UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For transition period from _______________ to _______________
Commission File Number: 0-17953
DIAMOND ENTERTAINMENT CORPORATION
(Exact Name of Small Business Issuer 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)
-------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
As of June 30, 2004, there were 597,409,872 shares of common stock, no par
value, outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2004 [Unaudited]
and March 31, 2004.................................................... 3-4
Condensed Consolidated Statements of Operations for the three months
ended June 30, 2004 and 2003 [Unaudited].............................. 5
Condensed Consolidated Statements of Cash Flows for three months ended
June 30, 2004 and 2003 [Unaudited].................................... 6-7
Notes to Condensed Consolidated Financial Statements [Unaudited]...... 8-22
Item 2: Management's Discussion and Analysis or
Plan of Operations.............................................. 23-29
Item 3: Controls and Procedures......................................... 29
Part II. Other Information
Item 1: Legal Proceedings..... ......................................... 29
Item 2: Changes in Securities and Small Business Issuer
Purchases of Equity Securities ................................. 29
Item 3: Defaults Upon Senior Securities................................. 31
Item 4: Submission of Matters to a Vote of Security Holders............. 31
Item 5: Other Information............................................... 31
Item 6: Exhibits and Reports on Form 8-K................................ 31
Signatures............................................................... 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2004 2004
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 63,164 $ 109,295
Accounts receivable, net of allowance for
doubtful accounts of $88,462 and $79,462 522,614 878,588
Inventory 1,364,082 946,925
Due from related parties 162,862 161,111
Prepaid expenses and other current assets 100,146 65,933
------------ -----------
Total current assets 2,212,868 2,161,852
PROPERTY AND EQUIPMENT, less
accumulated depreciation of $778,249 and $762,375 131,200 142,018
FILM MASTERS AND ARTWORK, less accumulated
amortization of $4,369,025 and $4,321,951 419,206 346,883
INVESTMENT IN EQUITY SUBSIDIARY - -
OTHER ASSETS 106,296 39,456
------------ -----------
TOTAL ASSETS $ 2,869,570 $ 2,690,209
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30, March 31,
2004 2004
------------ -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 268,863 $ 234,365
Accounts payable and accrued expenses 2,225,459 1,986,701
Due to factor 412,003 707,517
Notes payable - current portion 18,900 28,350
Due to related parties - notes payable 423,374 372,374
Customer Deposits 15,722 133,330
------------ -----------
Total current liabilities 3,364,321 3,462,637
------------ -----------
TOTAL LIABILITIES 3,364,321 3,462,637
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 5) - -
STOCKHOLDERS' DEFICIENCY
Convertible preferred stock, no par value; 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; 0 and 83 issued
and outstanding - 1,101,837
Common stock, no par value; 600,000,000 shares authorized;
597,409,872 and 489,057,359 issued and outstanding 18,584,485 17,319,122
Accumulated deficit (19,878,426) (19,992,577)
------------ -----------
TOTAL STOCKHOLDERS' DEFICIENCY ( 494,751) ( 772,428)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 2,869,570 $ 2,690,209
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
June 30,
--------------------------------
2004 2003
------------- ---------------
SALES - net $ 1,412,644 $ 584,354
COST OF GOODS SOLD 746,664 449,523
------------- ---------------
GROSS PROFIT 665,980 134,831
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 491,746 330,146
-------------- --------------
PROFIT/(LOSS) FROM OPERATIONS 174,234 ( 195,315)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest expense ( 74,469) ( 53,034)
Interest income 2,059 2,373
Other income (expense) 13,327 ( 17,550)
-------------- ---------------
Total other income (expense) ( 59,083) ( 68,211)
-------------- ---------------
PROFIT/(LOSS)BEFORE PROVISION FOR INCOME TAXES 115,151 ( 263,526)
PROVISION FOR INCOME TAXES (1,000) -
------------- ---------------
NET PROFIT/(LOSS) $ 114,151 $ ( 263,526)
============== ===============
NET LOSS PER SHARE
Basic $ ( 0.00) $ ( 0.00)
============= ===============
Diluted $ ( 0.00) $ ( 0.00)
============= ===============
WEIGHTED AVERAGE COMMON EQUIVALENT SHARES OUTSTANDING
Basic 581,179,815 474,994,910
============= ===============
Diluted 581,179,815 474,994,910
============= ===============
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 Three Months Ended
June 30,
---------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit/loss $ 114,151 $( 263,526)
Adjustments to reconcile net profit/loss to net cash
used in operating activities:
Depreciation and amortization 62,940 93,578
Provision for doubtful accounts 9,000 8,988
