UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES AND EXCHANGE COMMISSION
For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For transition period from _______________ to _______________
Commission File Number: 0-17953
DIAMOND ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2748019
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Tucker Lane, Walnut California, California 91789
(Address of principal executive offices)
(909) 839-1989
(Issuer's telephone number, including area code)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
As of December 31, 2003, there were 489,057,359 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1: Condensed Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 2003
[Unaudited] and March 31, 2003........................................ 3-4
Condensed Consolidated Statements of Operations for the three months
and nine months ended December 31, 2003 and 2002 [Unaudited].......... 5
Condensed Consolidated Statements of Cash Flows for nine months ended
December 31, 2003 and 2002 [Unaudited]............................... 6-7
Notes to Condensed Unaudited Consolidated Financial Statements...... 8-20
Item 2: Management's Discussion and Analysis or
Plan of Operations.............................................. 21-26
Item 3: Controls and Procedures......................................... 26
Part II. Other Information.............................................. 26
Item 1: Legal Proceedings............................................... 26
Item 2: Changes in Securities........................................... 26
Item 3: Defaults Upon Senior Securities................................. 26
Item 4: Submission of Matters to a Vote of Security Holders............. 27
Item 5: Other Information............................................... 27
Item 6: Exhibits and Reports on Form 8-K................................ 27
Signatures............................................................... 28
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2003
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 149,090 $ 6,900
Accounts receivable, net of allowance for
doubtful accounts of $114,578 and $87,570 466,328 196,426
Inventory 918,650 759,372
Due from related parties 226,469 208,808
Prepaid expenses and other current assets 72,106 2,872
------------ -----------
Total current assets 1,832,643 1,174,468
PROPERTY AND EQUIPMENT, less
accumulated depreciation of $721,940 and $676,613 159,167 217,904
FILM MASTERS AND ARTWORK, less
accumulated amortization of $4,287,361 and $4,084,783 312,298 300,818
INVESTMENT IN EQUITY SUBSIDIARY - -
OTHER ASSETS 32,564 26,814
------------ -----------
TOTAL ASSETS $ 2,336,672 $ 1,720,004
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, March 31,
2003 2003
------------ -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 117,736 $ 270,153
Accounts payable and accrued expenses 2,508,950 1,788,294
Due to factor 228,012 113,450
Financing agreement payable - -
Notes payable - current portion 37,800 37,800
Due to related parties - notes payable 338,718 363,718
Customer Deposits 23,183 45,813
------------ -----------
Total current liabilities 3,254,399 2,619,228
Notes payable, less current portion - 28,350
------------ -----------
TOTAL LIABILITIES 3,254,399 2,647,578
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 5) - -
STOCKHOLDERS' DEFICIENCY
Convertible preferred stock, no par value; 5,000,000 and
5,000,000 shares authorized; 483,251 issued (of which
172,923 are held in treasury) 376,593 376,593
Treasury stock ( 48,803) ( 48,803)
Series A convertible preferred stock, $10,000 per share
stated value; 50 shares authorized; 40 issued and outstanding 471,400 471,400
Series B convertible preferred stock, $10,000 per share
stated value; 87 shares authorized; 83 issued and outstanding 1,101,837 1,111,837
Common stock, no par value; 600,000,000 shares authorized;
489,057,359 and 457,634,122 issued and outstanding 17,249,122 17,239,122
Accumulated deficit (20,067,876) (20,077,722)
------------ -----------
TOTAL STOCKHOLDERS' DEFICIENCY ( 917,727) ( 927,573)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 2,336,672 $ 1,720,004
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
SALES - net $ 1,879,774 $ 1,200,233 $3,698,756 $2,897,477
COST OF GOODS SOLD 993,674 642,571 2,210,109 1,812,772
----------- ----------- ----------- ----------
GROSS PROFIT 886,100 557,662 1,488,647 1,084,675
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 468,702 429,680 1,310,121 1,129,300
----------- ----------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS 417,398 127,982 178,526 ( 44,625)
