequently, we renamed the company Jewel Products International, Inc. We
acquired Jewel in consideration of the issuance of an aggregate of 2,427,273
shares of our common stock and the assumption of certain obligations of Jewel.
The Jewel acquisition was an arms-length transaction. Jewel is in the business
of manufacturing and distributing one toy product, the Woblong Double Wing
Flier. They also purchase various other children's toy products from U.S. based
importers or directly from Asia for distributionto mass merchandisers in the
United States in addition to purchasing and distributing certain furniture
products.
At the time of its acquisition, JPI's sole line of business was the manufacture
and sale of its patented Woblong(R) Double Wing Flier, a bi-wing aerodynamic
flying toy. The Woblong, subsequently renamed the Zoombie(R), is a game of catch
intended to compete directly with Frisbee(R), Aerobie(R) and Whoosh(TM). During
the year ended March 31, 2001, the Zoombie was primarily sold through our
web-site. We are continuing to seek additional products for its general
merchandise line to replace or add to its existing inventory.
For the year ended March 31, 2001, and the nine months ended December 31, 2001
we made purchases from one supplier, Addicks Engineering.
SUPPLIERS
Video/DVD Products
Our video programs are duplicated using high speed sprinters by two duplicators
located in the United States. Our DVD disc products are replicated by either two
local replicators or two other replicators in Asia. Generally, we arrange with
these firms to duplicate or replicate masters we supply and the product is
labeled, packaged, and shrink-wrapped by us at our Walnut, California plant. We
submit our orders and instructions by purchase order with terms payable within
60 days of delivery. For the year ended March 31, 2001, we purchased video and
DVD from three suppliers, Everbright Chung Cheong DVD Co., Ltd., Vida
Corporation, United Media Services, Inc., and L & M Optical Disc West which
amounted to approximately 58% of our net purchases. During such period, the
percentage of net video/DVD product purchases made from such suppliers were 26%,
19% and 13%, respectively. During the nine months ended December 31, 2001, we
29
purchased video and DVD from four suppliers, Skura Intercontinental, Everbright
Chung Cheong DVD Co., Ltd., Vida Corporation and L & M Optical Disc West, which
amounted to approximately 70% of our net purchases. During such period, the
percentage of net video/DVD product purchases made from such suppliers were 28%,
16%, 15% and 11%, respectively. We believe that, if for any reason we could not
rely on or retain the services of any of our current suppliers, duplicators or
manufacturers, other suppliers would be available in the marketplace.
MARKETING
Video/DVD Products
We market our program inventory to large retail chain outlets and provide each
retail chain operator with brochures, advertising materials and literature
describing and promoting our program inventory. Our products are sold through
more than ten mass merchandisers such as Musicland, Walgreen and Best Buy,
primarily in the Northeast, the South and the East Coast. These outlets sell our
products to the general public at retail prices ranging from approximately $1.99
to $9.99 per videocassette and $4.99 to $12.99 per DVD program packs. For the
years ended March 31, 2001 and 2000, we derived revenue from our video and DVD
products of approximately $3,155,000 and $3,563,000, respectively. For the year
ended March 31, 2001, we had net sales of approximately $1,443,000 to two
customers which accounted for more than 10% of our revenues, compared to our net
sales for the year ended March 31, 2000 which was approximately $1,003,000. Our
two prominent customers, Walgreens and Musicland accounted for more than 10% of
our revenues in fiscal year 2000 and 2001 thus the loss of one of these
customers would have a material adverse effect on our financial condition and
results of operations.
Customers
Our marketing strategy of distributing directly to retail chain outlets has
allowed us to market our products at all consumer levels. In particular, we seek
to attract retail customers in department, drug, discount, electronic, music,
toy and book stores as well as supermarkets and convenience stores. We are
continuing to improve the name recognition of our company as a video and DVD
company specializing in educational, children and film classic video and DVD
titles. In addition, through its sales program, we seek to place increased focus
on the promotion of sales to major mass merchandising companies which would
increase the delivery of high volume orders. In addition to using independent
sales representatives in certain geographical marketing areas, we have revamped
our web-site in May of 2001 to enable us to sell our video/DVD and other
products to our current customer base and directly to the retail customer.
We derive approximately 54% of our gross revenue from sales to mass
merchandisers and other retail outlets. Approximately 27% of gross revenue is
derived from sales through consignment arrangements with a catalog company and
retail company under which we deliver product to their distribution centers. We
only book sales from consignment sales after the catalog company delivers the
actual funds from such sales. Less than one percent of revenues are derived from
products sold on a retail basis directly to consumers via the internet or
telemarketing.
30
Toy Products
We market our toy products using outside sales personnel and manufacturer
representatives and utilized independent manufacturer's representatives to reach
our customers. During fiscal year 2000, we began shipping our Zoombie flying toy
for sale by certain Target stores and during fiscal 2001, the Zoombie toy
product was placed for sale on our web-site and also purchased by a Fortune 500
company to be included in its employee catalog. For the year ended March 31,
2001, and the nine months ended December 31, 2001, revenues from toy products
were $4,988 and $10,898.
SEASONALITY
Video and DVD Products
DMEC generally experiences higher sales from our video and DVD programs from
September through January due to increased consumer spending around the year-end
holidays. During the year ended March 31, 2001, the Company derived
approximately 49% of its gross revenue from sales during those five months, with
approximately 51% of revenue generated in the other seven months of the year.
Toy Products
Our revenues are very seasonal and are currently generated during the period
from June to September.
LICENSE ARRANGEMENTS - VIDEO AND DVD PRODUCTS
DMEC enters into various license agreements, which we acquire from licensors the
right to duplicate and distribute a licensed video program. Licenses may be
exclusive or non-exclusive, but typically are non-exclusive. Generally, licenses
cover specific titles. In return for the grant of certain rights by the
licensor, we pay certain advance payments or guarantees and also pay royalties.
Royalty payments under license agreements typically are credited against any
advances paid. Generally, our licenses are for a term of between three and seven
years. While our effort to renegotiate and renew our license agreements have
generally been successful, there can be no assurance that such licenses will be
renegotiated or renewed in the future. The programs that we have acquired under
license contain limitations from the licensors regarding the geographic areas to
which we can distribute our products and are usually restricted to distribution
and sales in the United States and Canada.
The various licensing agreements that we have entered into with licensors
provide for advance payments ranging from $1,500 to $100,000 and subsequent
royalty payments based upon either a per video sold fee or a percentage of
wholesale price fee. During the year ended March 31, 2001, and the nine months
ended December 31, 2001 we incurred royalty expenses of approximately $24,000
and $26,000, respectively, under our licensing agreements.
31
COMPETITION
Video and DVD Products
DMEC competes with other distributors who sell budget priced videotapes and
DVD's. We also compete with other video duplicators and DVD replicators. We have
been able to compete based on offering low pricing and superior packaging
designs. Most of the companies with which we compete with such as, Platinum
Entertainment, Brentwood Entertainment and Madacy, are better established, have
broader public and industry recognition, have financial resources substantially
greater than us and have manufacturing and distribution facilities better than
those which now or in the foreseeable future become available to us.
Toy Products
DMEC competes with other distributors of toy products including distributors of
other flying toys such as "Frisbies". We concentrate on the most popular new
products available and offer these toy products for limited sales period and, as
demand for products change. We can immediately switch to newer and more popular
products. We compete primarily on uniqueness of product and lower prices. Most
of the distributors with which we compete are better established, have a broader
product line and industry recognition, and have financial resources
substantially greater then ours.
Greeting Card Product
Most of our competitors are better established, have broader industry
recognition, financial resources and have manufacturing and distribution
facilities better than those which now or in the foreseeable future will become
available to us. These competitors include Hallmark, American Greeting Cards and
Gibson.
The greeting card market requires substantial resources to obtain shelf space in
retail outlets, therefore, we cannot make assurances that it can or will be
successful in this marketplace in the foreseeable future.
AMERICAN TOP REAL ESTATE
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. We paid
$50,000 for a 50% interest in ATRE. Our 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.
Upon sale or development of land, proceeds are used to repay all related loans
and other obligations, with the remaining balance distributed among the
shareholders of ATRE pro rata based on their interests. ATRE has interests in
two real estate parcels.
32
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. As the
result of the sale, we recorded approximately $15,000 as our share of income
from equity investment for the period ended March 31, 2001.
As of June 30, 1999, we had $809,500 due to ATRE 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, 2001. At
the option of the lender all or part of the balance can be paid with shares of
our 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 our common stock. As of March 31, 2001, the outstanding
balance was $809,500. On July 24, 2001, our Board of Directors authorized and
approved the issuance of 140,343,755 shares of our common stock to 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 as of July 23, 2001
at the conversion price of $0.0065 per share as of the close of business on July
23, 2001.
As of December 31, 2001 and March 31, 2001, we had outstanding loan balances of
$619,600 and $576,300, respectively, from ATRE, bearing interest at the rate of
14% per annum, and due on demand.
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.
COPYRIGHT, LICENSES AND OTHER PROPRIETARY RIGHTS
We rely on a combination of common law trademark, copyright and trade secret law
to establish and protect our property rights and promote our reputation and the
growth of our business. In addition, in the toys product line, the Woblong(R),
subsequently renamed as the Zoombie(R), is protected by patent claims in the
form of a utility patent registered with the U.S. Patent and Trademark Office.
The U.S. Patent number is 5,131,879. In addition, a design patent was issued on
March 9, 1994 - D344,989.
We license approximately 273 videocassette titles from licensors for duplication
and distribution, generally on a non-exclusive basis. Such licensors could
become subject to third party infringement claims which could result in their
inability or willingness to license these titles to us and would impair our
ability to provide such titles to our customers.
33
DESCRIPTION OF PROPERTY
We lease approximately 20,000 square feet at 800 Tucker Lane, Walnut, California
under a lease that commenced January 6, 2000 and expires on January 31, 2003,
for use as executive offices and manufacturing and warehouse facilities for a
monthly rent of $10,500.00. We closed our 1,200 square feet facility in
Freehold, New Jersey in April 2000, which we used for our sales office. As of
May 2001, our lease of the Cerritos property expired, thus we are no longer in
use of it.
Our lease agreement of the Walnut property is with an unaffiliated party. We
believe that we have sufficient space for operations for the next twelve months.
EMPLOYEES OF THE COMPANY
As of December 31, DMEC employed 31 full-time employees. During the peak season
we engage additional part-time or temporary employees to help with the surge for
Christmas season orders. We reduce our manufacturing force after the peak season
to improve the profitability of our operations when sales orders decline. Our
employees are not unionized. We believe we have a good working relations with
our employees.
MANAGEMENT
The Company's current officers and directors consist of the following persons:
Name Age Position with Company
- ----------------------- --- ---------------------------------------------
James K.T. Lu.......... 54 Chairman of the Board, President, Chief
Executive Officer, Secretary and Director
Jeffrey I. Schillen.... 55 Executive Vice President, Sales and Marketing
and Director
Murray T. Scott........ 79 Director
Fred U. Odaka.......... 64 Chief Financial Officer
JAMES K.T. LU (Class 2 Director). Mr. Lu has been a director since February
1989, Chairman of the Board, Chief Executive Officer and Secretary since March
1, 1990, and President since July 1991. Mr. Lu received his B.S.I.E. degree from
Chung Yuen University Taiwan in 1969, his M.S.I.E. degree from the Illinois
Institute of Technology in 1972 and a Master of Business Administration (MBA)
from California State University in 1981. Mr. Lu entered a plea and cooperation
agreement with the Office of the United States Attorney for the Eastern District
of New York. The agreement involved Mr. Lu pleading guilty to one count of
Conspiracy to Launder Money and one count of violation of the Travel Act. The
conduct for which Mr. Lu pled guilty had no relationship to our business or his
activities as an officer of Diamond Entertainment Corporation. It is not
anticipated that Mr. Lu will be sentenced for approximately one year during
which time the government will evaluate his performance under the agreement to
cooperate.
34
JEFFREY I. SCHILLEN (Class 1 Director). Mr. Schillen has been our Executive Vice
President of Sales and Marketing since 1993 and has been a director since our
inception in April 1986. From May 1984 to April 1986, Mr. Schillen was President
and Chief Operating Officer of Music Corner Inc., a retail record, tape and
video chain he co-founded. From 1974 to April 1984, Mr. Schillen founded and
served as Vice President in charge of purchasing, store openings and
acquisitions of Platter Puss Records, Inc., a retail record, tape and video
chain.
MURRAY T. SCOTT (Class 2 Director). Mr. Scott became a director in November
1993. Mr. Scott was the President and Chief Executive Officer of Gregg's
Furniture, a custom furniture building business in Victoria, Canada, from 1958
to 1995. Mr. Scott remains involved with Gregg's Furniture in a consulting and
advisory capacity.
FRED U. ODAKA. Mr. Odaka has been our Chief Financial Officer since September
2000. From December 1998 to September 2000 Mr. Odaka was a consultant to Diamond
Entertainment and was our "acting" Chief Financial Officer. From July 1996 to
July of 1998, Mr. Odaka served as chief financial officer for Front Row
Collectibles, Inc., a manufacturer and distributor of super event collectibles.
From January 1993 to June 1996, Mr. Odaka was a financial consultant and analyst
for Kibel, Green Inc., a West Coast business advisory and financial services
firm specializing in corporate re-structuring and crisis intervention. From July
1986 to December 1992, Mr. Odaka was a partner and principal of two investment
banking firms concentrating in mergers and acquisitions. From November 1984 to
June 1986, Mr. Odaka was vice president and chief financial officer for Ibex
Computer Corporation, a manufacturer of computer tape drives. Mr. Odaka was a
founder of Rexon, Inc., a publicly traded manufacturer of computers and computer
peripheral equipment and, from May 1978 to October 1984, held the positions of
vice president and chief financial officer and was instrumental in taking the
company public. From January 1970 to April of 1978, Mr. Odaka was controller of
the computer division of Perkin-Elmer Corporation, a publicly traded company
that manufactures life sciences systems and analytical instruments. Mr. Odaka
received his Bachelor of Science degree in finance from Fresno State College,
Fresno, California.
Under our certificate of incorporation, our board of directors is divided into
three (3) classes, with each class to be elected by the shareholders every three
years. All directors hold office for terms of three (3) years and until the next
annual meeting of stockholders scheduled to vote on such class of directors and
the election and qualification of their respective successors. Our board
presently consists of three directors and our directors were elected at the 2000
annual meeting of stockholders for concurrent three year terms. None of our
directors have resigned or declined to stand for re-election due to a
disagreement on any matter relating to our operations, policies or practices.
