UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1996 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.)
16818 Marquardt Avenue
Cerritos, California 90703
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (310) 921-3999
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 13, 1996
- ---------------------------------- -----------------------------------
Common Stock, No Par Value 12,894,941
Convertible Preferred Stock, No Par Value 483,251
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DIAMOND ENTERTAINMENT CORPORATION
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INDEX
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Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Balance Sheet as of September 30, 1996 [Unaudited] ......... 1.....2
Statements of Operations for the three and six months ended
September 30, 1996 and 1995 [Unaudited]..................... 3.....
Statement of Stockholders' Equity for the six months ended
September 30, 1996 [Unaudited].............................. 4.....
Statements of Cash Flows for six months ended September 30, 1996
and 1995 [Unaudited]........................................ 5.....6
Notes to Financial Statements [Unaudited]................... 7.....12
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................13.....16
Signature...........................................................17.....
. . . . . . . .
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Item 1:
DIAMOND ENTERTAINMENT CORPORATION
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BALANCE SHEET AS OF SEPTEMBER 30, 1996.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Current Assets:
Accounts Receivable - Net $ 1,557,496
Inventory 1,716,156
Prepaid Expenses and Deposits 39,732
Other Receivables 26,697
-----------
Total Current Assets 3,340,081
Property and Equipment:
Leasehold Improvements 26,448
Furniture, Fixtures and Equipment 734,841
Total - At Cost 761,289
Less: Accumulated Depreciation 535,512
Property and Equipment - Net 225,777
-----------
Film Masters and Artwork 4,234,773
Less: Accumulated Amortization 3,703,722
Total Film Masters and Artwork - Net 531,051
-----------
Other Assets:
Accounts Receivable - ATRE 1,520,238
Idle Assets 90,931
Investment in ATRE 50,000
Officer's Loan Receivable 52,009
Employee Receivable 844
Other Assets 9,326
-----------
Total Other Assets 1,723,348
Total Assets $ 5,820,257
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
1
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DIAMOND ENTERTAINMENT CORPORATION
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BALANCE SHEET AS OF SEPTEMBER 30, 1996.
[UNAUDITED]
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<S> <C>
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Cash Overdraft $ 225,349
Accounts Payable 2,098,642
Convertible Promissory Notes Payable 1,257,988
Notes Payable 1,604,600
Royalties Payable 64,899
Lease Obligations Payable 5,697
Accrued Expenses 617,321
Customer Deposit 3,371
Related Party Payable 33,525
-----------
Total Current Liabilities 5,911,392
Long-Term Liabilities:
Notes Payable 114,119
Lease Obligations Payable 2,139
Total Long-Term Liabilities 116,258
Commitments and Contingencies [5] --
Stockholders' Equity [Deficit]:
Convertible Preferred Stock - No Par Value, 5,000,000
Shares Authorized, 656,174 Issued as of September 30,
1996 [of which 172,923 are held in Treasury] 376,593
Common Stock - No Par Value, 100,000,000 Shares
Authorized; 12,894,941 Shares Issued and Outstanding
at September 30, 1996 9,611,834
Additional Paid-in Capital (1,310,231)
Retained Earnings [Deficit] (8,814,500)
Totals (136,304)
Less: Treasury Stock [Preferred] - At Cost (48,803)
Deferred Costs [5H] (22,286)
Total Stockholders' Equity [Deficit] (207,393)
Total Liabilities and Stockholders' Equity [Deficit] $ 5,820,257
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
2
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DIAMOND ENTERTAINMENT CORPORATION
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STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended Six months ended
September 30, September 30,
------------- -------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales - Net $1,708,898 $ 2,898,521 $3,139,119 $ 6,530,521
Cost of Sales 1,061,158 1,723,450 1,969,280 3,976,308
---------- ----------- ---------- -----------
Gross Profit 647,740 1,175,071 1,169,839 2,554,213