----------- ----------- ----------- ----------
OTHER INCOME (EXPENSE)
Interest expense ( 76,137) ( 45,818) (168,680) (133,962)
Other income (expense) - 56,957 - 57,002
----------- ----------- ----------- ----------
Total other income (expense) (76,137) 11,139 ( 168,680) ( 76,960)
----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 341,261 139,121 9,846 ( 121,585)
PROVISION FOR INCOME TAXES - - - -
----------- ----------- ----------- ----------
NET INCOME (LOSS) $ 341,261 $ 139,121 $ 9,846 $ ( 121,585)
=========== =========== =========== ==========
NET INCOME (LOSS) PER SHARE -
Basic $ 0.00 $ ( 0.00) $ ( 0.00) $ ( 0.00)
=========== =========== =========== ==========
Diluted $ 0.00 $ ( 0.00) $ ( 0.00) $ ( 0.00)
=========== =========== =========== ==========
WEIGHTED AVERAGE COMMON EQUIVALENT
SHARES OUTSTANDING -
Basic 482,273,653 477,160,096 479,847,405 471,511,359
=========== =========== =========== ===========
Diluted 482,273,653 477,160,096 479,847,405 471,511,359
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
December 31,
--------------------------
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 9,846 $(121,585)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization 269,280 98,838
Provision for doubtful accounts 27,008 61,107
Inventory reserve 151,142 (284,453)
Changes in certain assets and liabilities (Increase) decrease in:
Due from related parties ( 17,661) 64,257
Accounts receivable ( 296,910) (342,478)
Inventory ( 310,420) 542,326
Prepaid expenses and other current assets ( 69,144) 33,504
Other assets ( 5,750) 4,819
Increase (decrease) in
Due to factor 114,562 (159,747
Accounts payable and accrued expenses 720,656 566,053
Customer deposits ( 22,629) (221,186)
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 569,980 241,455
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ( 7,964) ( 10,551)
Purchase of film masters and artwork ( 214,059) (123,104)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ( 222,023) (133,655)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft ( 152,417) -
Net proceeds of financing agreement - 138,164
Proceeds (payments) of notes payable ( 28,350) ( 28,350)
Proceeds (payments) of notes payable (related party) ( 25,000) (260,440)
Proceeds from the exercise of options 62,500
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ( 205,767) ( 88,126)
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
6
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
For the Nine Months Ended
December 31,
--------------------------
2003 2002
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 142,190 19,674
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 6,900 15,642
----------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 149,090 35,316
=========== ==========
SUPPLEMENTAL INFORMATION
CASH PAID FOR:
Interest expense $ 59,477 $ 136,024
=========== ==========
Income taxes $ 4,602 $ -
=========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of series B preferred stock into common stock $ (10,000) $ (30,000)
Conversion of series B preferred stock into common stock $ 10,000 $ 30,000
For the nine months ended December 31, 2003:
On June 27, 2003, one share of the Company's Series B Preferred Stock was
converted into 7,692,308 shares of the Company's common stock at the conversion
price of $0.0013.
The accompanying notes are an integral part of these consolidated financial
statements.
7
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 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.
Interim Financial Statements
---------------------------
The accompanying consolidated financial statements include all
adjustments (consisting of only normal recurring accruals) which are,
in the opinion of management, necessary for a fair presentation of the
results of operations for the periods presented. Interim results are
not necessarily indicative of the results to be expected for the full
year ending March 31, 2004. The consolidated financial statements
should be read in conjunction with the consolidated financial
statements included in the annual report of the Company on Form 10-KSB
for the year ended March 31, 2003.
Nature of Business
------------------
The Company is in the business of distributing and selling
videocassette/DVD programs, general merchandise, and patented toys,
through normal distribution channels throughout the United States and
through a web site. As of March 31, 2003 and 2002, 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 as follows:
1. VIDEO/DVD 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. The Company also distributes a product called
Cine-Chrome utilizing classic images of licensed properties.