Officers are elected annually by our board of directors and, subject to existing
employment agreements, serve at the discretion of our board.
35
EXECUTIVE COMPENSATION
The following table sets forth aggregate compensation earned and paid by the
Company to each Officer and to all Executive Officers as a group for services
rendered in all capacities during the year ended March 31, 2001.
Summary Compensation Table
Annual Compensation Long Term Compensation
---------------------- ------------------------------------------
Awards Payouts
---------- ----------------------------
Securities All Other
Underlying LTIP Payouts Compensation
Name and Principal Position Year Salary($) Bonus ($) Options (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------
James K.T. Lu (1) President, 2001 50,000 0 0 0 26,739
Chief Executive Officer and 2000 37,500 0 0 0 27,606
Secretary 1999 120,000 0 0 0 89,983
Jeffrey I. Schillen (2) 2001 40,000 0 0 0 17,148
Executive Vice President of 2000 50,000 0 0 0 15,618
Sales and Marketing 1999 100,000 0 0 0 13,036
- ---------------------------------------------------------------------------------------------------------------
(1) Mr. Lu's annual salary was $150,000 during the fiscal year ended March
31, 2001 and he has elected to defer a substantial portion of his salary
for this period. During March 2000, Mr. Lu waived all of his deferred
salary owed as of March 31, 1999 and as of the date of this prospectus,
Mr. Lu continues to defer a substantial portion of his salary.
(2) Mr. Schillen's annual salary was $120,000 during the fiscal year ended
March 31, 2001 and he elected to defer a substantial portion of his
salary for this period. During March 2000, Mr. Schillen waived all of his
deferred salary owed as of March 31, 1999, and as of the date of this
prospectus, Mr. Schillen continues to defer, a substantial portion of his
salary.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the options
granted during the year ended March 31, 2001, for the persons named in the
Summary Compensation Table (the "Named Executive Officers"):
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- -------------------------------------------------------------------------------
James K.T. Lu -0- -- -- --
Jeffrey I Schillen -0- -- -- --
- --------------------------------------------------------------------------------
36
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with respect to options
exercised during the fiscal year ended March 31, 2001 by the Named Executive
Officers and with respect to unexercised options held by such persons at March
31, 2001.
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs In-the-Money Options/SARs
Acquired On Value At FY-End (#) at FY-End ($)
Exercise Realized --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------
James K.T. Lu 0 0 9,100,000 0 0 0
Jeffrey I. Schillen 0 0 2,150,000 0 0 0
- --------------------------------------------------------------------------------------------------------------
EMPLOYMENT AGREEMENTS
In 1991, we entered into employment agreements with each of Messrs. Lu and
Schillen for annual compensation of $150,000 and $90,000, respectively; both
provide for annual adjustments in accordance with the consumer price index.
However, effective 1996, Mr. Schillen's annual compensation was increased to
$120,000. Consequently, contracted salary levels are at $150,000 for Mr. Lu and
$120,000 for Mr. Schillen. Both employment agreements were extended in July 2000
for a period of five years terminating on December 31, 2005. In March 2000, Mr.
Lu and Mr. Schillen both waived all of their deferred salaries owed as of March
31, 1999. See "Summary Compensation Table" above, and the notes thereto.
On April 23, 1996 we agreed to reserve 1,000,000 shares of common stock for
distribution to Messrs. Lu and Schillen. Such shares could be purchased for $.25
per share, in installment payments with a five year promissory note with
interest at 6% per annum. On July 24, 2001, our Board of Directors approved the
lowering of the exercise rate per share to $.005 to purchase such shares and
extended the expiration date of such options to April 22, 2004. As of the date
of this prospectus such officers had not purchased any of such shares.
In September 1997 as consideration for each of Messrs. Lu and Schillen agreeing
to defer up to 90% of their salaries through March 31, 1998, we issued 3,000,000
shares of common stock and warrants to purchase 3,000,000 shares of common stock
to Mr. Lu, and issued 750,000 shares of common stock and warrants to purchase
750,000 shares of common stock to Mr. Schillen. All of such warrants have an
exercise price of $.10 per share. The warrants are fully vested and were
exercisable until March 31, 1999. On July 24, 2001, we lowered the exercise
price of such warrants to $.005 per share. In February 2002, we extended the
term of the warrants until March 31, 2005.
37
We maintain a life insurance policy on Mr. Lu, for our benefit in the amount of
$1,000,000.
On September 1, 1997 we entered into employment agreements with nine other
employees holding important positions. The agreements provided for the issuance
of an aggregate of 550,000 shares of common stock with a fair value of $11,000,
as payment for services, warrants for 550,000 shares with an exercise price of
$.10 per share and the semi-monthly compensation of approximately $14,000 in the
aggregate. On September 1, 1999, the warrants to exercise the 550,000 shares of
common stock expired. On August 27, 1999, we granted warrants to purchase
300,000 shares of common stock, which expire on September 1, 2002, at an
exercise price of $.10 per share to the five remaining employees with employment
agreements. On July 24, 2001, we lowered the exercise price of 175,000 warrants
granted to three employees with employment agreements from $.10 per share to
$.005 per share.
None of the employment agreements which we have with any of our executives,
indicated above, provides for any specific compensation to such individuals
should their respective employment agreements be terminated prior to expiration
of their respective terms.
EMPLOYEE AND DIRECTOR STOCK OPTION PLAN
In July 24, 2001, DMEC adopted the Stock Option Plan in order to attract and
retain qualified personnel. The Plan authorized our Board of Directors 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. On July 24, 2001, our Board of
Directors granted an aggregate of 50,000,000 options to purchase shares of our
Common Stock to our officers, directors, and key employees. As of the date of
this prospectus, none of these options were exercised.
EMPLOYEE AND DIRECTORS STOCK COMPENSATION PLAN
On June 9, 2000, we adopted our 2000 Stock Compensation Plan for the purpose of
providing a means of compensating selected key employees including officers,
directors and consultants of Diamond Entertainment and our subsidiaries for
their services rendered in connection with our development through the issuance
of shares of common stock. We were authorized to sell or award up to 13,000,000
shares and/or options to purchase our common stock. The plan was administered by
our board of directors which had the discretion to determine the grantees, the
number of shares, the date of each grant, the consideration for the shares and
such other terms and conditions as the board may determine. In June 2000, we
entered into three consulting agreements that terminated on May 31, 2001. The
consultants provided consulting services for us concerning management,
marketing, consulting, strategic planning, corporate organization and financial
matters in connection with the operation of our businesses, expansion of
services, acquisitions and business opportunities. The consultants received
options to purchase a total of 7,300,000 of our common stock exercisable at
$0.035 per share in exchange for services rendered. Such options were exercised
as of March 31, 2001. The plan expired on May 31, 2001, and the outstanding
balance of options of 5,700,000 shares to be awarded or sold in accordance with
this plan was canceled.
38
COMPENSATION OF DIRECTORS
To date, directors who are not also our employees have received no compensation
for attending meetings of our board of directors. All directors are entitled to
reimbursement of reasonable travel and lodging expenses related to attending
meetings of our directors. There are no standard arrangements or agreements to
provide compensation to directors for attending meetings of our board of
directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 25, 1997 we executed a consulting agreement with Murray T. Scott, one
of our directors, for long term strategic planning including development of
marketing strategies and development and acquisition of new products. Mr.
Scott's consulting agreement had a term of two years. As compensation under the
agreement, Mr. Scott was issued 250,000 shares of common stock, and warrants to
purchase an additional 250,000 shares of common stock at an exercise price of
$0.10 per share. On July 24, 2001 we lowered the exercise price of the warrants
from $0.10 to $0.005 per share. Such warrants expires on August 24, 2005.
On September 1, 1997, we issued to each of Messrs. Lu and Schillen shares and
granted warrants as consideration for agreeing to defer payment of their
salaries. Mr. Lu was issued 3,000,000 shares of common stock and granted
warrants to purchase an additional 3,000,000 shares of common stock at $0.10 per
share through March 31, 1999. Mr. Schillen was issued 750,000 shares of common
stock and granted warrants to purchase an additional 750,000 shares of common
stock at $0.10 per share through March of 1999. The warrants are fully vested
and were exercisable until March 31, 1999. In March of 1999, we extended the
exercise periods of the warrants until August 24, 2002. On July 24, 2001 we
lowered the exercise price of the warrants from $0.10 to $0.005 per share.
During the quarter ended December 31, 1999, our Board of Directors authorized
the conversion of approximately $1,880,725 in related parties payables into one
year 7% convertible promissory notes of $1,071,225 and $809,500 to GJ Products
Corporation and American Top Real estate, Inc. ("ATRE"), respectively. The due
dates of both notes were extended to September 30, 2001. The terms of the new
convertible notes allow us to make partial principal and interest payments from
time to time and the holders of the convertible notes have the option to request
such payments of the indebtedness evidenced by the notes either in lawful money
of the United States or in an equivalent value consisting of our common stock,
the number of shares to be determined by dividing the payment amount by the
average twenty day bid price for our common stock during the twenty trading days
prior to the date of such payment. Also, during the quarter ended December 31,
1999, GJ Products Corporation to which $1,071,225 in related parties note was
owed by us, transacted a change in ownership of its common stock in which 100%
of its outstanding shares of common stock was sold to a non-related party. On
July 24, 2001, the we authorized and approved the issuance of 140,343,755 shares
of the company's common stock to 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 we also
authorized and approved the issuance of 180,928,097 shares of our 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
39
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.
At March 31, 1999, we were owed approximately $69,000 from Mr. Lu for advances
and loans. Simple interest is accrued monthly at an annual rate of 10% on the
outstanding balance. For the years ended March 31, 1999 and 1998, we recorded
interest income of $1,170 and $6,607, respectively. This loan amount is due in
December 2001. On March 15, 1999, the unpaid balance of approximately $69,000
was forgiven by us in consideration for Mr. Lu's 1999 and 1998 personal
guarantees for two leases and promissory notes.
In March and June 1999, we issued callable convertible notes for $50,000 and
$100,000 to James Lu and Jeffrey I. Schillen, respectively. The notes 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 our common stock at the option of the
lenders at a conversion rate of $0.05 per share. The notes contain certain
demand and piggyback registration rights. On July 24, 2001, we authorized and
approved an amendment of the foregoing callable convertible whereby by we
reduced the conversion rate from. $0.05 to $0.005 and allowed the note holders
to also convert any accrued interest against such notes. Also on July 24, 2001,
we approved the issuance of 12,343,150 shares of our common stock to Mr. Lu upon
conversion of his $50,000.00 note and accrued interest thereon in the amount of
$11,715.75 as of July 23, 2001.
On May 25, 1999, we issued to Mr. Lu, as a bonus, options to purchase 2,500,000
shares of our common stock at $0.05 and options to purchase 1,000,000 shares of
our common stock at $0.10 per share. The options expire on May 24, 2004. On July
24, 2001 we lowered the exercise price of the warrants from $0.10 to $0.005 per
share.
On May 25, 1999, we issued to Mr. Schillen, as a bonus, options to purchase
500,000 shares of common stock at $0.05 and options to purchase 500,000 shares
of our common stock at $0.10 per share. The options expire on May 24, 2004. On
July 24, 2001 we lowered the exercise price of the warrants from $0.10 to $0.005
per share.
On July 24, 2001, we authorized and approved, the that exercise rate ranging
from $0.05 to $0.25 of outstanding options granted to the our 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.
On November 16, 2001, Mr. Lu, the company's president waived his right to
exercise 29,000,000 of his outstanding stock options to provide for the company
to meet the stock reserve requirement of it's convertible series B preferred
stock.
On November 16, 2001, for consideration of waiving his aforementioned exercise
rights and for his part in completing the sale of the company's convertible
Series B preferred shares, Mr. Lu was awarded option to purchase 14,500,000
shares of the company's common stock. The option will be exercisable at $0.006
per share at such time permitted by the company's convertible series B preferred
share reserve clause.
The reserve clause calls for a 130% reserve requirement of estimated shares
needed to cover for the conversion of the convertible series B preferred stock.
40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth current information as of April 17, 2002,
relating to the beneficial ownership of the outstanding shares of our common
stock and preferred stock by (i) each person owning beneficially more than 5% of
our common stock, (ii) each Director of the Company, (iii) each Named Executive
Officer; and (iv) all Executive Officers and directors of the Company as a
group. Unless otherwise indicated below, such individuals have the sole power to
control the vote and dispose of such shares of capital stock.
Percentage of
Common Stock
Assuming
Common Stock Percentage of Preferred Conversion of
Name (1) Owned Common Stock Stock Owned (2) Preferred Stock (3)
-------- ------------ ------------- --------------- -------------------
James K. T. Lu (4) 62,288,110 10.85% 209,287 10.91%
Diamond Entertainment Corporation
800 Tucker Lane
Walnut, CA 91789
Jeffrey I. Schillen (5) 35,005,750 6.10% 36,282 6.10%
Diamond Entertainment Corporation
48 St. Lawrence Way
Marlboro, NJ 07746
Murray T. Scott (6) 6,300,000 1.10% 75,796 1.12%
Diamond Entertainment Corporation
800 Tucker Lane
Walnut, CA 91789
American Top Real Estate Inc. 140,343,755 24.45% 0 24.45%
313 S.E. 199th Ave.
Camas, WA 98607
Hung Yi Chen 80,000,000 13.94% 0 13.92%
2F. No 79, Sec 1, Jung Shung Rd
Gueishan Shiang
Taoyuan Hsien, Taiwan, 333, R.O.C
Yulie Lin 80,000,000 13.94% 0 13.92%
9F1.3, No 510, Sec 5, Jung Shiau
E. Rd
Taipei, Taiwan, 110, R.O.C
All directors and officers as a 103,593,860 18.05% 321,365 18.13%
group (3 persons) (7)
41
- ----------------
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, and is generally determined by voting
and/or investment power with respect to securities. Unless otherwise noted,
all shares of common stock listed above are owned of record by each
individual named as beneficial owner and such individual has sole voting
and dispositive power with respect to the shares of common stock owned by
each of them. Such person or entity's percentage of ownership is determined
by assuming that any options or convertible securities held by such person
or entity which are exercisable within 60 days from the date thereof
exercised or converted as the case any be.
(2) The preferred stock entitles the holder to 1.95 votes for each share owned
and each share may be converted into 1.95 shares of common stock.