Inventory reserve 30,000 ( 92,650)
Changes in certain assets and liabilities (Increase) decrease in:
Due from related party ( 1,751) ( 9,630)
Accounts receivable 346,974 ( 164,604)
Inventory ( 447,157) 146,899
Prepaid expenses and other current assets ( 34,213) 1,487
Other assets ( 66,840) -
Increase (decrease)
Due to factor ( 295,514) 44,245
Accounts payable and accrued expenses 238,758 90,384
Customer deposits ( 117,608) 10,371
Issuance of Common Stock for Consulting 35,000 -
Due From Series B Preferred Shareholder ( 1,474) -
------------ -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ( 127,734)) (134,458)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ( 5,056) -
Purchase of film masters and artwork ( 119,389) ( 57,370)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES ( 124,445) ( 57,370)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft 34,498 26,373
Proceeds (payments) of notes payable ( 9,450) ( 6,300)
Proceeds (payments) of notes payable (related party) 51,000 168,200
Proceeds from Sale of Common Stock 130,000 -
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 206,048 188,273
----------- -----------
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 Three Months Ended
June 30,
---------------------------
2004 2003
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 46,131) ( 3,555)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 109,295 6,900
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 63,164 $ 3,345
=========== ===========
SUPPLEMENTAL INFORMATION
CASH PAID FOR:
Interest expense $ 78,447 $ 16,525
=========== ===========
Income taxes $ 16,000 $ 602
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Series B preferred stock into common stock $ 1,100,364 $ 10,000
Issuance of Common Stock for Consultant Fees Owed $ 35,000 $ -
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
JUNE 30, 2004
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) Saledirect123.com ("Sales Direct") formerly known as 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.
4) E-DMEC Corporation ("e-DMEC") incorporated under the laws of the
state of California on 4/30/85.
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, 2005. 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, 2004.
Nature of Business
------------------
The Company is in the business of distributing and selling
videocassette/DVD programs, and general merchandise, through normal
distribution channels throughout the United States. As of June 30,2004
and 2003, 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
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.
8
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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 its general merchandise products to mass merchandisers in
the U.S. The Company offers its products for limited sale periods and
as demand for products change, the Company switches to newer and more
popular products. The company did not record any sales of its general
merchandise during the three months period ended June 30,2004.
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 June 30, 2004, 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 deliver the actual funds from consignment sales.
Consignments 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
JUNE 30, 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of Credit Risk
-----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and
accounts receivable arising from Company's normal business activities.
The Company routinely assesses the financial strength of its customers
and, based upon factors surrounding the credit risk, establishes an
allowance for uncollectible accounts and, as a consequence, believes
that its accounts receivable credit risk exposure beyond such
allowance is limited. The Company places its cash with high quality
financial institutions and at times may exceed the FDIC $100,000
insurance limit. The Company had no deposits as of June 30, 2004 and
March 31, 2004, 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 and DVD.
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
JUNE 30, 2004
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 is 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
JUNE 30, 2004
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
JUNE 30, 2004
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, are 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
13
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements, Continued
------------------------------------------
requires that a liability for costs associated with an exit or
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.
14
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements, Continued
------------------------------------------
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
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
15
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements, Continued
------------------------------------------
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.
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.