8
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Nature of Business, Continued
-----------------------------
2. GENERAL MERCHANDISE
The Company, through its wholly owned subsidiary, JPI, purchases and
distributes toy products to mass merchandisers in the U.S. The Company
offers the toy products for limited sale 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 accounting
principles generally accepted in the United States of America 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 December 31, 2003, 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. Customer deposits
and credits are deferred until such time products are shipped to
customers. The Company grants certain distributors limited rights of
return and price protection on unsold products. Product revenue on
shipments to distributors that have rights of return and price
protection is recognized upon shipment by the distributor. The Company
also derives sales through consignment arrangements under which it
delivers product to the consignment customers' distribution centers
and the Company only books sales from consignment sales after such
customers delivers the actual funds from consignment sales.
Consignment with customers are included in inventory.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
9
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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, 2003
and March 31, 2003, with financial institutions subject to a credit
risk beyond the insured amount.
Inventory
---------
Inventory is stated at the lower of cost or market utilizing the
first-in, first-out method. Inventory consists primarily of
videocassettes, general merchandise, patented toys, furniture, and
Cine-Chrome gift cards.
Property and Equipment
----------------------
Property and equipment is presented at historical cost less
accumulated depreciation. Depreciation is computed utilizing the
straight-line method for all furniture, fixtures and equipment over a
five-year period, which represents the estimated useful lives of the
respective assets. Leasehold improvements are being amortized over the
lesser of their estimated useful lives or the term of the lease.
Film Masters and Artwork
--------------------------
The cost of film masters and related artwork is capitalized and
amortized using the straight-line method over a three-year period.
Film masters consist of original "masters", which are purchased for
the purpose of reproducing videocassettes that are sold to customers.
The Company estimates that the approximate useful life of the film
masters and artwork is 3 years.
10
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 and B convertible
preferred stock in the periods in which they occur.
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 ("APB") No. 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.
11
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation, Continued
-----------------------------------
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 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.
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.
Segment Disclosure
------------------
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.
12
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
--------------------------------
On June 29, 2001, SFAS No. 141, "Business Combinations," was approved
by the Financial Accounting Standards Board ("FASB"). SFAS No. 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 April 1, 2002, and
its impact, if any, is not expected to be material, on its 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 April
1, 2002, and its impact on its financial position or results of
operations, if any, is not expected to be material.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligation." SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, and will require companies to record a
liability for asset retirement obligations in the period in which they
are incurred, which typically could be upon completion or shortly
thereafter. The FASB decided to limit the scope to legal obligations
and the liability will be recorded at fair value. The effect of
adoption of this standard on the Company's results of operations and
financial positions is being evaluated.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. It
provides a single accounting model for long-lived assets to be
disposed of and replaces SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The
effect of adoption of this standard on the Company's results of
operations and financial positions is being evaluated.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146
requires that a liability for costs associated with an exit or
13
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements, Continued
------------------------------------------
disposal activity be recognized and measured initially at fair value
only when the liability is incurred, rather than at the date of
commitment to an exit or disposal plan. SFAS 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. The
Company does not expect that the adoption of SFAS 146 will have a
material impact on the Company's financial position or results of
operations, although SFAS 146 may impact the timing of recognition of
costs associated with future restructuring, exit or disposal
activities.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123." SFAS 148 amends Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures both in
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method
used on reported results. The Company has included the disclosures
required by SFAS 148 in Note 1 - "The Company and Summary of
Significant Accounting Policies" and Note 10 - "Stockholders' Equity."
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees. It also clarifies that at the
time a company issues a guarantee, the company must recognize an
initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee. However, the provisions
related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations does not apply to
product warranties or to guarantees accounted for as derivatives. The
initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The Company has not yet determined the effect of
adopting FIN 45 on its results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
"Consolidation of Variable Interest Entities." Until this
interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity
through voting interests. FIN 46 requires a variable interest entity,
as defined, to be consolidated by a company if that company is subject
14
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements, Continued
------------------------------------------
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns. Management is currently evaluating the effect of adopting FIN
46 on its results of operations and financial position.
