United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities and Exchange Act of 1934
For the Quarter Ended Commission File Number
May 31, 2000 0-12423
MERIT DIVERSIFIED INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada
94-2906927
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1801 Avenue of the Stars, Suite 635, Los Angeles, Ca 90067
(Address of principal executive offices)
Registrants telephone number, including area code: (310) 552-0870
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 [ ]
The number of shares outstanding of each of the registrants classes of
common stock, as of May 31, 2000 was 31,139,991 shares, all of one class of
$.00 par value Common Stock.
MERIT DIVERSIFIED INTERNATIONAL, INC.
FORM 10-Q
Quarter Ended May 31, 2000
TABLE OF CONTENTS
FINANCIAL INFORMATION PAGE
Item 1- Consolidated Financial Statements
Consolidated Balance Sheets as of
May 31, 2000 and August 31, 1999 3
Consolidated Statements of Operations
for the three months ended May 31, 2000
and May 31, 1999 4
Consolidated Statements of Operations
for the nine months ended May 31, 2000
and May 31, 1999 5
Consolidated Statements of Cash Flows
for the three months ended May 31, 2000
and May 31, 1999 6
Notes to Consolidated Financial Statements 7,8
Item 2- Managements Discussion and Analysis of Financial
Condition and Results of Operations 9-11
OTHER INFORMATION
Item 1- Legal Proceedings 12
Item 2- Changes in Securities 12
Item 3- Defaults upon Senior Securities 12
Item 4- Submission of Matters to a Vote of Security Holders 12
Item 5- Other Information 12
Item 6- Exhibits and Reports on Form 8-K 12
SIGNATURES 13
MERIT DIVERSIFIED INTERNATIONAL, INC.
PART 1: FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 2000 AND AUGUST 31, 1999
May 31 August 31,
2000 1999
(Unaudited) (Note 1)
Assets $ 13,844,497 $ -
Total Assets $ 13,844,497 $ -
Liabilities and Shareholders Equity
Current liabilities
Accounts and taxes payable $ 131,808 $ 8,000
Total current liabilities $ 131,808 $ 8,000
Commitments
Shareholders Equity
Common Stock-no par value;
50,000,000 shares authorized,
31,142,257 issued and 30,042,257
outstanding as of May 31, 2000
and August 31, 1999 1,381,133 1,332,349
Additional paid-in capital 14,708,591 1,122,215
Accumulated deficit-accumulated(2,377,035) (2,462,564)
Total shareholders equity $13,712,689 $ (8,000)
Total liabilities and
shareholders equity $ 13,844,497 $ -
See Notes to Consolidated Financial Statements
MERIT DIVERSIFIED INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2000 AND 1999
(UNAUDITED)
Three Months Three Months
Ended Ended
May 31, May 31,
2000 1999
Net revenue $ 134,068 $ -
Costs and expenses:
General and administrative 438,897 -
Depreciation and amortization - -
Income (loss) from operations $ - -
Other income (expense):
Interest expense - -
Loss on sale of fixed assets - -
Loss on sale of investments - -
Income from debt adjustment - -
Total other income (expense) - -
Income (loss) before taxes
on income (304,829) -
Taxes on income - -
Net income (loss) (304,829) -
Net income (loss) per share $0.010 nil
Weighted average number of shares
and share equivalents
outstanding 31,142,257 30,042,257
See Notes to Consolidated Financial Statements
MERIT DIVERSIFIED INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 2000 AND 1999
(UNAUDITED)
Nine Months Nine Months
Ended Ended
May 31, May 31,
2000 1999
Net revenue $ 374,903 $ -
Costs and expenses:
General and administrative 762,988 -
Depreciation and amortization - -
Income (loss) from operations $(388,085) -
Other income (expense):
Interest expense (476) -
Loss on sale of fixed assets - -
Loss on sale of investments - -
Income from debt adjustment - -
Total other income (expense) (476) -
Income before taxes
on income (388,561) -
Taxes on income - -
Net income (loss) $ (388,561) -
Net income (loss) per share $.012 nil
Weighted average number of shares
and share equivalents
outstanding 31,142,257 30,042,257
See Notes to Consolidated Financial Statements
MERIT DIVERSIFIED INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MAY 31, 2000 AND 1999
(UNAUDITED)
Increase (Decrease) in Cash and Cash Equivalents
Three Months Three Months
Ended Ended
May 31, May 31,
2000 1999
Operating activities:
Net income (loss) $134,068 $ -
Adjustments to reconcile net loss
to cash used in operating
activities:
Amortization expense - -
Changes in operating assets and
liabilities:
Accounts receivable (161,237) -
Inventories (47,439) -
Accounts payable 131,808 -
Cash provided by (used in)
operating activities 57,200 -
Investing activities:
Investment in Fixed Assets (400,000) -
Financing activities:
Contribution by shareholder 400,000 -
Issuance of capital stock 14,021
Cash provided by financing
activities 414,021 -
Net increase (decrease) in
cash and cash equivalents 71,221 -
Cash and cash equivalents,
beginning of period - -
Cash and cash equivalents,
end of period $71,221 $ -
See Notes to Consolidated Financial Statements
MERIT DIVERSIFIED INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
Note 1 - Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been for
the three months ended May 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended August 31, 2000. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys Form 10-K for the year ended
August 31, 1999.