16
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - GOING CONCERN (Continued)
The Company has implemented plans to increase its overall market share
of core business and has implemented the following goals and
strategies to achieve its plan:
o Increase its sale of DVD titles by seeking new chain stores
and mass merchandiser customers.
o Attain leadership in the market segment of high quality budget
priced distribution of DVD titles.
o Continue to seek out additional financing sources to support
the expected growth in the Company's DVD video product line.
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.
The Company believes it can to sustain its operations through the
third quarter of fiscal 2005, when it expects to generate a positive
cash flow. The Company is continuing to negotiate with several
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 2005. Although the Company believes that the outlook
is favorable, there can be no assurance that market conditions will
continue in a direction favorable to the Company.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable as of June 30, 2004 and March 31, 2004, net of
allowance for doubtful accounts were $522,614 and $878,588
respectively. Substantially all of the accounts receivable as of June
30, 2004 and March 2004 have been factored and pledged as collateral
under a factoring agreement.
17
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 3 - ACCOUNTS RECEIVABLE (Continued)
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 June 30, 2004 and March 31, 2004, the Company had an allowance
for doubtful accounts of $88,462 and $79,462, respectively.
NOTE 4 - INVENTORY
Inventory consisted of the following as of:
June 30,
2004
-------------
Raw materials $ 842,339
Finished goods 780,222
-------------
1,622,561
Less: valuation allowance ( 258,479)
-------------
Inventory, net $ 1,364,082
==============
Allowance
---------
An allowance has been established for inventory totaling $258,479.
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:
June 30,
2004
------------
a) Loan due from - Officer $ 117,562
b) GJ Products 45,300
------------
$ 162,862
============
18
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 5 - RELATED PARTY TRANSACTIONS (Continued)
Due to related parties - notes payable:
June 30,
2004
------------
a) Note payable - ATRE $ 373,374
b) Convertible note payable - Jeffrey Schillen 50,000
------------
$ 423,374
============
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 June 30, 2004
and 2003, royalty expense was $631 and $3,743, respectively, pursuant
to these agreements.
Video Agreements
----------------
The Company has entered into various agreements to manufacture,
duplicate, and replicate and distribute videos and DVD programs.
Commissions are paid based upon the number of videos sold.
NOTE 7 - STOCKHOLDERS' DEFICIENCY
Common Stock
------------
As of June 30, 2004, 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 June 30, 2004 and March 31, 2004, 597,409,872 and
489,057,359 shares were issued and outstanding.
For the three months ended June 30, 2004, the Company had the
following significant issuance of its common stock:
On April 15, 2004, the Company concluded several transactions
that retired all the outstanding shares of the Company's Series B
Convertible Preferred Shares, noted as follows:
19
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 7 - STOCKHOLDERS' DEFICIENCY (Continued)
Three holders of record of the Company's Series B Convertible
Preferred Shares representing an aggregate of 25 Series B
Convertible Preferred Shares entered into a Letter Agreement to
Convert Preferred Shares, whereby such holders of the Series B
Convertible Preferred Shares agreed to convert their respective
shares and any liquidated damages and accrued interest in the
aggregate amount of approximately $50,000 into shares of the
Company's common stock at $0.01 per share. The holders further
agreed to convert their portion of any liquidated damages and
accrued interest of approximately $50,000 when the stockholders
of the Company approve the increase in the authorized shares of
the Company. As part of this letter agreement such holders
canceled and returned to the Company warrants to purchase
2,250,000 shares of the Company's common stock at a price of $.02
per share issued to them in conjunction with the Series B
Convertible Preferred Shares.
Four holders (the "Sellers") of record of the Company's Series B
Convertible Preferred Shares representing an aggregate of 57 1/2
Series B Convertible Preferred Shares entered into a Securities
Purchase Agreement to sell their entire respective portion of the
Company's Series B Convertible Preferred Shares to two accredited
investors (the "Buyers"). Under the terms of the Securities
Purchase Agreement, the Buyers agreed to convert their respective
shares of the Company's Series B Convertible Preferred Shares
into the shares of the Company's common stock at $0.01 per share.