In November 2002, the Emerging Issues Task Force reached a consensus
on Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple
Deliverables." EITF 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of EITF
00-21 will apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company does not believe
the adoption of EITF 00-21 will have a material impact on its
financial position or results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 00-21, addressing how to account for arrangements
that involve the delivery or performance of multiple products,
services and/or rights to use assets. Revenue arrangements with
multiple deliverables are divided into separate units of accounting if
the deliverables in the arrangement meet the following criteria: (1)
the delivered item has value to the customer on a standalone basis;
(2) there is objective and reliable evidence of the fair value of
undelivered items; and (3) delivery of any undelivered item is
probable. Arrangement consideration should be allocated among the
separate units of accounting based on their relative fair values, with
the amount allocated to the delivered item being limited to the amount
that is not contingent on the delivery of additional items or meeting
other specified performance conditions. The final consensus is
applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. The provisions of this consensus are not expected
to have a significant effect on the Company's results of operations or
financial position.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities", which amends SFAS
133 for certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149: (1) clarifies under what circumstances
a contract with an initial net investment meets the characteristic of
a derivative, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," and (4) amends certain other
existing pronouncements. This Statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In addition, most
provisions of SFAS 149 are to be applied prospectively. Management
does not expect the adoption of SFAS 149 to have a material impact on
the Company's financial position, cash flows or results of operations.
15
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements, Continued
-------------------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS 150"). SFAS 150 changes the accounting for certain
financial instruments that under previous guidance issuers could
account for as equity. It requires that those instruments be
classified as liabilities in balance sheets. The guidance in SFAS 150
is generally effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective on July 1,
2003. Management does not expect the adoption of SFAS 150 to have a
material impact on the Company's financial position, cash flows 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.
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 and mitigate the effects of the uncertainties.
The Company has implemented a plan to increase its overall market
share of core business and its general merchandise line products, and
to expand into the contract replication, duplication and packaging
business. The Company has implemented the following goals and
strategies to achieve its plan:
o Attain leadership in the market segment of high quality budget
priced distribution of videocassettes and DVD titles.
16
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 2 - GOING CONCERN, Continued
o Expand the Company's association with firms in China to source
and handle QA functions for its general merchandise line of
products and market a wide selection of high quality, low price
general merchandise and sundry items from China.
o Re-establish sales to club type stores with the Company's new
general merchandise line of products.
o Utilize the Company's relationship with mass merchandisers to
introduce and market its general merchandise line of products.
o Continue to seek out additional financing sources to support the
expected growth in the Company's general merchandise line of
products.
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 Continue to acquire new videocassette and DVD titles for
distribution.
o Expand the Company's internet e-Commerce.
The Company believes it has adequate cash resources to sustain its
operations through the fourth quarter of fiscal 2004, 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. The principal
objective of the Company is to complete the implementation of the
above strategies during remaining months of fiscal 2004. 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, 2003 and March 31, 2003, net of
allowance for doubtful accounts were $466,328 and $196,426
respectively. Substantially all of the accounts receivable as of
December 31, 2003 and March 2003 have been factored and pledged as
collateral under a factoring agreement.
The Company reviews accounts receivable periodically during the year
for collectability. An allowance for bad debt expense and sales
returns is established for any receivables whose collection is in
doubt or for estimated returns.
As of December 31, 2003 and March 31, 2003, the Company had an
allowance for doubtful accounts of $114,578 and $87,570, respectively.
17
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 4 - INVENTORY
Inventory consisted of the following as of:
December 31,
2003
-------------
Raw materials $ 728,469
Finished goods 674,624
-------------
$ 1,403,093
Less: valuation allowance (484,443)
-------------
Inventory, net $ 918,650
=============
Allowance
---------
An allowance has been established for inventory totaling $484,443.
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 - RELATED PARTY TRANSACTIONS
The Company has related party transactions with several officers, directors
and other related parties. The following summarizes related party
transactions.
Due from related parties:
December 31,
2003
------------
a) Loan due from - Officer $ 181,169
b) GJ Products 42,300
------------
$ 226,469
============
Due to related parties - notes payable:
December 31,
2003
------------
a) Note payable - ATRE $ 238,718
b) Convertible note payable - Jeffrey Schillen 100,000
------------
$ 338,718
============
18
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 6 - COMMITMENTS AND CONTIGENCIES
Royalty Commitments
-------------------
The Company has entered into various royalty agreements for licensing
of titles with terms of one to seven years. Certain agreements include
minimum guaranteed payments. For the three months ended December 31,
2003 and 2002, royalty expense was $18,434 and $13,236, respectively,
pursuant to these agreements. For the nine months ended December 31,
2003 and 2002, royalty expense was $27,426 and $52,854 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.