---------- ----------- ---------- -----------
Operating Expenses:
Selling Expenses 381,712 559,550 725,422 1,501,083
General and Administrative Expenses480,466 410,301 1,053,677 801,965
Factoring Fees 111,606 -- 236,290 --
Financing Costs - Non-Cash [6D][8C] -- -- 50,000 --
Consulting Costs - Non-Cash [5H] 3,714 -- 27,714 --
Bad Debt Expense 30,000 10,000 60,208 18,493
---------- ----------- ---------- -----------
Total Operating Expenses 1,007,498 979,851 2,153,311 2,321,541
---------- ----------- ---------- -----------
Operating [Loss] Income (359,758) 195,220 (983,472) 232,672
---------- ----------- ---------- -----------
Other [Income] Expenses:
Interest Expense 63,734 20,784 86,089 153,228
Interest Income - Related Party (42,508) -- (80,916) (117,800)
---------- ----------- ---------- -----------
Other Expenses - Net 21,226 20,784 5,173 35,428
---------- ----------- ---------- -----------
[Loss] Income Before Taxes (380,984) 174,436 (988,645) 197,244
Provision for Income Taxes -- -- -- --
---------- ----------- ---------- -----------
Net [Loss] Income $ (380,984) $ 174,436 $ (988,645) $ 197,244
========== =========== ========== ===========
Net [Loss] Income Per Share $ (.03) $ .02 $ (.07) $ (.21)
========== =========== ========== ===========
Weighted Average Number of
Shares Outstanding 13,837,280 11,142,023 13,837,280 6,608,702
========== =========== ========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
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3
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DIAMOND ENTERTAINMENT CORPORATION
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STATEMENT OF STOCKHOLDERS' EQUITY [DEFICIT]
[UNAUDITED]
- ------------------------------------------------------------------------------
Convertible Treasury Total
Preferred Stock Common Stock Additional Retained Stock Stock Stockholders'
Number of Number of Paid-in EarningsSubscription[Preferred]DeferredEquity
Shares Amount Shares Amount Capital [Deficit]ReceivableAt Cost Costs [Deficit]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1996 483,251 376,593 12,894,941 9,611,834 (1,410,231)(7,825,855)(86,636)(48,803) -- 616,902
Stock Options Issued ]-- -- -- -- 100,000 -- -- -- (100,000) --
(5h ) (6d) (8c )
Financing Expense [6D][8C] -- -- -- -- -- -- -- -- 50,000 50,000
Consulting Expense [5H] -- -- -- -- -- -- -- -- 27,714 27,714
Stock Subscription Canceled -- -- -- -- -- -- 86,636 -- -- 86,636
Net [Loss] for the six months
ended September 30, 1996 -- -- -- -- -- (988,645) -- -- -- (988,645)
---- ------- -------- -------- --------- -------- ------ ------- ------- --------
Balance - September 30,
1996 483,251 376,593 12,894,941 9,611,834(1,310,231) (8,814,500) -- (48,803) (22,286) (207,393)
======= ======== ========= ========== ============ ========== === ======== ======== =========
The Accompanying Notes are an Integral Part of These Financial Statements.
4
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DIAMOND ENTERTAINMENT CORPORATION
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STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Six months ended
September 30,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Net Cash - Operating Activities $(1,058,556) $ 1,055,405
----------- -----------
Investing Activities:
Proceeds from Maturity of CD -- 600,000
Advances to ATRE (30,000) (62,300)
Proceeds from ATRE 80,600 --
Employee Advances -- (830)
Advances to Officers (38,448) --
Capital Expenditures (18,609) (47,846)
Masters and Artwork (175,604) (167,030)
---------- -----------
Net Cash - Investing Activities (182,061) 321,994
---------- -----------
Financing Activities:
Purchase of Treasury Stock -- (35,803)
Proceeds from Notes Payable 4,399,440 3,762,343
Proceeds from Convertible Promissory Notes Payable 1,257,988 --
Payments of Notes Payable (4,582,908) (5,102,045)
Payments of Leases Payable (3,870) (77,341)
Cash Overdraft 169,967 75,447
---------- -----------
Net Cash - Financing Activities 1,240,617 (1,377,399)
---------- -----------
Net Increase in Cash and Cash Equivalents -- --
Cash and Cash Equivalents - Beginning of Periods -- --
---------- -----------
Cash and Cash Equivalents - End of Periods $ -- $ --
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 53,096 $ 121,000
Income Taxes $ -- $ --
The Accompanying Notes are an Integral Part of These Financial Statements.