The Sellers canceled and returned to the Company 8,700,000
warrants to purchase the Company's common stock at price of $0.02
shares in conjunction with the conversion of the Series B
Convertible Preferred Shares on the closing date of such purchase
agreement, April 15, 2004. The Sellers further agreed to convert
liquidated damages and accrued interest in the aggregate amount
of approximately $181,000 into shares of the Company's common
stock at $0.01 per share as soon as the stockholders of the
Company approve the increase in the authorized shares of the
Company.
As a result of these conversion transactions, all of the
Company's outstanding Series B Convertible Preferred Shares,
which amounted to 82.5 shares, were converted into approximately
82,353,000 shares of Common Stock at an exercise price of $.01
per share.
20
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 7 - STOCKHOLDERS' DEFICIENCY (Continued)
On April 1, 2004, the Company sold an aggregate of 22,500,000
shares of the Company's common stock at a price of $0.01 per
share pursuant to subscription agreements dated April 1, 2004.
The purchasers were Jeffrey I. Schillen, James Lu and Longview
Fund LP, who purchased 2,500,000, 2,500,000 and 17,500,000
shares, respectively.
On April 15, 2004, the Company issued an aggregate of 3,500,000
shares of the Company's common stock to two of the Company's
consultants for consulting fees owed to the consultants in the
aggregate amount of $35,000 pursuant to consulting agreements
entered into on December 3, 2001.
The Company issued the foregoing securities in reliance upon the
exemption from a registration requirement set forth in Section
4(2) of the Securities Act of 1933.
21
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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 the three months period ended June 30, 2004, the Company had
no activity in its general merchandise segment of its business. During three
months period ended June 30, 2003 the Company operated in two principal
industries
a) Video programs and other licensed programs
b) General merchandise
Three Months Ended
June 30,
-------------------------------
2004 2003
-------------- --------------
Revenues:
Video programs and other licensed products $ 1,412,266 $ 561,681
Merchandise - 22,673
-------------- --------------
$ 1,412,266 $ 584,354
============== ==============
Cost Of Goods Sold:
Video programs and other licensed products $ 746,664 $ 431,934
Merchandise - 17,589
-------------- --------------
746,664 449,523
============== ==============
Profit(Loss) before taxes:
Video programs and other licensed products $ 115,326 $ (265,333)
Merchandise ( 175) 1,807
--------------- --------------
$ 115,151 $ ( 263,526)
=============== ==============
Depreciation and amortization:
Video programs and other licensed products $ 62,940 $ 94,684
Merchandise - -
-------------- --------------
$ 62,940 $ 94,684
============== ==============
Segment assets:
Video programs and other licensed products $ 4,066,157 $ 3,222,335
Merchandise (1,196,587) (1,502,331)
--------------- --------------
$ 2,869,570 $ 1,720,004
============== ==============
Expenditure for segment assets:
Video programs and other licensed products $ 124,445 $ 57,370
Merchandise - -
-------------- --------------
$ 124,445 $ 57,370
============== ==============
22
Item 2: Management's Discussion and Analysis or Plan of Operations
This Form 10-QSB report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," "intend," "will," "plan,"
"should," "seek" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such statements
reflect the current view of the Company regarding future events and are subject
to certain risks, uncertainties and assumptions, including the risks and
uncertainties noted. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended. In each instance, forward-looking information
should be considered in light of the accompanying meaningful cautionary
statements herein.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes included in
its Annual Report on Form 10KSB for the year ended March 31, 2004. 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.