NOTE 7 - STOCKHOLDERS' DEFICIENCY
Common Stock
------------
As of December 31, 2002, the aggregate number of shares of common
stock that the Company has authority to issue is 600,000,000 shares
with no par value. As of December 31, 2003 and March 31, 2003,
489,057,359 and 481,365,051 shares were issued and outstanding.
Common Stock
------------
On June 27, 2003, one share of the Company's Series B Preferred Stock
was converted into 7,692,308 shares of the Company's common stock at
the conversion price of $0.0013.
NOTE 8 - 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 three months period ended December 31, 2003 and 2002, and
the nine months period ended December 31, 2003 and 2002, the company
operated in two principal industries:
a) Video programs and other licensed products
b) General merchandise
19
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 8 - SEGMENT INFORMATION (Continued)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Video programs and other
licensed products $ 1,877,649 $ 1,126,493 $ 3,671,765 $ 3,160,255
Merchandise 2,125 10,235 26,991 19,092
----------- ----------- ----------- -----------
$ 1,879,774 $ 1,136,728 $ 3,698,756 $ 3,179,347
=========== =========== =========== ===========
Cost Of Goods Sold:
Video programs and other
licensed products $ 1,381,936 $ 674,382 $ 2,190,561 $ 1,874,199
Merchandise 314 40,088 19,548 101,795
----------- ----------- ----------- -----------
$ 1,382,250 $ 714,470 $ 2,210,109 $ 1,975,994
=========== =========== =========== ===========
Profit (Loss) before taxes:
Video programs and other
licensed products $ 345,470 $ ( 4,826) $ 50,365 $ ( 10,321)
Merchandise ( 4,209) ( 37,454) (40,519) (136,184)
----------- ----------- ----------- -----------
$ 341,261 $ ( 42,280) $ 9,846 $ (146,505)
=========== =========== =========== ===========
Depreciation and amortization:
Video programs and other
licensed products $ 84,143 $ 37,939 $ 271,715 $ 114,203
Merchandise - - - 131
----------- ----------- ----------- -----------
$ 84,143 $ 37,939 $ 271,715 $ 114,334
=========== =========== =========== ===========
Segment assets:
Video programs and other
licensed products $ 3,905,726 $ 4,137,894 $ 3,905,726 $ 4,137,894
Merchandise (1,569,054) (1,666,431) (1,569,054) (1,666,431)
----------- ----------- ----------- -----------
$ 2,336,672 $ 2,471,463 $ 2,279,704 $ 2,471,463
=========== =========== =========== ===========
Expenditure for segment assets:
Video programs and
other licensed products $ 73,680 $ 40,887 $ 222,023 $ 153,355
Merchandise - - - -
----------- ----------- ----------- -----------
$ 73,680 $ 40,887 $ 222,023 $ 153,355
=========== =========== =========== ===========
20
Item 2: Management's Discussion and Analysis or Plan of Operations
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes for the year
ended March 31, 2003 included in its Annual Report on Form 10KSB and its Form
10QSB for period ended June 30, 2003 and September 30, 2003. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH THE NINE MONTHS ENDED DECEMBER
31, 2002:
Results of Operations
- ---------------------
The Company's net income for the nine months ended December 31, 2003 was
approximately $10,000 as compared to a net loss of approximately $122,000 for
the same period last year. The primary reason for the net income at December 31,
2003, was the Company's operating income of approximately $179,000 offset by
interest expense of approximately $169,000.
The Company's operating income for the nine months ended December 31, 2003 was
approximately $179,000 as compared to an operating loss of approximately $44,000
for the same period last year. The increase in the Company's operating income of
approximately $223,000 when compared to an operating loss of approximately
$45,000 for the same period a year earlier arose primarily from increased
operating expenses of approximately $181,000 offset by a increase in gross
profit of approximately $404,000.