(3) Assumes conversion of shares of preferred stock beneficially owned.
(4) Mr. Lu is President, Chief Executive Officer, Secretary and a director.
Includes 43,600,000 shares of common stock issuable upon exercise of
warrants, options and convertible notes.
(5) Mr. Schillen is the Executive Vice President and a director. Includes
32,150,000 shares of common stock issuable upon exercise of warrants,
options and convertible notes.
(6) Mr. Scott is a director. Includes 5,250,000 shares of common stock issuable
upon exercise of warrants.
(7) Represents 10,250,710 shares of common stock outstanding and 14,500,000
shares of common stock issuable upon exercise of warrants, options or
convertible notes.
There are no agreements or other arrangements or understandings known to us
concerning the voting of our common stock or otherwise concerning control of us
which are not disclosed herein. There are no pre-emptive rights applicable to
our securities.
DESCRIPTION OF SECURITIES
General
As of the date of this registration statement, the Company has authorized to
issue 600,000,000 shares of common stock, no par value per share, of which
457,595,650 shares are issued and outstanding as of November 22, 2000. Each
outstanding share of common stock entitles the holder thereof to one vote on all
matters that may be voted upon by the owners thereof at meetings of the
stockholders. The holders of our common stock (i) have equal ratable rights to
dividends from funds legally available therefrom when declared by our board of
directors; (ii) subject to the rights of our preferred stockholders, they are
entitled to share ratably in all of our assets available for distribution to
holders of common stock upon our liquidation, dissolution or the winding up of
our affairs; and (iii) do not have, except as described below, preemptive,
42
subscription or conversion rights, or redemption or sinking fund provisions
applicable thereto. In addition, holders of our common stock do not have rights
to cumulate their votes on matters on which stockholders may vote at meetings of
stockholders. However, under Section 2115 of the California Corporations Code,
specific provisions of the California General Corporation Law, including
mandatory cumulative voting rights of stockholders, are made applicable to
"Pseudo-California" corporations incorporated under the laws of other states
which meet certain tests. The tests are: (i) that the average of specified
property, payroll and sales factors (generally related to the extent of
activities in California) exceed 50% on a consolidated basis during the
corporation's latest full income year and (ii) that more than one-half of the
corporation's outstanding voting securities are held of record by persons having
addresses in California. We do no believe we meet such tests. If we were
required to implement cumulative voting for the election of directors, the
existence of a classified board of directors may have the effect of delaying or
preventing changes in control or in management because a greater number of
shares would be required to elect any one director.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock, no par
value per share, of which 1,000,000 shares have been designated Preferred Stock
as of the date of this prospectus of which 483,251 are issued and outstanding.
50 shares have been designated Series A Preferred Stock of which 40 shares are
outstanding. 87 shares have been designated Series B Convertible Preferred Stock
and all of such shares are issued and outstanding as of the date of this
prospectus. Our board of directors is authorized to determine the rights,
preferences, privileges and restrictions, including the dividend rights,
conversion rights, voting rights, terms of redemption (including sinking fund
provisions, if any) and liquidation preferences, of any new series of preferred
stock and to fix the number of shares of any such series without any further
vote or action by stockholders.
The Preferred Stock has no (i) dividend rights; (ii) sinking fund provisions;
(iii) rights of redemption; (iv) classification provisions for voting; (v)
pre-emptive rights; (vi) liability to further calls or to assessments by us, or
(vii) any provision discriminating against any existing or prospective holder.
Holders of shares of preferred stock are not entitled to any dividend
preference. In the event of liquidation, holders of shares of preferred stock
shall be entitled to a preference of $.01 per share, and any other remaining
proceeds of liquidation shall be distributed share and share alike to holders of
all capital stock.
Series A Preferred Stock
The Series A Preferred Stock entitles the holder of a share to 1.95 votes and
each share may be immediately converted into 1.95 shares of common stock. The
Series A Preferred Stock and common stock vote together on all matters.
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.
43
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.
Series B Convertible Preferred Stock
We have designated 87 shares of our preferred stock as Series B Convertible
Preferred Stock and all of such shares are issued and outstanding as of the date
of this prospectus. The Series B Convertible Preferred Stock has a stated value
of $10,000 per share. The conversion price of the Series B Convertible Preferred
Stock is the lower of $.02 per share or 70% of the average of the closing bid
prices of our common stock on any five trading days in the thirty trading days
preceding the date of conversion. The conversion price of the Series B
Convertible Preferred Stock is also adjusted in the event of stock dividends,
stock splits, recapitalizations, reorganizations, consolidations, mergers or
sales of assets. To the extent the holders of Series B Preferred Stock convert
and then sell shares of common stock, the price of our common stock may decrease
even further due to additional shares in the market, allowing the holders to
convert additional shares of Series B Convertible Preferred Stock into greater
amounts of common stock.
The Series B Convertible Preferred Stock does not provide any voting rights,
except as may be required by law. However, we may not take certain actions that
would adversely affect the rights of the holders of Series B Convertible
Preferred Stock without the approval of two-thirds of the outstanding shares of
Series B Convertible Preferred Stock.
Penny Stock Disclosure Requirements
See discussion in risk factor section, page 11, with the heading "Resale
restrictions on transferring "penny stock" are sometimes imposed by some states
which make transactions in our stock cumbersome..."
Warrants
In connection with the sale of our Series B Convertible Preferred Stock, we
issued an aggregate of 10,950,000 warrants to purchase our common stock to the
selling shareholders. The warrants are exercisable for five years from the date
of issuance, and contain certain antidilution and cashless exercise provisions.
The warrants are exercisable at a price of $.02 per share for a period of five
years.
44
Anti-Takeover Provisions
The provisions in our certificate of incorporation relating to a staggered board
of directors and issuance of our preferred stock may have the effect not only of
discouraging tender offers or other stock acquisitions but also of impeding
management changes sought by existing shareholders. A classified board, while
promoting stability in board membership and management, also moderates the pace
of any change in control of our board of directors by extending the time
required to elect a majority, effectively requiring action at a minimum of two
consecutive annual meetings. All directors may be removed from office, with
cause, upon the vote of holders of a majority of shares entitled to vote in the
election of directors.
These provisions enhance the possibility that a potential bidder for control of
us will be required to act through arm's-length negotiation with respect to a
major transaction, such as a merger, consolidation or purchase of substantially
all of our assets. Such provisions may also have the effect of discouraging
tender offers or other stock acquisitions, giving our management power to reject
certain transactions which might be desired by the owners of a majority of our
voting securities. These provisions could also be deemed to benefit incumbent
management to the extent they deter such offers by persons who would wish to
make changes in management or exercise control over management. Our board of
directors does not presently know of a third party that plans to make an offer
to acquire us through a tender offer, merger or purchase of all or substantially
all of our assets.
Shares Eligible for Future Sale
On the date of this offering, DMEC has 457,595,650 shares of Common Stock
outstanding.
45
SELLING SHAREHOLDERS
The table below sets forth information concerning the resale of shares of Common
Stock by the Selling Stockholders. We will not receive any proceeds from the
resale of the common stock by the Selling Stockholders. We will receive proceeds
from the exercise of the warrants. Assuming all the shares registered below are
sold by the Selling Stockholders, none of the Selling Stockholders will continue
to own any shares of our Common Stock.
The following table also sets forth the name of each person who is offering
shares of common stock by this prospectus, the number of shares of common stock
beneficially owned by each person, the number of shares of common stock that may
be sold in this offering and the number of shares of common stock each person
will own after the offering, assuming they sell all of the shares offered.
Shares Beneficially Shares Shares Beneficially Owned
Owned Offered After Offering
Selling Prior to the For If All Offered
Stockholder (1) Offering (2) Sale (3) Shares Are Sold (3)
- -------------------------- ------------------------------ ---------- -------------------------
Number of Number of
Shares Percentage (4) Shares Percentage
----------- -------------- ---------- ----------
Stonestreet LP (1)(2) 26,249,531 4.999% 28,000,000 0 0%
Stonestreet Corp (3) 2,400,000 0.457% 2,400,000 0 0%
Filter Int'l Corp (4) 12,000,000 2.285% 12,000,000 0 0%
Joe Kaufman (5) 4,000,000 0.762% 4,000,000 0 0%
Alpha Capital A.G. (6)(7) 12,000,000 2.285% 12,000,000 0 0%
Balmore S.A.(8)(9) 8,450,000 1.609% 8,450,000 0 0%
Owen Naccarato (10) 650,000 0.123% 650,000 0 0%
- ------------------------------------------------------------------------------------------------------
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. The actual number of shares of common stock issuable upon the conversion
of the debentures and exercise of the debenture warrants is subject to
adjustment depending on, among other factors, the future market price of the
common stock, and could be materially less or more than the number estimated in
the table.
No Selling Stockholder has held any position or office, or has had any material
relationship with us or any of our affiliates within the past three years.
46
None of the selling shareholders are broker-dealers or affiliates of
broker-dealers.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
Mr. Michael Finkelstein may be deemed a control person of the shares owned
by such entity. Stonestreet L.P. is a private investment fund that is owned
by all its investors and managed by Ms. Libby Leonard.
(2) Independent third party who invested in our company through 35 convertible
Preferred Series B shares at $10,000 a share and 5,250,000 warrants issued
on November 16, 2001. The selling shareholder is an "underwriter" within
the meaning of Section 2(11) of the Securities Act of 1933
(3) Represents the underlying common shares of 3 Series B convertible Preferred
Shares at $10,000 a share plus 450,000 warrants issued on November 16,
2001. Michael Finkelstein is the control person for Stonestreet
Corporation.
(4) Represents the underlying common shares of 15 Series B convertible
Preferred Shares at $10,000 a share plus 2,250,000 warrants issued on
November 16, 2001. Al Davis is the control person for Filter International.
(5) Represents the underlying common shares of 5 Series B convertible Preferred
Shares at $10,000 a share plus 750,000 warrants issued on November 16,
2001.
(6) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
Mr. Konard Ackerman may be deemed the control person of the shares owned by
such entity. ALPHA Capital AG is a private investment fund that is owned by
all its investors and managed by Mr. Konard Ackerman.
(7) Independent third party who invested in our company through 15 convertible
Preferred Series B shares at $10,000 a share and 2,250,000 warrants issued
on November 16, 2001. The selling shareholder is an "underwriter" within
the meaning of Section 2(11) of the Securities Act of 1933.
(8) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
Gisela Kindle may be deemed a control person of the shares owned by such
entity. Balmore S.A. is a private investment fund that is owned by all its
investors and managed by Gisela Kindle.
(9) Independent third party who invested in our company through 13 convertible
Preferred Series B shares at $10,000 a share. The selling shareholder is an
"underwriter" within the meaning of Section 2(11) of the Securities Act of
1933.
(10) Represents the underlying common shares of 1 Series B convertible Preferred
Shares at $10,000 issued on November 16, 2001. Owen Naccarato is a member
of Naccarato & Associates.
Percentages are based on 525,095,650 shares of our common stock (includes
the shares in this Offering) as of this offering.
47
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. There is no assurance that the selling stockholders will sell
any or all of the common stock in this offering. The selling stockholders may
use any one or more of the following methods when selling shares:
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers.
o Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction.
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account.
o An exchange distribution following the rules of the applicable
exchange
o Privately negotiated transactions
o Short sales or sales of shares not previously owned by the seller
o Broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share
o A combination of any such methods of sale and any other lawful method
The selling stockholders may also engage in:
o Short selling against the box, which is making a short sale when the
seller already owns the shares.
o Other transactions in our securities or in derivatives of our
securities and the subsequent sale or delivery of shares by the
stockholder.
o Pledging shares to their brokers under the margin provisions of
customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer to sell the pledged
shares.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from selling stockholders in amounts to be negotiated. If any
broker-dealer acts as agent for the purchaser of shares, the broker-dealer may
receive commission from the purchaser in amounts to be negotiated. The selling
stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
48
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be considered to be "underwriters" within the meaning of
the Securities Act for such sales. An underwriter is a person who has purchased
shares from an issuer with a view towards distributing the shares to the public.
In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be considered to be
underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares in this offering. However, we will not pay any commissions or any other
fees in connection with the resale of the common stock in this offering. We have
agreed to indemnify the selling shareholders and their officers, directors,
employees and agents, and each person who controls any selling shareholder, in
certain circumstances against certain liabilities, including liabilities arising
under the Securities Act. Each selling shareholder has agreed to indemnify the
Company and its directors and officers in certain circumstances against certain
liabilities, including liabilities arising under the Securities Act.
If we are notified by the selling stockholder that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholder and the broker-dealer.
LEGAL PROCEEDINGS
We have in the past been named as defendant and co-defendant in various legal
actions filed against us in the normal course of business. All past litigation
have been resolved without material adverse impact on us.
On February 15, 2000, one of our suppliers brought legal action against the us
to collect approximately $35,200 comprising of unpaid invoices, interest, court
costs and attorneys fees owed to the supplier. We recorded the liability upon
receipt of the goods and entered into a monthly payment plan with the supplier
to settle the amount owed. As of December 31, 2001, the balance of the liability
had been fully paid.
During March 2000, our former lessor brought action against us to recover
delinquent rental payment and penalties arising from the termination of our
building lease in Cerritos, California. The action against us resulted in a
stipulated judgement whereby we agreed to pay $72,000.00 at 10% interest by
paying $6,600.00 per month for twelve consecutive months beginning April 1, 2000
through March 1, 2001. There was a penalty clause for a failure to pay in a
timely manner which increases the total amount to $119,000 with immediate
acceleration in the event of a default under the stipulated judgement. All
required payments through March 1 2001 were made in a timely manner and on June
5, 2001, we received from the lessor, an acknowledgment of full satisfaction of
judgment.
49
In April 2001, a former landlord, brought action against us to recover $100,000
in damages, for additional rent for holding over, or not vacating the premises
after the term expired, late fee penalty of 10% for late payment of monthly rent
and for removing the plaintiff's metal storage racks. To avoid incurring
extraordinary legal fees to defend this action against us, we entered into a
stipulation for settlement and dismissal with the landlord in December 2001 to
make three payments of $5,000 to have the legal action dismissed. The final
payment was made in February 2002, and we received from the landlord on March
20, 2002, an acknowledgment that such legal action against us was dismissed.