23
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003:
Results of Operations
- ---------------------
The following table sets forth certain summary financial information for the
Company for the three months ended June 30, 2004 and 2003 (derived from our
Condensed Financial Statements (Unaudited) included in Item 1 of this report:
(In Thousands)
For the Three Months Ended
June 30,
--------------------------
2004 2003
---------- ------------
SALES - net $ 1,413 $ 584
COST OF GOODS SOLD 747 449
---------- ------------
GROSS PROFIT 666 135
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 492 330
----------- -----------
PROFIT/(LOSS) FROM OPERATIONS 174 ( 195)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense ( 74) ( 53)
Interest income 2 2
Other income (expense) 13 ( 18)
----------- ------------
Total other income (expense) ( 59) ( 69)
----------- ------------
PROFIT/(LOSS) BEFORE PROVISION FOR INCOME TAXES 115 ( 264)
PROVISION FOR INCOME TAXES (1) -
---------- ------------
NET PROFIT/(LOSS) $ 114 $ ( 264)
=========== ============
EXECUTIVE SUMMARY
During three months period ended June 30, 2004 and 2003, Diamond Entertainment
Corporation d/b/a e-DMEC (the "Company" or "DMEC") operated in two principal
industries, a) distribution and sales of DVD/video programs and other licensed
programs and b) distribution of certain general merchandise.
DMEC markets and sells a variety of videocassette and DVD (Digital Video Disc)
titles to the budget home video and DVD market. 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
24
our video programs to national and regional mass merchandisers, department
stores, drug stores, supermarkets and other similar retail outlets. Our video
and DVD products are also offered by consignment arrangements through one large
mail order catalog company and one retail chain. Videocassette titles are
duplicated in-house and we sub-contract out to U.S. based vendors all
replication of our DVD programs.
We are continuing to acquire new licensed video and DVD titles and upgrading the
quality of packaging and pre-printed materials in order to enhance our products.
During the three months ended June 30, 2004 we saw a major industry shift from
videocassette sales to DVD programs sales compared to the same period in 2003,
whereby DVD and videocassette sales represented 94% and 6% of total revenues,
respectively. For the period ended June 30, 2003, DVD and videocassette sales
were 65% and 32% of total sales, respectively.
During the three months ended June 30, 2004, the higher demand for our DVD
programs from our major customers, was the primary reason for our increase in
sales of approximately 142% when compared to the same period a year earlier.
Management believes the sales shift from Video products to its DVD product line
will continue and increase the overall sales for the Company during the
remaining months of fiscal year 2005, however, there is no assurance that this
trend will continue nor will the Company be able to maintain its current gross
profit margins due to increased competition.
The Company's wholly owned subsidiary Jewel Products International, Inc.
("JPI"). JPI is in the business of distribution of certain general merchandise.
During the three months period ended June 30, 2004, JPI did not record any sales
of general merchandise products and during the same period a year earlier JPI
had minimal sales.
NET SALES
Net sales for the Company was approximately $1,413,000 for the quarter ended
June 30, 2004 as compared to approximately $584,000 for the quarter ended June
30, 2003, representing an increase of 142%. Of total net sales, DVD program net
sales were approximately $1,319,000 for the quarter ended June 30, 2004, as
compared to approximately $379,000 for the quarter ended June 30, 2003,
representing an increase of approximately $248%. Videocassette net sales, of
total sales, was approximately $92,000 for the quarter ended June 30, 2004, as
compared to approximately $185,000 for the quarter ended June 30, 2003, a
decrease of approximately 50%. The industry shift from videocassette programs to
DVD programs together with our expanded DVD library were the primary factors
contributing to the increase DVD sales and lower videocassette sales. Management
expects higher DVD program sales to continue in the remaining quarters of fiscal
2005.
GROSS PROFIT
Gross profit was approximately $666,000 for the three months ended June 30, 2004
as compared to approximately $135,000 for the three months ended June 30, 2003.
The higher gross margin of approximately $531,000 was primarily the result of
increased DVD program sales offset by lower videocassette sales. For the three
months ended June 30, 2004 and 2003 the gross profit as a percentage of sales
was 47% and 23%, respectively. This increase of the gross profit percentage of
24%, was primarily the of result higher margins realized from our DVD programs
resulting from the economy of scale realized from higher sales volume together
with product mix of videocassette sales having higher margins.
25
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses for the three months ended June 30, 2004 and 2003 were
approximately $239,000 and $101,000, respectively. The increase in selling
expenses of approximately $128,000 was primarily caused by the increased sales
level resulting in higher expense levels in commission, advertising, sales
promotion, freight out expense and sales consulting fees.