The Company's sales for the nine months ended December 31, 2003 and 2002, were
approximately $3,700,000 and $2,897,000 respectively. The Company's sales
increased, by approximately $803,000 from the same period a year earlier with
increases in DVD product sales of approximately $1,685,000 offset by decreases
in videocassette and general merchandise product sales of approximately
$882,000. The lower Videocassette product sales when compared to the same period
a year earlier was primarily attributable to a product mix shift from
videocassettes to DVD product. We expect our sales to improve in fiscal year
ending March 31, 2004 resulting from increased sales of new DVD products. Sales
of the Company's products are generally seasonal resulting in increased sales
starting in the third quarter of the fiscal year.
Cost of sales for the nine months ended December, 2003 and 2002 were
approximately $2,210,000 and $1,813,000 or 60% and 63% of sales, respectively.
The increase in cost of goods of approximately $397,000 was primarily the result
of higher sales volume realized from our DVD product. The decrease in the cost
of sales as a percentage to sales of approximately 3% when compared to the same
period a year earlier, was primarily the result of increased DVD product having
average lower costs.
Gross profit for the nine months ended December 31, 2003 and 2002 was
approximately $1,489,000 and $1,085,000, or 40% and 37% of sales, respectively.
The higher gross margin of approximately $404,000 was primarily the result of
increased sales volume. The increase in the gross profit percentage when
compared to sales of 3% was primarily the result of the product mix shift from
our videocassette product sales to DVD product.
21
Selling, general and administrative expenses for the nine months ended December
31, 2003 and 2002 were approximately $1,310,000 and $1,129,000, respectively.
The, increase of approximately $181,000 was the result of increases in general
administrative and selling expenses of approximately $79,000 and $102,000,
respectively.
General administrative expenses for the nine months ended December 31, 2003 and
2002 were approximately $773,000 and $694,000, respectively. The increase in
general administrative expenses of approximately $79,000 was primarily the
result of higher salaries and professional fees, and partially offset by lower
consulting expense, accounting and settlement fees.
Selling expenses for the nine months ended December 31, 2003 and 2002 were
approximately $537,000 and $435,000, respectively. The increase in selling
expenses of approximately $102,000 was attributable mainly to higher expense
levels in salaries, outgoing freight costs and sales promotion expense,
partially offset by lower royalty expense.
Interest expense for the nine months ended December 31, 2003 and 2002 was
approximately $169,000 and $134,000 respectively. The decrease in interest
expense of approximately $35,000 was the result of lower levels of borrowings.
As of December 31, 2003, the outstanding debt of the Company was approximately
$605,000 all of which is classified as current.
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 2002:
Results of Operations
- ---------------------
The Company's net income for the three months ended December 31, 2003 was
approximately $341,000 as compared to a net income of approximately $139,000 for
the same period last year. The primary reason for the net profit at December 31,
2003, was the Company's operating income of approximately $417,000 and partially
offset by other income and expense of approximately $76,000.
The Company's operating income for the three months ended December 31, 2003 was
approximately $417,000 as compared to an operating income of approximately
$128,000 for the same period last year. The increase in the Company's operating
income of approximately $289,000 when compared to an operating loss for the same
period a year earlier of $128,000 arose from the increase in gross profit of
approximately $328,000, partially offset by an increase in operating expenses of
approximately $39,000.
The Company's sales for the three months ended December 31, 2003 and 2002, were
approximately $1,880,000 and $1,200,000 respectively. The Company's sales
increased by approximately $680,000 from the same period a year earlier with
increased DVD product and general merchandise sales of approximately $925,000,
and partially offset by decreases in videocassette product sales of
approximately $245,000. The lower videocassette product sales when compared to
the same period a year earlier was primarily attributable to a product mix shift
of sales to our DVD product. The Company did not have significant sales for
general merchandise products for the three months ended December 31, 2003.