5
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DIAMOND ENTERTAINMENT CORPORATION
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STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Supplemental Schedule of Non-Cash Investing and Financing Activities:
On April 13, 1995, the Company's former President surrendered his employment
contract and returned 146,654 shares of the Company's preferred stock back to
the Company as treasury stock. Equipment with a carrying value of approximately
$170,000 was transferred from the Company and the Company's former President
assumed all remaining obligations on these assets of approximately $75,000.
On May 8, 1995, the Company closed the sales agreement with an unaffiliated
company for $750,000 by allowing credit to the Company for future duplication
services. The Company received $750,000 of duplication services and surrendered
equipment having a book value of approximately $630,000.
In May of 1995, three debt obligations totaling $1,131,434 were assigned to
the Company's Chief Executive Officer. In July of 1995, 8,212,785 shares of the
Company's common stock were issued for this obligation.
Pursuant to the June 15, 1995 assignment of debt agreement, the Company's
$658,750 obligation to its former underwriter was purchased by an unaffiliated
Company. On July 19, 1995, an agreement was reached to issue 2,538,446 shares of
the Company's common stock for this obligation.
In December 1995, the Company settled a debt with a creditor for $390,000 less
than the carrying amount.
During the six months ended September 30, 1996, the Company recorded a
non-cash consulting expense of $27,714 for 475,000 options granted to a
financial consultant and a non-cash financing cost of $50,000 for a total of
2,000,000 options granted to two consultants in connection with commitments for
additional financing for the Company [See Notes 5H, 6D and 8C].
The Accompanying Notes are an Integral Part of These Financial Statements.
6
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation SB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial statements include all adjustments which are necessary in
order to make the financial statements not misleading. The results of operations
for any interim period are not necessarily indicative of the results for the
full year. These condensed financial statements should be read in conjunction
with the financial statements and notes thereto contained in the annual report
on Form 10-KSB for the year ended March 31, 1996.
[2] Accounts Receivable
Accounts receivable at September 30, 1996 are shown net of an allowance for
doubtful accounts of approximately $396,000. Substantially all of the accounts
receivable at September 30, 1996, have been pledged as collateral for the line
of credit [See Note 6C].
[3] Inventory
Inventory consists of:
September 30,
1 9 9 6
Raw Materials $ 162,116
Finished Goods 1,554,040
Totals $1,716,156
[4A] Related Parties Receivables
At September 30, 1996, the Company was owed $52,009 from the President of the
Company. Interest of $1,148 was accrued for the six month ended September 30,
1996 at 10%.
[4B] American Top Real Estate ["ATRE"]
Investment - The Company paid $50,000 for a 50% interest in ATRE. This
investment is accounted for on the equity method. The investee has not incurred
any significant earnings or losses to date, therefore, this investment does not
reflect any adjustments for earnings and losses.
Sale of ATRE Real Estate Parcel - In May 1995, ATRE entered into a sales
agreement for two acres of land for approximately $940,000. In December of 1995,
the sale for one parcel of land was closed and the Company received $48,475. In
September 1996, the other parcel was sold and proceeds were retained for future
sewage construction needed for this 20 acre property, however, the Company
received $80,600 from ATRE for the six months ended September 30, 1996. It is
anticipated that in 1997 monies will be received by the Company for
reimbursement of monies reinvested from the proceeds of sales of property.
7
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
- ------------------------------------------------------------------------------
[4B] American Top Real Estate ["ATRE"] [Continued]
Accounts Receivable - The Company has a receivable [including interest] from
ATRE of $1,520,238 as of September 30, 1996. This balance includes interest
income of $51,000 for the six months ended September 30, 1996 at an annual rate
of 10%.
[5] Commitments and Contingencies
[A] Accounts Payable - The Company is currently delinquent on a significant
amount of its accounts payable.
[B] Employment Agreements - As of September 30, 1996, there are two employment
agreements in effect for two officers for annual compensation totaling $240,000.
These agreements terminate in the year 2001 and are adjusted annually in
accordance with the Consumer Price Index. The Board of Directors agreed on April
23, 1996 to reserve 1,000,000 shares of common stock for distribution to two
officers of the Company. The common stock can be purchased in installment
payments with a five year promissory note with interest at 6% per annum.