General and administrative expenses for the three months ended June 30, 2004 and
2003 were approximately $252,000 and $229,000, respectively. The increase in
general administrative expenses of approximately $23,000 was primarily the
result of higher salaries, travel expenses and consulting expenses offset by
lower accounting fees.
OTHER INCOME AND EXPENSE
Interest expense for the three months ended June 30, 2004 and 2003 was
approximately $74,000 and $53,000 respectively. The increase in interest expense
of approximately $21,000 was primarily the result of increased interest from our
factoring arrangement and other short term loans of approximately $33,000 and
$10,000 respectively, offset by lower interest of approximately $22,000
resulting from the conversion of all the Series B Preferred stock. As of June
30, 2004, the outstanding debt of the Company was approximately $854,000, all
classified as current.
OPERATING INCOME
Our operating income for the three months ended June 30, 2004 was approximately
$174,000 as compared to an operating loss of approximately $195,000 for the same
period last year. The increase in the Company's operating profit of
approximately $369,000 arose primarily from an increase in gross profit of
approximately $531,000 offset by an increase in operating expenses of
approximately $162,000.
NET PROFIT (LOSS)BEFORE PROVISON FOR INCOME TAXES
The Company's net profit before income taxes for the three months ended June 30,
2004 was approximately $115,000 as compared to a net loss of approximately
$264,000 for the same period last year. The primary reason for the net profit
before provision for income taxes at June 30, 2004, was the Company's operating
profit of approximately $174,000 and other income and (expense)of approximately
($59,000).
The Company's auditors issued a going concern report for the year ended March
31, 2004. There can be no assurance that management's plans to reduce operating
losses will continue or the Company's efforts to obtain additional financing
will be successful.
LIQUIDITY AND CAPITAL RESOURCES
The Company has four primary sources of capital which include 1) cash provided
by operations, 2) a factoring arrangement with a financial institution to borrow
against the Company's trade accounts receivable, 3) funds derived from the sale
of its common stock and 4) a loan arrangement with a related party bearing
interest at 10%. Although there can be no assurance, management believes that
26
its revenues will continue to increase during fiscal year 2005 and will generate
positive cash flows in the third quarter of fiscal 2005. Management anticipates
cash flow provided by operations will be adequate to operate the business for
the next twelve months.
On June 30, 2004 the Company had assets of approximately $2,870,000 compared to
$2,690,000 on March 31, 2004. The Company had a total stockholder's deficiency
of $495,000 on June 30, 2004, compared to a deficiency of $772,000 on March 31,
2004, a decrease of approximately $277,000. The decrease in stockholder's
deficiency was the result of recording the net profit of approximately $114,000
for the three months ended June 30, 2003 and the net cash proceeds from the
issuance of the Company's common stock of $130,000 together with approximately
$33,000 in common stock issued to consultants who were owed consulting fees by
the Company.
As of June 30, 2004 the Company's working capital deficit decreased by
approximately $149,000 from a working capital deficit of approximately
$1,300,000 at March 31, 2004, to a working capital deficit of approximately
$1,151,000 at June 30, 2004. The increase was attributable primarily to
increases in inventory, decrease in amounts due factor and customer deposits
totaling approximately $831,000 offset by a increase in accounts payable and
decrease in accounts receivable totaling of approximately $595,000. The
remaining decreases to the working capital deficit of approximately $87,000
occurred in miscellaneous areas, including changes in assets.
On April 15, 2004, we concluded several transactions as part a restructuring of
our equity capital, all the outstanding shares of the Company's Series B
Convertible Preferred Shares, noted as follows:
Three holders of record of the Company's Series B Convertible Preferred Shares
representing an aggregate of 25 Series B Convertible Preferred Shares entered
into a Letter Agreement to Convert Preferred Shares, whereby such holders of the
Series B Convertible Preferred Shares agreed to convert their respective shares
and any liquidated damages and accrued interest in the aggregate amount of
approximately $50,000 into shares of the Company's common stock at $0.01 per
share. The holders further agreed to exercise their portion of any liquidated
damages and accrued interest of approximately $50,000 when the stockholders of
the Company approve the increase in the authorized shares of the Company. As
part of this letter agreement such holders canceled and returned to the Company
warrants to purchase 2,250,000 shares of the Company's common stock at a price
of $.02 per share issued to them in conjunction with the Series B Convertible
Preferred Shares.