22
Cost of sales for the three months ended December 31, 2003 and 2002 were
approximately $994,000 and $643,000 or 53% and 54% of sales, respectively. The
increase in cost of goods of approximately $351,000 was mainly the result of
higher sales volume realized from our DVD products having lower unit costs. The
decrease in the cost of sales as a percentage to sales of approximately 1% when
compared to the same period a year earlier, was primarily the result of selling
DVD product having lower unit costs.
Gross profit for the three months ended December 31, 2003 and 2002 was
approximately $886,000 and $558,000, or 47% and 46% of sales, respectively. The
higher gross margin of approximately $328,000 was primarily the result of
increase sales of higher margin DVD product resulting in an increase of 1% as a
percentage of sales.
Selling, general and administrative expenses for the three months ended December
31, 2003 and 2002 were approximately $469,000 and $430,00, respectively.
Increases in selling expenses of approximately $67,000 were partially offset by
decreases in general administrative expenses of approximately $28,000.
General administrative expenses for the three months ended December 31, 2003 and
2002 were approximately $226,000 and $254,000, respectively. The decrease in
general administrative expenses of approximately $28,000 was primarily the
result of lower levels of consulting expense, accounting fees, partially offset
by higher salaries.
Selling expenses for the three months ended December 31, 2003 and 2002 were
approximately $243,000 and $176,000, respectively. The increase in selling
expenses of approximately $67,000 was attributable mainly to higher expense
levels in salaries, commission expense, and outgoing freight costs.
Interest expense for the three months ended December 31, 2003 and 2002 was
approximately $76,000 and $46,000 respectively. The increase in interest expense
of approximately $30,000 was primarily the result of higher levels of
borrowings.
Other income was lower by $57,000 when compared to the same period a year
earlier. During the three months ended June 30, 2002, the Company recorded as
income, forgiveness of debt of approximately $57,000.
The Company's auditors issued a going concern report for the year ended March
31, 2003. There can be no assurance that management's plans to reduce operating
losses will continue or the Company's efforts to obtain additional financing
will be successful.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2003 the Company had assets of $2,337,000 compared to $1,720,000
on March 31, 2003. The Company had a total stockholder's deficiency of $918,000
on December 31, 2003, compared to a deficiency of $928,000 on March 31, 2003, an
increase of $46,585. The decrease in stockholder's deficiency was the result of
recording the net loss of approximately $10,000 for the nine months ended
December 31, 2003.
23
As of December 31, 2003 the Company's working capital deficit decreased by
approximately $24,000 from a working capital deficit of approximately $1,445,000
at March 31, 2003, to a working capital deficit of approximately, $1,421,000 at
December 31, 2003. The decrease in the working capital deficit was the
attributable primarily to increases in accounts payable, accrued expenses and
amount due factor of approximately $835,000 and decreases in bank overdraft,
notes payable and customer deposit totaling approximately $200,000, which were
offset by increases in cash, accounts receivable, inventory due related party
and prepaid expense totaling approximately $659,000.
As of the filing of this Form 10-QSB, we had not yet obtained the effectiveness
of a registration statement covering the resale of common stock upon conversion
of the Series "B" Convertible Preferred Shares as required under the Certificate
of Designations, the Securities Purchase Agreement pursuant to which such
securities were sold, and related registration rights agreements ("Agreements")
and are in default under certain provisions of the Agreements entitling holders
of our Series B Preferred Shares, under certain circumstances, to be paid
liquidated damages equal to 1% per month of the liquidated value of such shares
(currently $8,250 per month); such liquidated damages have not been paid, and as
of December 31, 2003, aggregated approximately $167,000. This is in addition to
a daily late payment which by the terms of the Agreements becomes payable if the
Company fails to convert Series B Preferred Shares into Common Stock within
seven business days after receipt of a conversion notice and the certificate(s)
for the Series B Preferred Shares to be converted.) Also at the option of at
least two-thirds of the holders of our outstanding Series B Preferred Shares,
such holders may have the right to require us to redeem such shares which as of
December 31, 2003, would require us to pay an aggregate of approximately
$1,280,000 upon such redemption, or the holders who deliver a conversion notice
may be entitled to the redemption of their shares at a redemption price equal to
120% of the liquidation value of such shares. As of the date of the filing of
this Form 10- QSB, we do not have sufficient cash to redeem all of such shares
or pay the penalties that have accrued. Also, we have insufficient authorized
shares of common stock available for issuance upon conversion of the Series B
Preferred Shares. Also, certain holders of such shares of preferred stock may be
able to sell the shares of common stock issuable upon conversion pursuant to
Rule 144 without registration under the Securities Act. The sale of the shares
upon conversion of the Series B Preferred Shares and outstanding warrants may
adversely affect the market price of our common stock. The issuance of shares
upon conversion of the Series "B" Convertible Preferred Shares and exercise of
outstanding warrants will also cause immediate and substantial dilution to our
existing stockholders and may make it difficult for us to obtain additional
capital.