In June of 2001, we were named as a defendant by one of our suppliers Progen
Technology Inc., who filed bankruptcy under Chapter 7. The bankruptcy court
brought legal action against us to recover $100,000.00 we borrowed from the
supplier in April of 1999, plus applicable interest. In accordance with the
loan, we made four separate payments to the supplier during April and May of
1999 totaling $101,166.67 in principal and interest. As of December 31, 2001, we
reflected one check in the amount of $25,116.67 still outstanding. On March 6,
2001, we entered into a stipulation for settlement and dismissal whereby we
agreed and stipulated that we will pay $2,500.00 within ten (10) days after
entry of an order approving the settlement. As of the date of this prospectus,
we have not received such order approving the settlement.
EXPERTS
The consolidated financial statements included in this prospectus and elsewhere
in this registration statement and for the periods included in their report have
been audited by Merdinger, Fruchter, Rosen & Corso, P.C., independent auditors,
and are included herein in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
On January 14, 2000, our independent public accountants, Moore Stephens, P.C.,
terminated its client-auditor relationship with us. On January 18, 2000, our
board of directors approved the engagement of Merdinger, Fruchter, Rosen &
Corso, P.C. to serve as our independent public accountants and to be the
principal accountants to conduct the audit of our financial statements for the
fiscal year ending March 31, 2000, replacing the firm of Moore Stephens, P.C.
who had been engaged to audit our financial statements for the fiscal years
ended March 31, 1996, 1997, 1998 and 1999. Subsequently, we engaged Merdinger,
Fruchter, Rosen & Corso, P.C., to re-audit our financial statements for the year
ended March 31, 1999. Moore Stephens, P.C.'s report on our statements during the
fiscal years ended March 31, 1998 and 1999 contained no adverse or disclaimer of
opinion, however it did contain a going concern explanatory paragraph. Our
management knows of no past disagreements with the former accountants on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope, or procedure, which disagreements, if not resolved to the
satisfaction of Moore Stephens, P.C., would have caused it to make a reference
to the subject matter of the disagreement in connection with its reports.
50
LEGAL MATTERS
Legal matters concerning the issuance of shares of common stock offered in this
registration statement will be passed upon by Owen Naccarato, Attorney at Law.
Owen Naccarato does not beneficially own shares of the company.
OTHER AVAILABLE INFORMATION
We are subject to the reporting requirements of the Securities and Exchange
Commission (the "commission"). We file periodic reports, proxy statements and
other information with the commission under the Securities Exchange Act of 1934.
We will provide without charge to each person who receives a copy of this
prospectus, upon written or oral request, a copy of any information that is
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference). Requests should be directed to: Garrett
Cohn.
We have filed a registration statement on Form SB-2 under the Securities Act of
1933 Act with the Commission in connection with the securities offered by this
Prospectus. This Prospectus does not contain all of the information that is the
registration statement, you may inspect without charge, and copy our filings, at
the public reference room maintained by the Commission at 450 Fifth Street, N.W.
Washington, D.C. 20549. Copies of this material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W. Washington,
D.C. 20549, at prescribe rates.
Information about the public reference room is available from the commission by
calling 1-800-SEC-0330.
The commission maintains a web site on the Internet that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the commission. The address of the site is www.sec.gov.
Visitors to the site may access such information by searching the EDGAR archives
on this web site.
You should rely on the information contained in this Prospectus. We have not
authorized anyone to provide you with any information that is different.
The selling security holders are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where such offers and sales are
permitted.
The information contained in this Prospectus is accurate as of the date of this
prospectus.
Financial Statements
Our Financial Statements begin on page F-1
51
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
I N D E X
PAGE
Consolidated Financial Statements, March 31, 2001 and 2000
- ----------------------------------------------------------
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3 to F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Deficiency F-6
Consolidated Statements of Cash Flows F-7 to F-9
Notes to Consolidated Financial Statements F-10 to F-38
Consolidated Financial Statements, December 31, 2001
- ----------------------------------------------------
Consolidated Balance Sheets as of December 31, 2001
(Unaudited) and March 31, 2001. F-39-F-40
Consolidated Statements of Operations for the three and nine
months ended December 31, 2001 and 2000 (Unaudited) F-41
Consolidated Statements of Cash Flows for the nine months
ended December 31, 2001 and 2000 (Unaudited) F-42-F-44
Notes to Consolidated Financial Statements (Unaudited) F-45-F-72
F-1
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS' AND BOARD OF DIRECTORS OF
DIAMOND ENTERTAINMENT CORPORATION
We have audited the accompanying consolidated balance sheets of Diamond
Entertainment Corporation and Subsidiaries as of March 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' deficiency and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Diamond
Entertainment Corporation and Subsidiaries as of March 31, 2001 and 2000, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred recurring losses and
a negative cash flow from operations, as well as a working capital deficit which
raises substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 2. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
June 15, 2001
F-2
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
-------------------------------
2001 2000
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 29,900 $ -
Accounts receivable, net of allowance for
doubtful accounts of $144,542 and $137,750 413,020 421,196
Inventory 1,088,951 1,094,878
Due from related party 101,366 -
Prepaid expenses and other current assets 45,714 116,456
------------- -------------
Total current assets 1,678,951 1,632,530
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $1,030,785 and $878,032 199,487 266,570
FILM MASTERS AND ARTWORK, less accumulated
amortization of $3,901,070 and $3,813,596 145,817 114,424
INVESTMENT IN EQUITY SUBSIDIARY 60,725 45,275
OTHER ASSETS 62,982 65,707
------------- -------------
TOTAL ASSETS $ 2,147,962 $ 2,124,506
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31,
-------------------------------
2001 2000
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 224,681 $ 19,428
Accounts payable and accrued expenses 1,789,523 1,486,142
Due to factor 319,303 370,461
Financing agreement payable 311,807 538,670
Notes payable - current portion 42,576 125,762
Related parties - notes and advances payable
- current portion 1,478,233 1,543,841
Convertible debentures - current portion 1,142,675 1,050,775
Capital lease obligations - current portion 17,600 28,742
Other current liabilities 10,057 -
------------- -------------
Total current liabilities 5,336,455 5,163,821
Notes payable, less current portion - 63,872
Related parties - notes and advances payable,
less current portion 150,000 100,000
Convertible debentures, less current portion - 100,000
Capital lease obligations, less current portion - 17,912
------------- -------------
TOTAL LIABILITIES 5,486,455 5,445,605
------------- -------------
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 -
Common stock, no par value; 100,000,000 shares
authorized; 81,180,628 and 62,334,029 issued
and outstanding 14,552,635 14,001,535
Accumulated deficit (18,565,318) (17,650,424)
Treasury stock ( 48,803) ( 48,803)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 3,338,493) ( 3,321,099)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 2,147,962 $ 2,124,506
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
--------------------------------
March 31,
2001 2000
------------ ------------
SALES - net $ 3,181,079 $ 3,828,261
COST OF GOODS SOLD 1,796,722 3,348,102
------------ ------------
GROSS PROFIT 1,384,357 480,159
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,939,089 4,055,809
------------ ------------
LOSS FROM OPERATIONS (554,732) ( 3,575,650)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (455,478) ( 418,524)
Other income (expense) 80,316 61,091
Income (loss) from equity investment 15,000 ( 4,275)
------------ ------------
Total other income (expense) (360,162) ( 361,708)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (914,894) ( 3,937,358)
PROVISION FOR INCOME TAXES - -
------------ ------------
NET LOSS $ (914,894) $( 3,937,358)
============ ============
LOSS PER SHARE
Basic $ ( 0.01) $ ( 0.07)
============ ============
Diluted $ ( 0.01) $ ( 0.07)
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED MARCH 31, 2001 AND 2000
Convertible Series A Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- -------------------- -------------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- ------- --------- ---------- -----------
Balance at March 31, 1999 483,251 $ 376,593 - $ - 50,619,029 $ 11,935,760
Exercise of common stock options:
Cash - - - - 4,000,000 200,000
Settlement of debt and interest - - - - 7,225,000 376,875
Settlement of accounts payable - - - - 490,000 24,500
Options issued for consulting services - - - - - 660,000
Options issued for officers compensation - - - - - 620,000
Interest for convertible debentures - - - - - 184,400
Net loss - - - - - -
-------- ---------- ------- --------- ---------- -----------
Balance at March 31, 2000 483,251 376,593 - - 62,334,029 14,001,535
Exercise of common stock options:
Cash - - - - 6,157,143 215,500
Settlement of debt and interest - - - - 285,714 10,000
Settlement of accounts payable - - - - 857,123 30,000
Options issued for consulting services - - - - - 209,000
Options issued for officers compensation - - - - -
Interest for convertible debentures - - - - -
Issuance of Series A convertible
preferred stock - - 50 500,000 - -
Offering costs - - - (67,000) - -
Conversion of Series A convertible
preferred stock to common stock - - (10) (86,600) 11,546,619 86,600
Net loss - - - - - -
--------- ---------- ------- --------- ---------- ------------
Balance at March 31, 2001 483,251 $ 376,593 40 $ 346,400 81,180,628 $ 14,552,635
========= =========== ======= ========= ========== ============
(Table continued on following page)
F-6a
(Table continued from previous page)
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED MARCH 31, 2001 AND 2000
Total
Accumulated Treasury Stockholders'
Deficit Stock Deficiency
------------ ------------ -------------
Balance at March 31, 1999 $(13,713,066) $( 48,803) $( 1,449,516)
Exercise of common stock options:
Cash - - 200,000
Settlement of debt and interest - - 376,875
Settlement of accounts payable - - 24,500
Options issued for consulting services - - 660,000
Options issued for officers compensation - - 620,000
Interest for convertible debentures - - 184,400
Net loss ( 3,937,358) - ( 3,937,358)
------------ ------------ -------------
Balance at March 31, 2000 (17,650,424) ( 48,803) ( 3,321,099)
Exercise of common stock options:
Cash - - 215,500
Settlement of debt and interest - - 10,000
Settlement of accounts payable - - 30,000
Options issued for consulting services - - 209,000
Options issued for officers compensation - -
Interest for convertible debentures - -
Issuance of Series A convertible
preferred stock - - 500,000
Offering costs - - (67,000)
Conversion of Series A convertible
preferred stock to common stock - - -
Net loss ( 914,894) - ( 914,894)
------------ ------------ ------------
Balance at March 31, 2001 $(18,565,318) $ ( 48,803) $( 3,338,493)
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6b
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
March 31,
---------------------------------
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (914,894) $ ( 3,937,358)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 240,264 279,038
Provision for doubtful accounts 6,792 ( 51,205)
Inventory reserve - 176,386
Issuance of note payable for settlement - 72,000
Issuance of equity instruments as compensation
and other fees 239,000 1,464,400
(Income) loss from equity investment ( 15,450) ( 42,500)
Changes in assets and liabilities
(Increase) decrease
Due from related party (101,366) -
Accounts receivable 1,384 189,240
Inventory 5,927 977,527
Prepaid expenses and other current assets 70,742 ( 30,096)
Other assets 2,725 230,020
Increase (decrease)
Due to factor ( 51,158) -
Accounts payable and accrued expenses 303,381 244,141
Accrued interest - 29,997
Other 10,057 -
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (202,596) ( 398,410)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ( 85,707) ( 18,506)
Purchase of film masters and artwork (118,867) ( 66,420)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (204,574) ( 84,926)
------------- -------------
(table continued on following page)
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Year Ended
March 31,
---------------------------------
2001 2000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft 205,253 ( 85,475)
Issuance of stock for settlement of debt and interest 10,000 -
Net repayments of financing agreement (226,863) ( 267,796)
Proceeds from notes payable - 194,146
Payments of notes payable (147,058) ( 350,270)
Proceeds from notes payable (related party) - 784,341
Payments of notes payable (related party) ( 15,608) -
Proceeds from convertible debentures - 50,000
Payment of convertible debentures ( 8,100) ( 16,370)
Payments on capital leases ( 29,054) ( 25,240)
Proceeds from the exercise of options - 200,000
Proceeds from issuance of common stock 302,100 -
Proceeds from issuance of Series A Preferred Stock 346,400 -
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 437,070 483,336
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 29,900 -
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR - -
------------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 29,900 $ -
============= =============
SUPPLEMENTAL INFORMATION
CASH PAID FOR:
Interest $ 148,500 $ 237,000
============= =============
Income taxes $ - $ -
============= =============
Non-Cash Investing and Financing Activities:
Conversion of preferred stock to common stock $ 86,600 $ -
Stock issued for settlement of debt and interest $ 10,000 $ 376,875
Interest for convertible debentures - 184,400
Stock issued for settlement of accounts payable $ 30,000 $ 24,500
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended March 31, 2001, the Company issued the following equity and
security instruments:
Granted options to consultants to purchase 7,300,000 shares of its common
stock, in connection with consulting agreements and officer compensation.
The Company has recognized consulting expense of $209,000.
Issued 285,714 shares of its common stock for the conversion of debt.
Converted $30,000 of accounts payable to related parties into 857,123 shares
of its common stock.
Converted 10 shares of its Series A convertible preferred stock into
11,546,619 shares of its common stock.
For the year ended March 31, 2000, the Company issued the following equity and
security instruments:
Granted options to consultants to purchase 14,465,000 shares of its common
stock, in connection with consulting agreements and officer compensation.
The Company has recognized consulting expense of $1,535,000.
Issued 7,225,000 and 490,000, respectively, shares of its common stock for
the conversion of $376,875 of principal balance and accrued interest and
$24,500 of accounts payable, respectively.
Converted $1,860,275 of accounts payable to related parties into two
separate convertible debentures for i) $1,050,775 issued to an unrelated
third party, and ii) $809,500 issued to a related party.
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.
F-9
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
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 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, general merchandise, patented toys, furniture, 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:
VIDEO PROGRAMS AND OTHER LICENSED PRODUCTS
The Company distributes and sells videocassette 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.
F-10
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Reclassification
----------------
As of March 31, 2001, certain prior year amounts have been
reclassified to conform with current presentation.
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.
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 March 31, 2001 and
2000, 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.
F-11
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
F-12
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising costs were
approximately $20,891 and $44,500 for the years ended March 31, 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.
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 liability method of
accounting pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". The 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.
F-13
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. As of March 31, 2001 and 2000,
the weighted average common shares outstanding would have been
increased 12,500,000 and 19,004,000 shares if the issued and
exercisable stock options would have been dilutive.
The shares used in the computation of loss per share were as follows:
March 31,
-----------------------------
2001 2000
---------- ----------
Basic 69,359,016 59,375,234
========== ==========
Diluted 69,359,016 59,375,234
========== ==========
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 March 31, 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.