Note 2 - Net Income (Loss) Per Share
Net income (loss) per share and common equivalent share is computed using the
weighted average number of shares outstanding during each period.
Note 3- Mergers and Acquisitions
The Company acquired 100% ownership of Allied Artists valued at historic cost
of $2,000,000. The Company issued 500,000 shares, paid $150,000 USD and
issued a promise to pay an additional $350,000 for this business. This
transaction is being accounted for as a purchase, with the results of
operations of the acquired entity included in the consolidated statement of
income. Over the years, Allied Artists has produced and distributed hundreds
of films. Though it originally dealt with early talkies, soundtrack
n is now involved in motion picture production and television for various
studios, remaining active in musical and television productions, as well as
music videos.
The Company also acquired for 600,000 shares, $250,000 cash, and a
commitment to build out a new production facility at the cost of $5,000,000
a 100% ownership of Eye Candy Post, valued at $6,800,000. The excess of
cost over book value of assets acquired was recorded as goodwill in the
amount of $6,550,000and will be amortized over a period of forty years
utilizing the straight line method. Eye Candy Post is a film and television
Post Production.
MERIT DIVERSIFIED INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MAY 31, 2000
Facility located in Universal City Plaza, California. It caters to on-line
and off-line clients with D2, Digital Betacam, Betacam and 3/4" videotape.
Note 4 - Contributed Assets
Controlling interest in MERIT DIVERSIFIED INTERNATIONAL, INC., a Nevada
Corporation, and its predecessor (the "Company"), was transferred from Jen
Investment Corporation to the following entities:
1. Selective Entertainment 3,250,000 shares
2. United Assurance Company, Ltd. 3,250,000 shares
3. Apple Juice Productions 3,250,000 shares
4. International Synergy Corporation 3,250,000 shares
5. International Annuity Trust Corporation 3,250,000 shares
6. IAT Mortgage Bankers 3,250,000 shares
As a result of the transfer of controlling interest, the above listed
companies have irrevocably transfered into the Company assets having a
value $5,000,000 as follows:
1. Master Tapes: Value of $1,203,814 appraised by George L. (Sonny)
Carter, Tape Librarian, MCA Records, Inc.
2. Films: Two motion pictures ready for production; value of
$880,000 appraised by Dr. Philip Chamberlin of the Academy of
Motion Picture Arts & Sciences.
3. 300,000 Dino Babies animation cels valued at $3,000,000 as
appraised by Edward N. Okil, National Institute of Appraisers. A
nominal value of $10 per cel is considered reasonable.
(Balance of Page Left Blank Intentionally)
MERIT DIVERSIFIED INTERNATIONAL, INC.
MAY 31, 2000
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations or Plan of Operation
The following review concerns the three and nine month periods ended May 31,
2000 and May 31, 1999, which should be read in conjunction with the financial
statements and notes thereto presented in the Form 10-Q.
The information set forth in Managements Discussion and Analysis of Financial
Condition and Results of Operations below includes forward looking statements
within the meaning of Section 27A of the Securities Act, and is subject to
the safe harbor created by that section. Factors that could cause actual
results to differ materially from these contained in the forward looking
statements are set forth in managements Discussion and Analysis of Financial
Condition and Results of Operations.
Plan of operation.
The Company has continued its efforts to acquire, merge with, and enter into
other forms of business combinations. Presently a production and distribution
agreement has been signed with David Hasselhoff, an accomplished actor of
Baywatch and Knight Rider, fame, for distribution of his next three albums on
Allied Labels. He has surpassed both Madonna and Michael Jackson as the most
popular selling artist in Europe, and all these new recordings will be released
in English, Spanish and German.
In addition to this, a joint venture distribution and promotions agreement
has been reached with renowned rap artist, actor and entertainer Coolio, whose
past successes include the title music track, "Gangsta's Paradise", from the
successful motion picture, Dangerous Minds. His company of recording artist(s),
including Lucky Luciano, who is currently selling, 20,000 units per week, will
all be distributed and promoted by the Company. A revenue stream is anticipated
in the fourth quarter of 2000, and conti
is profitability is anticipated by the second quarter of 2001.
The company is completing new global distribution and licensing agreements with
major companies in Europe Asia and N. American which will maximize it's sales
and profit margins.
The television division has signed a production and distribution deal with
Apple Juice Production who have just completed pilots for Kings Pawn a comedy
series, and the Wherehouse of Music show that features the top urban music
artist and D.J.'s playing their latest hits for a live studio audience.