The Company may be unable to effect any equity financing until it has increased
its authorized shares of common stock and/or effected a restructuring of its
equity capital, such as by means of a stock split, combination or similar
restructuring and a buy back of all the outstanding preferred stock. The Company
is currently contemplating a restructuring of the terms and conditions
underlying the Agreements and plans to negotiate with its Series B Preferred
shareholders to mitigate any existing defaults of our obligations to the Series
B Preferred shareholders and to minimize the amount of dilution by negotiating
the terms of the Series B Preferred Shares. There is no assurance that the
Company will be successful in such negotiations.
24
Operations
- ----------
Cash flows provided by operating activities was approximately $570,000 during
the nine months period ended December 31, 2003 compared to cash flows provided
by operating activities of approximately $241,000 during the nine months period
ended December 31, 2002. Cash provided by operating activities was primarily
attributable to increases in accounts payable and accrued expenses and the
Company's net income loss offset by increases in accounts receivable and
inventory. deposits.
The Company has also been experiencing difficulties in paying its vendors on a
timely basis. These factors create uncertainty as to whether the Company can
continue as a going concern.
Investing
- ----------
For the nine months ended December 31, 2003 and 2002, investments in masters and
artwork were approximately $214,000 and $123,000, respectively. Management
continues to seek to acquire new titles to enhance its product lines.
Financing
- -----------
Cash flows used for financing activities was approximately $206,000 during the
nine months period ended December 31, 2003 compared to cash flows used in
financing activities of approximately $88,000 during the nine months period
ended December 31, 2002.
Impact of Inflation
- -------------------
The Company does not believe that inflation had an impact on sales or income
during the past several years. Increases in supplies or other operating costs
could adversely affect the Company's operations; however, the Company believes
it could increase prices to offset increases in costs of goods sold or other
operating costs.
Forward Looking Statements
- --------------------------
Forward looking statements are within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Stockholders are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
ability of us to implement our new plan to attain our primary goals as discussed
above under "Operations". Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements contained in the report will prove to be
accurate.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
25
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, accrued expenses, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of the Company's financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources,
primarily allowance for doubtful accounts receivables, accruals for other costs,
and the classification of net operating loss and tax credit carry forwards
between current and long-term assets. These accounting policies are described at
relevant sections in this discussion and analysis and in the notes to the
consolidated financial statements included in our Annual Report on Form 10-KSB
for the fiscal year ended March 31, 2002.
Item 3: Controls and Procedures
Our Co-Chief Executive Officer and Chief Financial Officer (the "Certifying
Officers") are responsible for establishing and maintaining disclosure controls
and procedures for the Company.
The Certifying Officers have designed such disclosure controls and procedures to
ensure that material information is made known to them, particularly during the
period in which this report was prepared.
The Certifying Officers have evaluated the effectiveness of the Company's
disclosure controls and procedures as of the end of the period covered by this
report and believe that the Company's disclosure controls and procedures are
effective based on the required evaluation. There have been no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
26
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
None.
27
SIGNATURES
In accordance with Section 13 or 15(A) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
DIAMOND ENTERTAINMENT CORPORATION
Dated: March 26, 2004 By: /s/ James K.T. Lu
----------------------------------------
James K.T. Lu
President and Co-Chief
Executive Officer
Dated: March 26, 2004 By: /s/ Fred U. Odaka
---------------------------------------
Fred U. Odaka
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
28