Four holders (the "Sellers") of record of the Company's Series B Convertible
Preferred Shares representing an aggregate of 57 1/2 Series B Convertible
Preferred Shares entered into a Securities Purchase Agreement to sell their
entire respective portion of the Company's Series B Convertible Preferred Shares
to two accredited investors, (the "Buyers"). Under the terms of the Securities
Purchase Agreement the Buyers agreed to convert their respective shares of the
Company's Series B Convertible Preferred Shares into the shares of the Company's
common stock at $0.01 per share. The Sellers canceled and returned to the
Company 8,700,000 warrants to purchase the Company's common stock exercisable at
price of $0.02 shares in conjunction with their respective Series B Convertible
Preferred Shares at the closing date of such purchase agreement on April 15,
2004. The Sellers further agreed to convert liquidated damages and accrued
interest in the aggregate amount of approximately $181,000 into shares of the
Company's common stock at $0.01 per share as soon as the stockholders of the
Company approve the increase in the authorized shares of the Company.
27
As a result of these transactions, all of the Company's outstanding Series B
Convertible Preferred Shares, which amounted to 82.5 shares, were converted into
approximately 82,353,000 shares of Common Stock at an exercise price of $.01 per
share.
On April 1, 2004, the Company sold an aggregate of 22,500,000 shares of the
Company's common stock at a price of $0.01 per share pursuant to subscription
agreements dated April 1, 2004, entered into with Jeffrey I Schillen, James Lu
and Longview Fund LP, to purchase 2,500,000, 2,500,000 and 17,500,000 shares,
respectively. Cash proceeds from the sales of 22,500,000 shares common stock was
$225,000 less financing expenses and legal fees in connection with the sale of
such shares of common stock and the conversion of all the Series B Preferred
Shares totaled $95,000, which resulted in a net cash proceeds to the Company of
$130,000.
The Company issued the foregoing securities in reliance upon the exemption from
a registration requirement set forth in Section 4(2) of the Securities Act of
1933.
We will require the approval of our stockholders to increase our authorized
shares at a meeting of stockholders or as otherwise permitted under New Jersey
law. The Company may be unable to effect any equity financing until it has
increased its authorized shares of common stock, or otherwise effected a reverse
stock split or similar restructuring transaction. There is no assurance that the
Company will be successful in obtaining approval of its stockholders for such an
increase, reverse stock split or similar restructuring.
Operations
- ----------
Cash flows used in operating activities was approximately $61,000 during the
three months period ended June 30, 2004 compared to cash flows used in operating
activities of approximately $134,000 during the three months period ended June
30, 2003. Cash used in operating activities was primarily attributable to
increases in the Company's net profit, accounts payable and decrease of accounts
receivable offset by increases inventory and decreases in amounts due factor and
customer deposits for the three months period ended June 30, 2004.
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 three months ended June 30, 2004 and 2003, investments in masters and
artwork were approximately $119,000 and $57,000, respectively. Management
continues to seek to acquire new titles to enhance its product lines.
Financing
- -----------
Cash flows provided by for financing activities was approximately $206,000
during the three months period ended June 30, 2004 compared approximately
$188,000 during the three months period ended June 30, 2003.
28
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.
Item 3: Controls and Procedures
The President/Co-CEO and the Chief Financial Officer of the Company have
established and are currently maintaining disclosure controls and procedures for
the Company. The disclosure controls and procedures have been designed to ensure
that material information relating to the Company is made known to them as soon
as it is known by others within the Company.