BRE magazine and allied are currently developing a half hour music news show
for syndication shooting is scheduled for late September.
MERIT DIVERSIFIED INTERNATIONAL, INC.
MAY 31, 2000
Results of Operations Three Months and Nine Months Ended May 31, 2000 and May
31, 1999
The Company had no assets and had not engaged in any operational activities
during the past four years prior to the acquisition of Allied Artists
Entertainment Group, and Eye Candy Post. As a result of this acquisition, the
Company now has 335 employees.
During the three and nine months ended May 31, 2000, the Parent Company had no
operations. The results of operations as reported includes the consolidated
results of the business combination of Allied Artists Entertainment and Eye
Candy Post.
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations or Plan of Operation (Continued)
As stated above in the Plan of Operation, due to the nature of the Companys
activities, the Companys prospects for the future are dependent on a number of
variables which cannot be predicted. Generally, after identifying a potential
business opportunity, the Company could incur significant costs in evaluating
the desirability of an acquisition or other form of business combination.
Should the Company determine to proceed with the business combination, the
transaction costs could be significant. Thereafter, results of operation would
likely be materially affected by the business acquired or merger with the
Company.
Recent accounting pronouncements: On March 3, 1997, the Financial Accounting
Standards Board (FASB) issued the Statement of Financial Accounting Standards
(SFAS) No. 128, Earning Per Share. This pronouncement provides a different
method of calculating earnings per share than is currently used in accordance
with Accounting Principles Board Opinion No. 15, Earnings Per Share. SFAS No.
128 provides for the calculation of Basic and Diluted earnings per share.
Basic earnings per share includes no dilution and income available to common
shareholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. The Company adopted SFAS No. 128 in the fiscal
year 1998 and its implementation is not expected to have a material effect on
the financial statements.
MERIT DIVERSIFIED INTERNATIONAL, INC.
MAY 31, 2000
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income which
establishes standards for reporting and display of comprehensive income, as
components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 required
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
Also, in June 1997, FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS No.131 establishes
standards for the way that public companies report information about operating
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations or Plan of Operation (Continued)
segments in annual financial statements and required reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standard for disclosure regarding products
and services, geographic areas and major customer. SFAS No. 131 defines
operating segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources in assessing performance
Both SFAS No. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any, they
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.
(Balance of Page Left Blank Intentionally)
MERIT DIVERSIFIED INTERNATIONAL, INC.
MAY 31, 2000
PART II Other Information
Item 1 Legal Proceedings
None
Item 2 Change in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
(Balance of Page Left Blank Intentionally)
Item 6 Exhibits and Reports on Form 8-K
Exhibit A Unaudited Financial Statements of Allied Artists
Entertainment Group, Inc. (Company Acquired)
Allied Artists Entertainment Group, Inc.
Balance Sheet (Unaudited)
December 31, 1999
Assets
Current Assets $47,045
Fixed Assets 13,057
Other Non-Current Assets 1,827,213
Total Assets $1,887,315
Liabilities and Equities
Current Liabilities $37,047
Shareholders Equity 1,790,269
Total Liabilities and Equity $1,887,315
Allied Artists Entertainment Group, Inc.
Income Statement (Unaudited)
Year Ended December 31, 1999
Revenues $48,286
Operating Expenses 40,448
Net Income $ 7,838
(Balance of Page Left Blank Intentionally)
Exhibit B Unaudited Financial Statements of Eye Candy Post
(Company Acquired)
Eye Candy Post
Balance Sheet (Unaudited)
December 31, 1999
Assets
Current Assets $106,730
Other Non-Current Assets 17,924
Total Assets $124,654
Liabilities and Equities
Current Liabilities $111,330
Shareholders Equity 13,324
Total Liabilities and Equity $124,654
Eye Candy Post
Income Statement (Unaudited)
Year Ended December 31, 1999
Revenues $710,164
Cost of Sales 348,796
Operating Expenses 367,317
Net Income $ (5,949)
(Balance of Page Left Blank Intentionally)
Exhibit C Merit Diversified International, Inc. Pro forma Financial Statements
of the post acquisition consolidated company
Merit Diversified International
Pro forma Balance Sheet (Unaudited)
May 31, 2000
Assets
Current Assets $279,986
Other Non-Current Assets 13,564,512
Total Assets $13,844,497
Liabilities and Equities
Current Liabilities $131,808
Shareholders Equity 13,712,689
Total Liabilities and Equity $13,844,497
Merit Diversified International
Pro Forma Income Statement (Unaudited)
Nine Months Ended May 31, 2000
Revenues $573,290
Cost of Sales 198,387
Operating Expenses 762,988
Net Income $(388,561)
(Balance of Page Left Blank Intentionally)
MERIT DIVERSIFIED INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERIT DIVERSIFIED INTERNATIONAL, INC.
(Registrant)
Date: July 12, 2000 By: __________________/s/__________________
Georgette Rainey, Secretary
(Balance of Page Left Blank Intentionally)