F-14
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
--------------------------------------------
SFAS No. 132, "Employers' Disclosures about Pension and Other Post
Employment Benefits," was issued in February 1998 and specifies
amended disclosure requirements regarding such obligations. SFAS No.
132 does not effect the Company as of March 31, 2001 and 2000.
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.
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.
F-15
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 2 - GOING CONCERN (Continued)
Management plans to take, or has taken, the following steps that it
believes will be sufficient to provide the Company with the ability to
continue in 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
- Attain leadership in the market segment of high quality budget
priced distribution of videocassettes and DVD titles.
- Avoid direct competition with larger competitors who sell in the
same product categories as the Company, by offering higher
quality budgeted price products.
- Attain leadership in pricing and packaging innovations.
- Maintain efficiency in quick turnaround of product shipments.
- 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 our national chain
stores and mass merchandisers.
- Continue to acquire new videocassette and DVD titles for
distribution
Internet e-Commerce
- Maintain and improve our service through fast turnaround.
- Keep our pricing competitive.
- Maintain and improve customer service procedures.
- Complete thorough search for the most effective marketing and
promotional tools and methods for our web-site.
F-16
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 2 - GOING CONCERN (Continued)
- Continuously maintain and update our web-site to keep up with
current products.
- Continue to seek viable new products to be added to the web-site.
Contract Replication and Contract Packaging Service
- 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.
- Capitalize on the experience and know-how of our alliance
company, to deliver the highest quality replication service
available on a consistent basis.
- Use our association with our alliance company to penetrate this
market segment by broadcasting to our potential contract
customers the unique capabilities, experience and consistency of
production capabilities provided.
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.
F-17
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable as of March 31, 2001 and 2000, net of allowance
for doubtful accounts were approximately $413,020 and $421,196,
respectively. Substantially all of the accounts receivable as of March
31, 2001 and 2000 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 March 31, 2001 and 2000, the Company had an allowance for
doubtful accounts of $144,542 and $137,750, respectively.
NOTE 4 - INVENTORY
Inventory consisted of the following as of:
March 31,
2001 2000
------------- -----------
Raw materials $ 944,215 $ 525,209
Finished goods 844,895 1,246,055
------------- -----------
1,789,110 1,771,264
Less: valuation allowance (700,159) (676,386)
------------- -----------
Inventory, net $ 1,088,951 $ 1,094,878
============= ===========
Allowance
---------
An allowance has been established for inventory of $700,159 and
$676,386 as of March 31, 2001 and 2000. 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 March 31, 2001, the Company advanced $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.
F-18
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
March 31,
-----------------------------
2001 2000
------------ -----------
Furniture and equipment $ 1,165,610 $ 1,079,941
Automobile 24,487 24,487
Leasehold improvements 40,175 40,174
------------ -----------
1,230,272 1,144,602
Less: accumulated depreciation
and amortization (1,030,785) ( 878,032)
------------ -----------
Furniture and equipment, net $ 199,487 $ 266,570
============ ===========
Depreciation expense for the years ended March 31, 2001 and 2000 was
approximately $153,000 and $89,000, respectively.
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 years ended March 31, 2001 and 2000, investment income (loss)
from ATRE was $15,500 and $(4,275).
As of March 31, 2001 and 2000, the investment in ATRE totaled $60,725
and $45,725, 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.
F-19
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 8 - DUE TO FACTOR/FINANCING AGREEMENT PAYABLE (Continued)
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 $117,000 and $110,000 for the
years ended March 31, 2001 and 2000, respectively. The financing
agreement and factor advances were as follows:
March 31,
-----------------------------
2001 2000
------------- -----------
Due to factor payable $ 319,303 $ 370,461
Financing agreement payable -
inventory 311,807 538,670
-------------- ------------
$ 631,110 $ 909,131
============= ===========
NOTE 9 - NOTES PAYABLE
Notes payable represents the following as of:
March 31,
-----------------------------
2001 2000
------------- -----------
a) Mount Vernon Properties $ - $ 72,000
b) Waring Investments 4,585 27,500
c) Automobile 5,905 12,214
d) Other 32,086 77,920
------------- -----------
42,576 189,634
Less current (42,576) (125,762)
------------- -----------
Long term $ - $ 63,872
============= ===========
F-20
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 9 - NOTES PAYABLE (Continued)
a) Mount Vernon Properties
--------------------------
During March 2000, the Company entered into a legal settlement with
its prior landlords for unpaid rent. The Company agreed to a note
payable for $72,000 bearing interest at the rate of 10% interest per
annum payable in twelve monthly installments of principal and interest
of $6,600. As of March 31, 2001 and 2000, the balance was $-0- and
$72,000, respectively.
b) 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 March 31, 2001 and 2000, the
balance of $4,585 and $27,500 is due and payable May 2001.
c) 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
March 31, 2001 and 2000 was $5,905 and $12,214 respectively.
d) Other
--------
As of March 31, 2001 and 2000, the Company had various payables
aggregating $32,085 and $77,920, due on demand.
NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE
Related parties - notes and advances payable consists of the following
as of:
March 31,
2001 2000
------------ -----------
a) Convertible note payable - ATRE $ 809,500 $ 809,500
b) Note payable - ATRE 576,300 478,900
c) Note payable - Jeffrey Schillen 71,300 90,000
d) Convertible note payable -
Jeffrey Schillen 100,000 100,000
d) Convertible note payable - James Lu 50,000 50,000
e) Note payable - James Lu - 46,208
f) Note payable - Golden Gulf 21,133 69,233
------------ -----------
1,628,233 1,643,841
Less: long term (150,000) (100,000)
------------ -----------
Current portion $ 1,478,233 $ 1,543,841
============ ===========
F-21
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE (Continued)
a) Convertible Note Payable - ATRE
-------------------------------
As of March 31, 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 March 31, 2001 and 2000, the outstanding balance was
$809,500.
b) Note Payable - ATRE
-------------------
As of March 31, 2001 and 2000, the Company was advanced $576,300 and
$478,900, 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 March 31, 2001 and 2000, the Company has a $71,300 and $90,000
note payable, due to an officer, bearing interest at the rate of 10%
per annum, and due on demand.
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 March 31, 2001 and 2000, neither of the
debentures were 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. The additional amount
of financing costs for the year ended March 31, 2000 was calculated to
be $184,400, of which each amount was expensed.
e) Note Payable - James Lu
-----------------------
As of March 31, 2001 and 2000, the Company has a $-0- and $46,208 note
payable, due to an officer, bearing interest at the rate of 0%, and
due on demand.
F-22
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE (Continued)
f) Note Payable - Golden Gulf
--------------------------
As of March 31, 2001 and 2000, the Company has a $21,133 and $69,233
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:
March 31,
----------------------------
2001 2000
----------- ----------
a) Balmore Funds $ 100,000 $ 100,000
b) GJ Products Corporation 1,042,675 1,050,775
----------- ----------
1,142,675 1,150,775
Less: Current (1,142,675) (1,050,775)
----------- ----------
Long Term $ - $ 100,000
=========== ==========
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 March 31, 2001 and 2000, the outstanding balance
of convertible debentures was $100,000, for which the lender extended
the due date to March 2001.
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 March 31, 2001 and 2000, the outstanding balance was
$1,042,675 and $1,050,775, respectively.
F-23
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
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 years ended March 31, 2001 and
2000, royalty expense was $23,607 and $103,841, 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 March 31, 2001
and 2000, 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.
F-24
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 12 - COMMITMENTS AND CONTIGENCIES, continued
Lease Commitments, continued
---------------------------
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:
Capital Operating
Leases Leases
---------- ----------
Year Ending March 31,:
2002 $ 18,900 $ 126,000
2003 - 105,000
--------- ----------
Total minimum lease payments 18,900 $ 231,000
=========
Less: amount representing interest ( 1,300)
---------
Present value of minimum lease payments 17,600
Less: current portion (17,600)
----------
Long-term portion $ -
=========
Rent expense for the years ended March 31, 2001 and 2000 was
approximately $142,000 and $154,000, respectively.
The following is a summary of property held under the capital leases
as of March 31, 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.
F-25
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
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 shares.
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 the year ended March 31, 2000, the Company had the following
significant issuances of its common stock:
o 7,225,000 shares for the exercise of options with the option
price settled by the holders' conversions of $376,875 of notes
payable and accrued interest.
o 4,000,000 shares for the exercise of options for cash proceeds of
$200,000
o The Company recorded $184,400 of additional financing costs
related to convertible debentures, convertible into 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 financing. The additional amount of
financing expense for the year ended March 31, 2000 was
calculated to be $184,400.
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 shares 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 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.
F-26
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
Common Stock (continued
-----------------------
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 1,142,857 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 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.
As of March 31, 2001, the Company had authorized 4,999,950 shares as
discussed below.
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.
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.
F-27
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
Series A Convertible Preferred Stock (continued)
------------------------------------------------
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.
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.
F-28
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
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
For the fiscal year ended March 31, 2000, the Company had the
following common stock option transactions:
The per unit weighted-average fair value of unit options granted for
the year ended March 31, 2000 was $0.11 at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: weighted-average risk-free interest rates of 5.5%;
dividend yields of 0%; weighted-average volatility factors of the
expected market price of the Company's common stock of 178%; and
expected lives of the options ranging from 1 to 3 years. The Company
issued the following stock options:
o The Company engaged a consultant for a period of one year to
provide managerial and strategical planning for financial matters
and expansion of the Company. The consultant received an option
to purchase 1,000,000 shares of the Company's common stock
exercisable at $0.10 per share in exchange for services to be
rendered and the option shall expire on July 8, 2001. The option
had an aggregate fair value at date of grant of approximately
$40,000.
o The Company engaged three consultants for a period of one year
each to provide managerial and strategical planning for financial
matters and expansion of the Company. The consultants received
options to purchase an aggregate of 6,000,000 shares of the
Company's common stock exercisable at $0.05 per share in exchange
for services to be rendered and the options shall expire on April
11, 2000. The options had an aggregate fair value at date of
grant of approximately $291,000. These options were exercised in
April 1999, by the forgiveness of $150,000 of notes payable,
executed in March 1999, and cash proceeds of $150,000.
F-29
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 14 - COMMON STOCK OPTIONS (Continued)
o The Company's board of directors approved and the Company issued
to the Company's President, as a bonus, options to purchase
2,500,000 and 1,000,000 shares of the Company's common stock at
$0.05 and $0.10 per share, respectively. The options expire on
May 24, 2004. Since the options are accounted for under APB 25
and the exercise price is below market, the Company has expensed
the aggregate intrinsic value at date of grant of approximately
$486,400.
o The Company's board of directors approved and the Company issued
to the Company's V.P. of Sales and Marketing, as a bonus, options
to purchase 500,000 and 500,000 shares of the Company's common
stock at $0.05 and $0.10 per share, respectively. The options
expire on May 24, 2004. Since the options are accounted for under
APB 25 and the exercise price is below market, the Company has
expensed the aggregate intrinsic value at date of grant of
approximately $133,600.
o The Company engaged a consultant for a period of one year to
provide advice to, and consult with, the Company concerning
managerial and strategical planning for financial matters and
expansion of the Company. The consultant received an option to
purchase 1,000,000 shares of the Company's common stock,
exercisable at $0.10 per share in exchange for services to be
rendered and the option shall expire on July 12, 2002. The option
had an aggregate fair value at date of grant of approximately
$127,000.
o The Company engaged two consultants for a period of one year each
to provide advice to, and consult with, the Company concerning
managerial and strategical planning for financial matters and
expansion of the Company. The consultants received options to
purchase in the aggregate 1,965,000 shares of the Company's
common stock exercisable at $0.05 per share in exchange for
services to be rendered and the options shall expire on August 1,
2000. The options had an aggregate fair value at date of grant of
approximately $202,000. The options were exercised during the
year ended March 31, 2000 by the forgiveness of $36,250 of
principal and interest of debt outstanding for 725,000 shares and
$50,000 cash and the forgiveness of $12,000 of accounts payable
for 1,240,000 shares.
F-30
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 14 - COMMON STOCK OPTIONS (Continued)
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. For the
fiscal year ended March 31, 2001, the Company had the following Common
Stock option transactions under this Plan:
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 $209,000.
F-31
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 14 - COMMON STOCK OPTIONS (Continued)
2000 Stock Compensation Plan, continued
---------------------------------------
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 March 31, 2001, and the
Company believes the firm has not performed under the agreement.
The following summarizes the common stock options issued for
consulting services for the years ended March 31, 2001 and 2000:
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 - - -
---------- -----------
Options outstanding, March 31, 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 $209,000 and $1,280,000 for the years ended March 31, 2001
and 2000, respectively.
F-32
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 14 - COMMON STOCK OPTIONS (Continued)
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.
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 - -
Expired - -
---------- -------
Options, Exercisable and Outstanding,
March 31, 2001 300,000 $ 0.10
========== =======
The weighted average remaining contract lives of stock options
outstanding are 1.42 years.
F-33
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 14 - COMMON STOCK OPTIONS (Continued)
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 be
increased by $0 and $279,504 for the years ended March 31, 2001 and
2000, respectively, to the pro forma amounts indicated below.
2001 2000
----------- -----------
Net Loss:
As Reported $ (914,894) $(3,937,358)
=========== ===========
Pro forma $ (914,894) $(4,216,862)
=========== ===========
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for years ended March 31, 2000: weighted-
average risk-free interest rates of 5.5%; 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 of 2.5 years.
NOTE 15 - MAJOR CUSTOMERS
For the year ended March 31, 2000, the Company had net sales to two
customers that accounted for approximately 17.1% and 10.8%,
respectively.
For the year ended March 31, 2001, the Company had net sales to 2
customers that amounted to approximately 28.3% and 17.1%,
respectively.