Our President/Co-CEO and our Chief Financial Officer conduct updates and review
and evaluate the effectiveness the Company's disclosure controls and procedures
and have concluded, based on their evaluation as of the end of the period
covered by this Report, that our disclosure controls and procedures are
effective for gathering, analyzing and disclosing the information we are
required to disclose in our reports filed under the Securities Exchange Act of
1934. During the last fiscal quarter, there has been no change in our internal
controls over financial reporting that has materially affected, or is reasonably
likely to materially affect, these controls.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities.
Common Stock
------------
As of June 30, 2004, 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 June 30, 2004 and March 31, 2004, 597,409,872 and
489,057,359 shares were issued and outstanding.
For the three months ended June 30, 2004, the Company had the
following significant issuance of its common stock:
On April 15, 2004, the Company concluded several transactions
that retired all the outstanding shares of the Company's Series B
Convertible Preferred Shares, noted as follows:
Three holders of record of the Company's Series B Convertible
Preferred Shares representing an aggregate of 25 Series B
Convertible Preferred Shares entered into a Letter Agreement to
Convert Preferred Shares, whereby such holders of the Series B
Convertible Preferred Shares agreed to convert their respective
shares and any liquidated damages and accrued interest in the
aggregate amount of approximately $50,000 into shares of the
Company's common stock at $0.01 per share. The holders further
agreed to convert their portion of any liquidated damages and
accrued interest of $50,000 when the stockholders of the Company
approve the increase in the authorized shares of the Company. As
part of this letter agreement such holders canceled and returned
to the Company warrants to purchase 2,250,000 shares the
Company's common stock at a price $.02 per share issued to them
in conjunction with the Series B Convertible Preferred Shares.
Four holders (the "Sellers") of record of the Company's Series B
Convertible Preferred Shares representing an aggregate of 57 1/2
Series B Convertible Preferred Shares entered into a Securities
Purchase Agreement to sell their entire respective portion of the
Company's Series B Convertible Preferred Shares to two accredited
investors (the "Buyers"). Under the terms of the Securities
Purchase Agreement, the Buyers agreed to convert their respective
shares of the Company's Series B Convertible Preferred Shares
into the shares of the Company's common stock at $0.01 per share.
The Sellers canceled and returned to the Company 8,700,000
warrants to purchase the Company's common stock at price of $0.02
shares in conjunction with the conversion of the Series B
Convertible Preferred Shares on the closing date of such purchase
agreement, April 15, 2004. The Sellers further agreed to convert
liquidated damages and accrued interest in the aggregate amount
of approximately $181,000 into shares of the Company's common
stock at $0.01 per share as soon as the stockholders of the
Company approve the increase in the authorized shares of the
Company.
30
As a result of these conversion transactions, all of the
Company's outstanding Series B Convertible Preferred Shares,
which amounted to 82.5 shares, were converted into approximately
82,353,000 shares of Common Stock at an exercise price of $.01
per share.
On April 1, 2004, the Company sold an aggregate of 22,500,000
shares of the Company's common stock at a price of $0.01 per
share pursuant to subscription agreements dated April 1, 2004.
The purchasers were Jeffrey I. Schillen, James Lu and Longview
Fund LP, who purchased 2,500,000, 2,500,000 and 17,500,000
shares, respectively.
On April 15, 2004, the Company issued an aggregate of 3,500,000
shares of the Company's common stock to two of the Company's
consultants for consulting fees owed to the consultants in the
aggregate amount of $35,000 pursuant to consulting agreements
entered into on December 3, 2001.
The Company issued the foregoing securities in reliance upon the
exemption from a registration requirement set forth in Section
4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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, filed herewith.
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, filed herewith.
32.1 Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)
and 15d-14(a), furnished herewith.
32.2 Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)
and 15d-14(a), furnished herewith.
(b) Reports on Form 8-K
None
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
DIAMOND ENTERTAINMENT CORPORATION
Dated: August 20, 2004 By: /s/ James K.T. Lu
------------------------------------
James K.T. Lu
President and Co-Chief
Executive Officer
Dated: August 20, 2004 By: /s/ Fred U. Odaka
----------------------------------
Fred U. Odaka
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
32