F-34
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 16 - INCOME TAXES
For The Years Ended
March 31,
--------------------------------
2001 2000
------------- --------------
Current Tax Expense
U.S. federal $ - $ -
State and local - -
-------------- --------------
Total Current - -
-------------- --------------
Deferred Tax Expense
U.S. federal - -
State and local - -
-------------- --------------
Total deferred - -
--------------- --------------
Total tax provision from
continuing operations $ - $ -
============== =============
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows for the years ended March 31, 2001 and
2000:
Federal income tax rate ( 34.0)%
Effect of valuation allowance 34.0%
-----------
Effective income tax rate 0.0%
============
F-35
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 16 - INCOME TAXES (Continued)
At March 31, 2001 and 2000, the Company had net carryforward losses of
approximately $18,565,318 and $17,650,424, respectively. Because of
the current uncertainty of realizing the benefit of the tax
carryforwards, a valuation allowance equal to the tax benefit for
deferred taxes has been established. The full realization of the tax
benefit associated with the carryforwards depends predominantly upon
the Company's ability to generate taxable income during the
carryforward period. The net change in the valuation allowance for the
years ended March 31, 2001 and 2000, increased by approximately
$311,000 and $491,000, respectively.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets and liabilities are as follows:
March 31,
-----------------------------
2001 2000
----------- -----------
Deferred Tax Assets
Loss carryforwards $ 6,312,000 $ 6,001,000
Less: valuation allowance (6,312,000) (6,001,000
----------- -----------
Net Deferred Tax Assets $ - $ -
=========== ===========
Net operating loss carryforwards expire starting in 2007 through 2018.
Per year availability is subject to change of ownership limitations
under Internal Revenue Code Section 382.
NOTE 17 - SEGMENT INFORMATION
The following financial information is reported on the basis that is
used internally for evaluating segment performance and deciding how to
allocate resources. During 2001 and 2000, the Company operated in two
principal industries;
a) Video programs and other licensed products
b) General merchandise
F-36
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 17 - SEGMENT INFORMATION (Continued)
Year Ended March 31,
------------------------------
2001 2000
----------- -----------
Revenues:
Video programs and other licensed products $ 3,174,029 $ 3,605,343
Merchandise 7,050 222,918
----------- -----------
$ 3,181,079 $ 3,828,261
=========== ===========
Loss before taxes:
Video programs and other licensed products $ (664,204) $(3,414,811)
Merchandise (250,690) ( 522,547)
----------- -----------
$ (914,894) $(3,937,358)
=========== ===========
Depreciation and amortization:
Video programs and other licensed products $ 168,205 $ 242,976
Merchandise 72,059 36,062
----------- -----------
$ 240,264 $ 279,038
=========== ===========
Segment assets:
Video programs and other licensed products $ 1,103,356 $ 1,813,567
Merchandise 1,044,606 310,939
----------- -----------
$ 2,147,962 $ 2,124,506
=========== ===========
Expenditure for segment assets:
Video programs and other licensed products $ 204,574 $ 84,926
Merchandise - -
----------- -----------
$ 204,574 $ 84,926
=========== ===========
F-37
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
NOTE 18 - SUBSEQUENT EVENTS
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 note bears interest at 2-1/2% per month and a loan
fee of 5% of the principal amount. The notes are personally guaranteed
by James Lu.
F-38
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2001 2001
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS,
Cash and cash equivalents $ 116,263 $ 29,900
Accounts receivable, net of allowance for
Doubtful accounts of $144,697 and $144,542 697,983 413,020
Inventory 881,687 1,088,951
Due from related party 200,541 101,366
Prepaid expenses and other current assets 76,574 45,714
------------- -------------
Total current assets 1,973,048 1,678,951
PROPERTY AND EQUIPMENT, less
accumulated depreciation of $1,079,343 and $1,030,785 167,854 199,487
FILM MASTERS AND ARTWORK, less
accumulated amortization of $3,966,674 and $3,901,070 233,567 145,817
INVESTMENT IN EQUITY SUBSIDIARY 60,725 60,725
OTHER ASSETS 36,269 62,982
------------ --------------
TOTAL ASSETS $ 2,471,463 $ 2,147,962
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, March 31,
2001 2001
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ - $ 224,681
Accounts payable and accrued expenses 1,639,209 1,789,523
Due to factor 396,361 319,303
Financing agreement payable 151,777 311,807
Notes payable - current portion 613 42,576
Related parties - notes and advances payable
-current portion 755,533 1,478,233
Convertible debentures - current portion 100,000 1,142,675
Capital lease obligations - current portion - 17,600
Other current liabilities - 10,057
------------- -------------
Total current liabilities 3,043,493 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 3,043,493 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
Series B convertible preferred stock, $10,000 per share
stated value; 87 shares authorized; 58 issued and
outstanding 508,985 -
Common stock, no par value; 600,000,000 shares authorized;
457,595,650 and 81,180,648 issued and outstanding 16,956,618 14,552,635
Accumulated deficit (18,711,823) (18,565,318)
Treasury stock ( 48,803) ( 48,803)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 572,030) ( 3,338,493)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,471,463 $ 2,147,962
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
December 31, December 31,
------------------------ -------------------------
2001 2000 2001 2000
----------- ---------- ----------- -----------
SALES - net $ 1,136,728 $ 919,694 $ 3,179,347 $ 2,393,260
COST OF GOODS SOLD 714,470 523,331 1,975,994 1,444,123
----------- ---------- ----------- -----------
GROSS PROFIT 422,258 396,363 1,203,353 949,137
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 430,067 579,287 1,150,121 1,493,139
----------- ---------- ----------- -----------
PROFIT (LOSS) FROM OPERATIONS ( 7,809) (182,924) 53,232 ( 544,002)
----------- ---------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest Expense (73,105) ( 139,454) ( 250,237) ( 300,098)
Other income 38,634 ( 7,488) 50,500 ( 18,555)
----------- ---------- ----------- -----------
PROFIT (LOSS) BEFORE INCOME TAXES (42,280) ( 329,866) ( 199,737) ( 862,655)
----------- ---------- ----------- -----------
INCOME TAXES - - - -
----------- ---------- ----------- -----------
NET PROFIT (LOSS) (42,280) ( 329,866) (146,505) ( 862,655)
=========== ========== =========== ===========
LOSS PER SHARE
Basic $ ( .00) $ ( .00) $ ( .00) $ ( .01)
=========== ========== =========== ===========
Diluted $ ( .00) $ ( .00) $ ( .00) $ ( .01)
=========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
December 31,
2001 2000
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ ( 146,505) $ ( 862,655)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 65,483 233,256
Provision for doubtful accounts 27,000 101,001
Non-cash consulting and compensation expense - 149,338
Changes in assets and liabilities
Due from related party ( 79,650) -
Accounts receivable (311,963) ( 126,352)
Inventory 207,264 146,887
Prepaid expenses and other current assets ( 50,385) 31,279
Other assets 26,713 ( 2,000)
Increase (decrease)
Accounts payable and accrued expenses (274,888) 441,065
Deferred costs - 87,083
Other (10,057) ( 110,179)
---------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (546,988) 88,723
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayment by ATRE - 122,900
Purchase of property and equipment (16,925) ( 9,549)
Purchase of film masters and artwork (153,355) ( 4,572)
---------- -----------
NET CASH USED IN (PROVIDED BY)INVESTING ACTIVITIES (170,280) 108,779
---------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(UNAUDITED)
December 31,
2001 2000
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft 224,681 ( 19,428)
Net repayments of financing agreement ( 246,964)
Proceeds (payments) from notes payable (82,972) ( 93,598)
Proceeds from notes payable (related party) (41,963) -
Payments of notes payable (related party) - (1,270,985)
Proceeds from convertible debentures 33,400 809,500
Payment of convertible debentures ( 4,900) ( 2,700)
Payments on capital leases (17,600) ( 21,327)
Proceeds from the exercise of options 214,000 215,000
Proceeds from issuance of Series A
Preferred Stock - 433,000
Proceeds from issuance of Series B
Preferred Stock 478,985 -
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 803,631 (197,502)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS 86,363 0
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 29,900 0
---------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 116,263 $ 0
========== ===========
SUPPLEMENTAL INFORMATION
CASH PAID FOR:
Interest $ 153,770 $ 132,191
========== ============
Income taxes $ - $ -
========== ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the nine months ended December 31, 2001, the company had the following
financing activity:
Issued 333,615,002 shares of common stock for conversion of notes payable
and convertible debentures. (See Note 13)
On July 24, 2001, the company recognized $40,000 of prepaid consulting
expense relating to the issuance of 27,000,000 common stock options. (See
Note 13)
For the nine months ended December 31, 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.
F-43
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 Corporation ("Grand"), incorporated under the
laws of the state of California on August 13, 1996; and
3) GalaxyNet International, Inc. ("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:
F-44
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Nature of Business (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.
F-45
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 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, DVD's,
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.
F-46
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 $30,551 and $1,661 for the nine months ended December
31,2001, 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.
F-47
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
F-48
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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:
December 31,
2001 2000
----------- ----------
Basic 285,033,427 68,011,807
============ ===========
Diluted 285,033,427 68,011,807
============ ===========
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 December 31, 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.
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.
F-49
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
--------------------------------------------
On June 29, 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations", was approved by the Financial Accounting
Standards board ("FASB"). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. Goodwill and certain intangible assets will remain on the balance
sheet and not be amortized. On an annual basis, and when there is reason to
suspect that their values have been diminished or impaired, these assets
must be tested for impairment, and write-downs may be necessary. The
Company is required to implement SFAS No. 141 on January 1, 2002 and it has
not determined the impact, if any, that this statement will have on its
consolidated financial position or results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets", was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this statement. The Company is required to implement
SFAS No. 142 on January 1, 2002 and it has not determined that impact, if
any, that this statement will have on its consolidated financial position
or results of operations
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:
F-50
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - GOING CONCERN (Continued)
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.
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.
F-51
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - GOING CONCERN (Continued)
Contract Replication and Contract Packaging Service (continued)
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.
The Company believes it has adequate cash resources to sustain its
operations through the fourth 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 December 31, 2001 and March 31, 2001, net of
allowance for doubtful accounts were approximately $697,983 and
$413,020,respectively. Substantially all of the accounts receivable as of
December 31, 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 December 31, 2001 and March 31, 2001, the Company had an allowance
for doubtful accounts of $144,697 and $144,542, respectively.
NOTE 4 - INVENTORY
Inventory consisted of the following as of:
December 31, March 31,
2001 2001
------------- -----------
Raw materials $ 801,338 $ 944,215
Finished goods 891,269 844,895
------------- -----------
1,789,110
Less: valuation allowance ( 810,920) (700,159)
------------- -----------
Inventory, net $ 881,687 $ 1,088,951
============= ===========
F-52
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 4 - INVENTORY (Continued)
Allowance
---------
An allowance has been established for inventory of $810,920 and $700,159 as
of December 31, 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 December 31, 2001, and March 31, 2001 the Company advanced $200,541
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:
December 31, March 31,
2001 2001
------------ -----------
Furniture and equipment $ 1,182,535 $ 1,165,610
Automobile 24,487 24,487
Leasehold improvements 40,175 40,175
------------ -----------
1,247,197 1,230,272
Less: accumulated depreciation and
amortization (1,079,343) (1,030,785)
------------ -----------
Property and equipment, net $ 167,854 $ 199,487
============ ===========
Depreciation expense for the nine months ended December 31, 2001 and 2000
was approximately $48,729 and $117,891, respectively.
F-53
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 nine months ended December 31, 2001 and 2000, there were no
investment income or loss from ATRE.
As of December 31, 2001 and March 31, 2001, 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 January 1, 2003. The
Company paid interest of approximately $154,000 and $132,000 for the nine
months ended December 31, 2001 and 2000, respectively. The financing
agreement and factor advances were as follows:
December 31, March 31,
2001 2001
-------------- -------------
Due to factor payable $ 396,361 $ 319,303
Financing agreement payable -
inventory 151,777 311,807
-------------- ------------
$ 548,138 $ 631,110
============== ============
F-54
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 9 - NOTES PAYABLE
Notes payable represents the following as of:
December 31, March 31,
2001 2001
------------- -----------
a) Waring Investments $ - $ 4,585
b) Automobile 613 5,905
c) Other - 32,086
------------- -----------
613 42,576
Less current ( 613) (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 December 31, 2001 and March
31, 2001, the outstanding balances were $-0- and $4,585, respectively.
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
December 31, 2001 and March 31, 2001 was $613 and $5,905 respectively.
c) Other
-----
As of December 31, 2001 and March 31, 2001, the Company had various
payables aggregating $-0- and $32,086, due on demand.
F-55
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE
Related parties - notes and advances payable consist of the following
as of:
December 31, March 31,
2001 2001
------------ ------------
a) Convertible note payable - ATRE $ - $ 809,500
b) Note payable - ATRE 619,600 576,300
c) Note payable - Jeffrey Schillen 29,300 71,300
d) Convertible note payable -
Jeffrey Schillen 100,000 100,000
d) Convertible note payable - James Lu - 50,000
e) Note payable - Golden Gulf 6,633 21,133
------------ ------------
755,533 1,628,233
Less: current portion (755,533) (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, 2001. 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 March 31, 2001, the outstanding balance was $809,500. 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. (See Note 13)
b) Note Payable - ATRE
-------------------
As of December 31, 2001 and March 31, 2001, the Company was advanced
$619,600 and $576,300, from ATRE (see Note 7), bearing interest at the
rate of 14% per annum, and due on demand.
F-56
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE (Continued)
c) Note Payable - Jeffrey Schillen
-------------------------------
As of December 31, 2001 and March 31, 2001, the Company has a $29,300
and $71,300 note payable, due to an officer, bearing interest at the
rate of 10% per annum, and due on demand.
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. On July 24, 2001, the Board of Directors of
the Company approved the reduction of the original conversion rate of
$0.05 down to $0.005 per share and allowed the holders of the notes to
also convert any accrued interest against such notes. On July 24,
2001, the Board of Directors of the Company authorized and approved
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. As of December 31, 2001 the debenture for $100,000 was
not converted. (See Note 13)
e) Note Payable - Golden Gulf
--------------------------
As of December 31, 2001 and March 31, 2001, the Company has a $6633
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:
December 31, March 31,
2001 2001
----------- -----------
a) Balmore Fund $ 100,000 $ 100,000
b) GJ Products Corporation - 1,042,675
------------ -----------
100,000 1,142,675
Less: Current ( 100,000) (1,142,675)
------------ -----------
Long Term $ - $ -
============ ===========
F-57
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 11 - CONVERTIBLE DEBENTURES (Continued)
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 December
31, 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.
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. 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. As of December 31, 2001 and March 31,
2001, the outstanding balance was $-0- 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 nine months ended December 31,
2001 and 2000, royalty expense was $25,763 and $16,729 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.
F-58
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 12 - COMMITMENTS AND CONTIGENCIES (Continued)
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 December 31, 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:
Capital Operating
Leases Leases
----------- -----------
Quarter Ending December 31,:
2002 $ - $ 126,000
2003 - 10,500
----------- -----------
Total minimum lease payments - $ 136,500
=========== ===========
Rent expense for the nine months ended December 31, 2001 was
approximately $98,935.
There were no property held under the capital leases as of December
31, 2001.
F-59
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 12 - COMMITMENTS AND CONTIGENCIES (Continued)
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.
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 nine months ended December 31, 2001, the Company had the
following significant issuance of its common stock:
Consulting Agreements
---------------------
On November 30, 2001, the Company entered into a consulting agreement
that will terminate on November 29, 2002. The consultant will provide
consulting service for the Company concerning various strategic
marketing planning, licensing consulting and other matters in
connection with the operation of the businesses of the Company. The
consultant received options to purchase a total of 1,500,000 of the
Company's common stock exercisable at $0.03 per share in exchange for
services to be rendered. Of such options, 1,000,000 shares will be
exercisable immediately and 500,000 shares will be exercisable
commencing on November 30, 2002 and will expire on November 29, 2002
and November 29, 2003, respectively. As of December 31, 2001, none of
the options were exercised.
On October 18, 2001, the Company entered into two consulting
agreements that will terminate on October 17, 2002, whereby the
consultants will provide consulting services for the Company
concerning various management, marketing, consulting, strategic
planning, and financial matters in connection with the operation of
the businesses of the Company. The consultants received options to
purchase a total of 30,800,000 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 October 17, 2002. In November
2001, the Company received $75,000 cash for the issuance of 15,000,000
shares upon the exercise of these options and 800,000 were exercised
for consulting services incurred and owed by the Company to one of the
consultants totaling $4,000. At December 31, 2001, 15,000,000 shares
of these options remained outstanding.
F-60
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
Consulting Agreements (Continued)
---------------------------------
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. On July 24, 2001, the
company recognized $40,000 of prepaid consulting expense relating to
the issuance of 27,000,000 common stock options. During the three
months ended December 31, 2001, the Company expensed $12,000.00 of
such prepaid consulting expenses.
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.
During the year ended March 31, 2001, the Company had the following
significant issuances of its common stock:
F-61
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
Stock Options
-------------
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 Debentures
----------------------
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).
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 B Convertible Preferred Stock
------------------------------------
On November 16, 2001, the Company amended its articles of
incorporation to authorize the issuance 87 shares of no par value,
Series B 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.
On November 16, 2001, the Company entered into a Securities Purchase
Agreement ("Securities Purchase Agreement") with 4 investors. Pursuant
to the Securities Purchase Agreement, the Company issued and sold 58
shares of Series B Convertible Preferred Stock for total consideration
of $580,000, or $10,000 per share.
F-62
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
Series B Convertible Preferred Stock (Continued)
------------------------------------------------
Commencing May 15, 2002, the Series B Preferred Stock is convertible,
at the investor's option, into shares of the Company's Common Stock
and automatically converts into Common Stock on November 16, 2003. The
conversion price of the Series B Preferred Stock is the lower of $.02
per share or 70% of the average of the closing bid prices of the
Company's Common Stock on any five trading days in the 30 trading day
period preceding the date of conversion. The conversion price of the
Series B Preferred Stock is also adjusted in the event of stock
dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. The Series B Preferred
Stock also provides for additional shares of the Company's Common
Stock calculated at a rate of 6% to determine the conversion rate of
the Company's Common Stock upon conversion.
Additional features of the Series B Preferred Stock include, among
other things:
i) a redemption feature at the option of the Company commencing
May 15, 2002 of shares of Series B 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 B 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 B Preferred Stock, the Company is required to
file a registration statement to register the Common Stock issuable
upon conversion of the Series B 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.
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.
F-63
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
F-64
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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
--------
On November 16, 2001, in connection with the sale of 58 shares of the
Company's Series B Preferred Stock to 4 investors, the Company issued
warrants to purchase an aggregate of 8,700,000 shares of the Company's
Common Stock to such investors at an exercise price per share equal to
$0.02, expiring on November 15, 2006. The purchase rights represented
by the warrants may be exercised in whole or in part at any time and
from time to time during the term commencing on November 16, 2001.
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
2001 Stock Option Plan
----------------------
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 Company with shares of Common Stock of the Company. The
plan authorized 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.
F-65
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 14 - COMMON STOCK OPTIONS, Continued
Stock Options
-------------
On November 30, 2001, the Company entered into a consulting agreement
that will terminate on November 29, 2002. The consultant will provide
consulting service for the Company concerning various strategic
marketing planning, licensing consulting and other matters in
connection with the operation of the businesses of the Company. The
consultant receive options to purchase a total of 1,500,000 of the
Company's common stock exercisable at $0.03 per share in exchange for
serves to be rendered. Of such options, 1,000,000 shares will be
exercisable immediately and 500,000 shares will be exercisable
commencing on November 30, 2002 and will expire on November 29, 2002
and November 29, 2003, respectively. As of December 31, 2001, none of
the options were exercised.
In connection with the terms of the sales of the Company's Series B
Preferred Shares, the Company is required, so long as any of the
Series B Preferred Shares are outstanding, to reserve and keep
available out of its authorized and unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the Series B
Preferred Shares, 130% of the shares of common stock required to
convert the Series B Preferred Shares on the filing date of the
related registration statement. In order to be in compliance with this
reserve clause, the President of the Company on November 16, 2001,
agreed to waive his rights to exercise 29,000,000 of his outstanding
stock options of the Company's common stock until such time the
reserve requirement would permit the exercise of such options. On
November 16, 2001, the Company's board of directors approved and the
Company issued to the Company's President, options to purchase
14,500,000 shares of the Company's common stock for his waiving his
aforementioned exercise rights and for his part in the successful sale
of the Company's Series B Preferred Shares. The options will be
exercisable at $0.006 per share at such time permitted by the
Company's Series B Preferred Shares reserve clause. The options expire
5 years from the date of grant.
F-66
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 14 - COMMON STOCK OPTIONS (Continued)
Stock Options (Continued)
-------------------------
On October 18, 2001, the Company entered into two consulting
agreements that will terminate on October 17, 2002, whereby the
consultants will provide consulting service for the company concerning
various management, marketing, consulting, strategic planning, and
financial matters in connection with the operation of the businesses
of the Company. The consultants received options to purchase a total
of 30,800,000 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 October 17, 2002. In November 2001, the Company received
$75,000 cash for the issuance of 15,000,000 shares upon the exercise
of these options and 800,000 were exercised for consulting services
incurred and owed by the Company to one of the consultants totaling
$4,000. At December 31, 2001, 15,000,000 shares of these options
remained outstanding.
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.
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. In connection with the
issuance of theses options, the Company recorded in July 2001, prepaid
consulting expenses of $40,000.00. During the three months ended
December 31, 2001, the Company expensed $12,000.00 of such prepaid
consulting expenses.
F-67
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 14 - COMMON STOCK OPTIONS (Continued)
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, and the outstanding balance of options of
5,700,000 shares to be awarded or sold in accordance with this plan
was canceled.
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.
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.
F-68
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 14 - COMMON STOCK OPTIONS (Continued)
2000 Stock Compensation Plan, Continued
---------------------------------------
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 December 31, 2001:
Weighted
Average
Exercise
Employees Consultants Price
---------- ------------ ---------
Options outstanding, March 31, 1999 7,000,000 3,454,000 $ 0.100
Granted 4,500,000 9,965,000 $ 0.060
Exercised - (8,215,000) $ 0.050
Expired/cancelled - (1,000,000) $ 0.250
---------- ------------
Options outstanding, March 31, 2000 11,500,000 4,204,000 $ 0.100
Granted - 7,900,000 $ 0.036
Exercised - (7,300,000) $ 0.035
Expired/cancelled - - $ -
---------- ------------ --------
Options outstanding, March 31, 2001 11,500,000 4,804,000 $ 0.094
=========== ============ ========
Granted 76,000,000 59,300,000 0.006
Exercised - (42,800,000) 0.005
Expired/cancelled (11,500,000) ( 3,204,000) 0.100
---------- ------------ ---------
Options outstanding, December 31, 2001 76,000,000 18,100,000 $ 0.008
=========== =========== ========
F-69
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 14 - COMMON STOCK OPTIONS (Continued)
2000 Stock Compensation Plan, Continued
---------------------------------------
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.
F-70
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 $ 0.100
Granted 300,000 $ 0.100
Expired ( 550,000) $ 0.100
------------- --------
Options, Exercisable and Outstanding, March 31, 2000 300,000 $ 0.100
============ ========
Granted - $ 0.000
Expired - $ 0.000
------------- --------
Options, Exercisable and Outstanding, March 31, 2001 300,000 $ 0.100
============ ========
Granted 175,000 $ 0.005
Cancelled (175,000) $ 0.100
------------- --------
Options, Exercisable and Outstanding,
December 31, 2001 300,000 $ 0.045
=========== ========
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 nine month period ended December 31, 2001.
NOTE 15 - MAJOR CUSTOMERS
For the nine month period ended December 31, 2001, the Company had net
sales to two customers that accounted for approximately 24%, and 19%,
respectively.
F-71
Part II. Information Not Required In Prospectus
- ---------------------------------------------------------------
Indemnification of Directors and Officers
Section 14A:3-5 of the New Jersey Business Corporation Act provides that: "Any
corporation organized for any purpose under any general or special law of this
State shall have the power to indemnify a corporate agent against his expenses
and liabilities in connection with any proceeding involving the corporate agent
by reason of his being or having been such a corporate agent, other than a
proceeding by or in the right of the corporation, if (a) such corporate agent
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation; and (b) with respect to any
criminal proceeding, such corporate agent had no reasonable cause to believe his
conduct was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that such corporate agent did not meet
the applicable standards of conduct set forth elsewhere in paragraphs 14A: 3-5
(2)(a) and 14A:
3-5(2)(b)."
Our By-Laws provide that, to the extent permitted under the New Jersey Business
Corporation Act, we may indemnify any director, officer, employee or agent
against his expenses and liabilities incurred in connection with any proceeding
involving such persons by reason of the fact that he was serving in such
capacity.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Other Expenses of Issuance and Distribution
Related to the securities being registered. The expenses shall be paid by the
Registrant.
SEC Registration Fee $ 124.20
Printing and Engraving Expenses $ 5,000.00
Legal Fees and Expenses $ 15,000.00
Accounting Fees and Expenses $ 15,000.00
Transfer Agent Fees $ 5,000.00
Blue Sky Fees $ 1,000.00
Miscellaneous $ 5,000.00
---------------
Total $ 46,124.20
II-1
Recent Sales of Unregistered Securities
In February 1999, the Company engaged Gary Swancey to provide internet media
consulting and public relations services for a period of one year. The fee for
the services to be rendered included a monthly cash fee of $3,000. The
consulting firm also received options to purchase a total of 250,000 shares of
our common stock with an exercise price of $.05 per share in exchange for
services to rendered and the options shall expire on February 11, 2001. During
the year ended March 31, 2000, all of the options were exercised for services
rendered by the consulting firm and cost incurred totaling $12,500. These shares
were issued pursuant to the exemption provided for under Section 4(2) of the
Securities Act of 1933, as amended, as a "transaction not involving a public
offering." Furthermore, Gary Swancey is an Accredited Investor.
During March and June 1999, the Company entered into two convertible debentures
for $50,000 to James Lu and $100,000 to Jeffrey Schillen. 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. On July 24,
2001, the Board of Directors of the Company approved the reduction of the
original conversion rate of $0.05 down to $0.005 per share and allowed the
holders of the notes to also convert any accrued interest against such notes. On
July 24,2001, the Board of Directors of the Company authorized and approved 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. As of March
31, 2002 the debenture for $100,000 was not converted. These shares were issued
pursuant to the exemption provided for under Section 4(2) of the Securities Act
of 1933, as amended, as a "transaction not involving a public offering."
Furthermore, James Lu and Jeffrey Schillen are both Accredited Investors.
In March of 1999, the Company received a total of $150,000 from five investors
and issued promissory notes due in one year with principal and interest paid
bimonthly at an interest rate of 10%. The notes could be used as proceeds for
the exercised options held by the investors. During the year ended March 31,
2000, the note holders used the $150,000 and accrued interest of $2,500 as funds
to exercise their common stock options for a total aggregate of 3,000,000 shares
of our common stock. The brake down of the investments is as follows:
Name of Investor Amount Invested
---------------- ---------------
P. Benz $50,000
G. Fulra $50,000
H. Schraub $30,000
M. Nelson $10,000
S. Nelson $10,000
These shares were issued pursuant to the exemption provided for under Section
4(2) of the Securities Act of 1933, as amended, as a "transaction not involving
a public offering." Furthermore, these five investors are Accredited Investors.
II-2
On May 25, 1999, the Company's issued to Mr. Lu, as a bonus, options to purchase
2,500,000 of our common stock at $0.05 and options to purchase 1,000,000 shares
of our common stock at $0.10 per share. The options expire on May 24, 2004. The
options had an aggregate fair market value at date of grant of approximately
$681,000. On July 24, 2001, the option prices for both options were reduced to
$0.005 per share. These shares were issued pursuant to the exemption provided
for under Section 4(2) of the Securities Act of 1933, as amended, as a
"transaction not involving a public offering." Furthermore, Mr. Lu is an
Accredited Investors.
On May 25, 1999, the Company's issued to Mr. Schillen, as a bonus, options to
purchase 500,000 shares of our common stock at $0.05 and options to purchase
500,000 shares of our common stock at $0.10 per share. The options expire on May
24, 2004. The options had an aggregate fair market value at date of grant of
approximately $194,000. On July 24, 2001, the option prices for both options
were reduced to $0.005 per share. These shares were issued pursuant to the
exemption provided for under Section 4(2) of the Securities Act of 1933, as
amended, as a "transaction not involving a public offering." Furthermore, Mr.
Schillen is an Accredited Investors.
In July 1999, the Company engaged Sandy Lang for a period of one year to provide
managerial and strategic planning for financial matters and expansion of the
Company. Sandy Lang received an option to purchase 1,000,000 shares of our
common stock exercisable at $0.10 per share in exchange for services to be
rendered and the options expired on July 8, 2001. The option had an aggregate
fair value at date of grant of approximately 40,000. These shares were issued
pursuant to the exemption provided for under Section 4(2) of the Securities Act
of 1933, as amended, as a "transaction not involving a public offering."
Furthermore, Sandy Lang is an Accredited Investors.
On July 13, 1999, the Company engaged a consultant for a period of one year to
provide advice to undertake for and consult with Company concerning managerial
and strategic planning for financial matters and expansion of the Company. The
consultant received an option to purchase 1,000,000 shares of our common stock
exercisable at $0.10 per share in exchange for services to be rendered and the
option shall expire on July 12, 2002. The option had an aggregate fair value at
date of grant of approximately $127,000. These options had not been exercised as
of March 31, 2002. These shares were issued pursuant to the exemption provided
for under Section 4(2) of the Securities Act of 1933, as amended, as a
"transaction not involving a public offering." Furthermore, this consultant is
an Accredited Investors.
On August 2, 1999, the Company engaged two consultants 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. The consultants received options to purchase a total of 1,965,000
of the Company's common stock exercisable at $.05 per share in exchange for
services to be rendered and the options shall expire on August 2, 2000. The
options had an aggregate fair value at date of grant of approximately $202,000.
The options were exercised during the year ended March 31, 2000 by the
II-3
forgiveness of $36,250 of principal and interest of debt outstanding for 725,000
shares and $50,000 cash and the forgiveness of $12,000 of accounts payable for
1,240,000 shares. These shares were issued pursuant to the exemption provided
for under Section 4(2) of the Securities Act of 1933, as amended, as a
"transaction not involving a public offering." Furthermore, these consultant are
Accredited Investors.
On August 27, 1999, the Company granted to five employees, pursuant to the
employment agreement, warrants to purchase 300,000 shares of common stock at an
exercise price of $.10 per share with an expiration date of 9/01/02. These
shares were issued pursuant to the exemption provided for under Section 4(2) of
the Securities Act of 1933, as amended, as a "transaction not involving a public
offering." Furthermore, these five employees are Accredited Investors.
In December 31,1999, $1,880,725 in related party payables were converted for two
promissory notes of $1,071,225 to GJ Products Corporation and $809,500 to
American Top Real estate, Inc. ("ATRE"), at a 7% interest rate, due September
30, 2001. In December 1999, GJ Products Corporation ownership was sold to a
unrelated party. The GJ Products name was retained by the new owners. These
notes were issued under the exemption to registration provided by Regulation D
Rule 506.
On July 24, 2001, we authorized and approved the issuance of 140,343,755 shares
of the company's common stock to 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.
We also authorized and approved the issuance of 180,928,097 shares of our 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. These shares
were issued pursuant to the exemption provided for under Section 4(2) of the
Securities Act of 1933, as amended, as a "transaction not involving a public
offering." Furthermore, both ATRE and GJ Products are Accredited Investors.
On May 11, 2000, the Company 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. These shares were issued under the
exemption to registration provided by Regulation D Rule 506.
On June 1, 2000, the Company entered into three consulting agreements that will
terminate on May 31, 2001, whereby the consultants will assist in the operation
of the businesses of the Company including expansion of services, acquisitions
and business opportunities. The consultants received options to purchase a total
of 7,300,000 of our common stock exercisable at $.035 per share in exchange for
services to be rendered and the options shall expire on May 31, 2001. 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.
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The consultants exercised the option and the 7,300,000 shares were issued. These
shares were issued pursuant to the exemption provided for under Section 4(2) of
the Securities Act of 1933, as amended, as a "transaction not involving a public
offering." Furthermore, these consultants are Accredited Investors.
On July 24, 2000, the Company granted a consulting firm options to purchase
600,000 shares at $0.05 per share. These options expire on July 24, 2003. To
date these options have not been exercised. These shares were issued pursuant to
the exemption provided for under Section 4(2) of the Securities Act of 1933, as
amended, as a "transaction not involving a public offering." Furthermore, the
consulting firm is an Accredited Investors.
On July 24, 2001, the Company granted three consulting firms options to purchase
27,000,000 shares at $0.005 per share. These options expire on July 23, 2002.
These options were exercised on August 15, 2001. These shares were issued
pursuant to the exemption provided for under Section 4(2) of the Securities Act
of 1933, as amended, as a "transaction not involving a public offering."
Furthermore, these consulting firms are Accredited Investors.
On October 18, 2001, the Company granted two consulting firms options to
purchase 30,800,000 shares at $0.005 per share. These options expire on October
17, 2002. 15,800,000 of these options were exercised on November, 2001. As of
March 31, 2002, 15,000,000 shares of these options have not been exercised.
These shares were issued pursuant to the exemption provided for under Section
4(2) of the Securities Act of 1933, as amended, as a "transaction not involving
a public offering." Furthermore, these consulting firms are Accredited
Investors.
On November 16, 2001, the Company issued 58 shares of Series B Convertible
Preferred Shares. These shares are convertible at the lesser of $.02 or 70% of
the average of the closing bid prices of our common stock on any five trading
days during the conversion of the Series B Convertible Preferred Shares. These
shares were issued under the exemption to registration provided by Regulation D
Rule 506.
On November 30, 2001, the Company granted a consulting firm an option to
purchase 1,500,000 shares at $0.03 per share. Of such options, 1,000,000 shares
will be exercisable immediately and 500,000 shares will be exercisable
commencing on November 30, 2002 and will expire on November 29, 2002 and
November 29, 2003, respectively. As of December 31, 2001, none of the options
were exercised. These shares were issued pursuant to the exemption provided for
under Section 4(2) of the Securities Act of 1933, as amended, as a "transaction
not involving a public offering." Furthermore, the consulting firm is an
Accredited Investors.
On January 30, 2002, the Company issued 29 shares of Series B Convertible
Preferred Shares. These shares are convertible at the lesser of $.02 or 70% of
the average of the closing bid prices of our common stock on any five trading
days during the conversion of the Series B Convertible Preferred Shares. These
shares were issued under the exemption to registration provided by Regulation D
Rule 506.
II-5
ITEM 27. EXHIBITS.
Exhibit
Number Title of Exhibit
------- ----------------
3.1 (4) Certificate of Incorporation, as amended
3.1.2 (8) Certificate of Amendment to Certificate of Incorporation of
Diamond Entertainment Corporation filed with the State of New
Jersey State Treasurer on May 11, 2000
3.1.3 (8) Certificate of Amendment to Certificate of Incorporation
of Diamond Entertainment Corporation filed with the State of
New Jersey State Treasurer on July 6, 2000.
3.1.4 Certificate of Amendment to Certificate of Incorporation of
Diamond Entertainment Corporation filed with the State of
New Jersey State Treasurer on April 1, 2002.
3.2 (4) By-laws, as amended.
4.1 (4) Certificate for shares of Common Stock.
5.1 Opinion of Naccarato & Associates
10.1 (2)(3) Employment Agreement effective as of January 1, 1991 between
the Company and James K.T. Lu, and Amendment No. 1 to
Employment Agreement, dated September 1, 1997
10.2 (2)(3) Employment Agreement effective as of August 16, 1991 between
the Company and Jeffrey I. Schillen, and Amendment No.1 to
Employment Agreement, dated September 1, 1997.
10.3 (5) Agreement of Merger dated May 13, 1997, between BDC
Acquisition Corp. and Beyond Design Corporation
10.4 (6) Agreement of Merger dated May 13, 1997, between BDC
Acquisition Corp. and Beyond Design Corporation.
10.5 (6) Consulting Agreement dated August 25, 1997 between the Company
and George Furla.
10.6 (6) Consulting Agreement dated August 25, 1997 between the Company
and Al Davis.
10.7 (2)(6) Consulting Agreement dated August 25, 1997 between the Company
and Murray T. Scott.
10.8 (6) Consulting Agreement dated August 25, 1997 among the Company
and Bruce W. Barren and the EMCO/Hanover Group.
10.9 (6) Employment Agreements dated as of September 1, 1997, between
the Company and various employees.
10.10 (3) Standard Sublease Agreement, dated as of July 30, 1998,
between the Company and Shinho Electronics & Communication,
Inc., for executive offices on Carmenita Road, Cerritos,
California.
10.11 (3) Standard Industrial/Commercial Multi-Tenant Lease Agreement,
dated as of November 1, 1995, between the Company and
Marquardt Associates, for offices on Marquardt Avenue,
Cerritos, California
II-6
Exhibit
Number Title of Exhibit
------- ----------------
10.12 (3) Office Lease Agreement dated October 31, 1997, between
the Company and Freehold-Craig Road Partnership, for offices
in Freehold, New Jersey
10.13 (3) Form of Sublease Agreement between the Company as sublessor
and Vigor Sports, Inc. as subtenant, for offices on Marquardt
Avenue, Cerritos, California.
10.14 (7) 10% Callable Convertible Note, dated March 22, 1999, in
the principal amount of $50,000 issued to Mr. Lu.
10.15 (7) 10% Callable Convertible Note, dated June 3, 1999, in the
principal amount of $100,000 issued to Mr. Schillen.
10.16 (8) 10% Callable Convertible Note, dated June 3, 1999, in the
principal amount of $100,000 issued to Mr. Schillen.
10.17 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Anthony E. Rakos concerning the issuance and sale
of shares of our Series A Convertible Preferred Stock.
10.18 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Gerald Holland concerning the issuance and sale
of shares our Series A Convertible Preferred Stock
10.19 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Jeffrey Hrutkay, MD concerning the issuance and
sale of shares of our Series A Convertible Preferred Stock.
10.20 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Charles and Jane Adkins concerning the issuance
and sale of shares of our Series A Convertible Preferred
Stock.
10.21 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Gordon D. Mogerley concerning the issuance and
sale of shares of our Series A Convertible Preferred Stock.
10.22 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Michelle Levite concerning the issuance and sale
of shares of our Series A Convertible Preferred Stock.
10.23 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Ralph Lowry Concerning the issuance and sale of
shares of our Series A Convertible Preferred Stock.
10.24 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and John Bolliger concerning the issuance and sale of
shares of our Series A Convertible Preferred Stock.
10.25 (8) Consulting Agreement dated June 1, 2000 between the Company
and Peter Benz.
10.26 (8) Consulting Agreement dated June 1, 2000 between the Company
and S. Michael Rudolph.
10.27 (8) Consulting Agreement dated June 1, 2000 between the Company
and Owen Naccarato.
10.28 (8) 2000 Stock Option Plan dated June 9, 2000.
10.29 Stonestreet Convertible Series B Preferred Stock Purchase
Agreement, November 2001
10.30 Stonestreet LP Warrant Agreement, November 2001
10.31 Stonestreet Corp Warrant Agreement, November 2001
10.32 Stonestreet Registration rights Agreement November 2001
II-7
Exhibit
Number Title of Exhibit
------- ----------------
10.33 Filter International Convertible Series B Preferred Stock
Purchase Agreement, November 2001
10.34 Filter International Warrant Agreement, November 2001
10.35 Filter International Registration rights Agreement November
2001
10.36 Kaufman Convertible Series B Preferred Stock Purchase
Agreement, November 2001
10.37 Kaufman Warrant Agreement, November 2001
10.38 Kaufman Registration rights Agreement November 2001
10.39 Alpha Capital Convertible Series B Preferred Stock Purchase
Agreement, January 2002
10.40 Alpha Capital Warrant Agreement, January 2002
10.41 Alpha Capital and Bakmore S.A Registration rights Agreement
January 2002
10.42 Balmore S.A. Convertible Series B Preferred Stock Purchase
Agreement, January 2002
10.43 Balmore S.A Warrant Agreement, January 2002
21.1 (8) Subsidiaries of the Registrant.
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
23.2 Consent of Counsel, Naccarato & Associates (included in
Exhibit 5.1)
- ------------------------
(1) Filed herewith.
(2) Indicated a management contract or compensatory plan or arrangement
required to be filed.
(3) Incorporated by reference to Registrant's exhibits to the Annual Report on
Form 10-KSB for the year ended March 31, 1998, filed December 24, 1998,
(File Number 0-17953).
(4) Incorporated by reference to Registrant's Registration Statement on Form
S-18 (File No. 33-33997).
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed May 16, 1997, (File No. 0-17953).
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, filed September 15, 1997 (File No. 333-35623).
(7) Incorporated by reference to Registrant's exhibits to the Annual Report on
Form 10-KSB for the year ended March 31, 1999, filed July 14, 1999, (File
Number 0-17953) and Annual Report on Form 10-KSB/A for the year March 31,
1999, filed August 23, 1999 (File Number 0-17953).
(8) Incorporation by reference to Registrant's exhibits to the Annual Report on
Form 10-KSB/A for the year ended March 31, 2000, filed October 26, 2000
(File No. 0-17953)
II-8
UNDERTAKINGS
The undersigned registrant hereby undertakes that it will:
Undertaking (a)
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information set forth in the
registration statement; and arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) ('230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of the
Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-9
Undertaking (e)
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14A:3-5 of the New Jersey Business Corporation Act provides that: "Any
corporation organized for any purpose under any general or special law of this
State shall have the power to indemnify a corporate agent against his expenses
and liabilities in connection with any proceeding involving the corporate agent
by reason of his being or having been such a corporate agent, other than a
proceeding by or in the right of the corporation, if (a) such corporate agent
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation; and (b) with respect to any
criminal proceeding, such corporate agent had no reasonable cause to believe his
conduct was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that such corporate agent did not meet
the applicable standards of conduct set forth elsewhere in paragraphs 14A: 3-5
(2)(a) and 14A:
3-5(2)(b)."
Our By-Laws provide that, to the extent permitted under the New Jersey Business
Corporation Act, we may indemnify any director, officer, employee or agent
against his expenses and liabilities incurred in connection with any proceeding
involving such persons by reason of the fact that he was serving in such
capacity.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
II-10
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Walnut,
CA 91789
Registrant: Diamond Entertainment Corporation
Signature Title Date
- --------------------------- ----- ----
By: /s/James K.T. Lu President, Co-Chief Executive April 18, 2002
---------------------- Officer, Principal Executive
James K.T. Lu Officer and Director
By: /s/Fred U. Odaka Chief Financial Officer, April 18, 2002
---------------------- Principle Financial
Fred U. Odaka Officer and Principal
Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:
Signature Title Date
- --------------------------- ----- ----
By: /s/James K.T. Lu President, Co-Chief Executive April 18, 2002
---------------------- Officer and Director
James K.T. Lu
By: /s/Jeffrey I. Schillen Executive Vice President, April 18, 2002
---------------------- Co-Chief Executive Officer and
Jeffrey I. Schillen Director
By: /s/Murray T. Scott Director April 18, 2002
----------------------
Murray T. Scott
II-11