[C] Transfer of Custom Duplication Business - On April 13, 1995, the Board of
Directors approved the transfer of its custom duplication business. Pursuant to
this transaction, the Company's former President surrendered his employment
contract and returned 146,654 shares of the Company's preferred stock back to
the Company as treasury stock. Equipment with a carrying value of approximately
$170,000 was transferred from the Company and the Company's former President
assumed all remaining obligations on these assets of approximately $75,000. The
Company agreed to a non compete agreement with this new custom duplication
venture by the Company's former President.
[D] Sale of Multi Media Assets - On May 8, 1995, the Company closed a sales
agreement with a Mexican company, Central Video, for $750,000 by allowing credit
to the Company for future duplication services. The President of Central Video
is the former President of the Company. The Company received $750,000 of
duplication services and surrendered equipment having a book value of
approximately $630,000. In addition, Central Video entered into a sublease for
the remaining thirteen month lease. The Company has guaranteed the Company's
former President a minimum of $2,500,000 a year of production orders for the
next three years. Central Video has agreed to provide a maximum of a $3,000,000
90 day credit line to the Company. The Company has agreed to pay the Company's
former President a 3% commission on orders the Company places with Central
Video.
[E] Termination of Employment - On December 31, 1995, an officer and director of
the Company resigned and terminated his employment agreement with the Company as
part of a settlement agreement. Effective January 1, 1996 and ending December
31, 1996, the Company entered into a monthly $10,000 consulting agreement with
this individual. The individual agreed to surrender 30,769 shares of preferred
stock and 10,000 shares of common stock upon execution of the settlement
agreement in consideration for 5% of net profits of the Company for the fiscal
years ended March 31, 1997 and 1998.
[F] Production Agreement - On December 31, 1995, the Company entered into a
production contract agreement for annual minimum orders totaling $500,000 with a
Company, whose sole owner is a former director and officer of the Company who
resigned December 31, 1995. The Company also sold production equipment to this
entity on January 1, 1996 for $45,000, which had a book value of $64,744.
8
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
- ------------------------------------------------------------------------------
[5] Commitments [Continued]
[G] Duplication Agreement/Line of Credit - On January 3, 1996, the Company
entered into a two year Duplication Agreement with a $200,000 revolving line of
credit with a non-affiliated entity. The balance as of September 30, 1996 was
$344,800 which exceeds the line of credit.
[H] Financial Consultant Commitments - In May and June of 1996, the Company
engaged three consultants for total fees of $11,000 monthly for a period of six
months. In addition to the monthly compensation, the Company will repay the
consultants for business expenses. All parties agreed that total expenses will
not exceed $5,000 per month. Another financial consultant received 400,000
options with an exercise price of $.25 per share and options for 25,000 shares
per month for 24 months exercisable at $.25 per share for services to be
rendered. The Company recorded deferred consulting costs of $50,000 for the
options to purchase the 1,000,000 shares and expensed $27,714 in the six months
ended September 30, 1996. The balance of $22,286 will be expensed over the
remaining eighteen months. The Company recorded the deferred consulting cost of
$50,000 in April for the fair value of the options granted. The fair value of
the options was determined based upon the fair value of services rendered by the
consultant.
[6] Notes Payable
Notes payable consist of the following:
S e p t e m b e r 3 0, 1 9 9 6
----------------------------------------------
Interest
Type of Loan Expense Amount Current Long-Term Rate Due Date
Installment Loan (A) $9,971 $156,509 $42,390 $114,119 10% November 14, 1999
Notes Payable (B) 7,324 23,638 23,638 14% 1997
Auto Loan 342 4,499 4,499 -- 12% September 3, 1997
Line of Credit (C) 15,267 1,534,073 1,534,073 -- Various Revolving Line
of Credit
Convertible Debenture (D) -- 1,257,988 1,257,988 -- 10% May 1997
Totals $32,904 $2,976,707 $2,862,58 $114,119
------ ======= ========== ========= =======
[A] Installment Loan - In March 1993 a loan was renegotiated for the sum of
$292,058 with principal payments of $5,000 per month with interest of 10% per
annum until November 14, 1999. The balance due at September 30, 1996. was
approximately $156,419.
[B] Note Payable for Equipment - On May 8, 1995, the Company closed the sales
agreement with a Mexican Company, for $750,000 by allowing credit to the Company
for duplication services and received $750,000 of duplication services in
exchange for equipment having a book value of approximately $630,000. The
Company has classified the obligation for the equipment as notes payable.
[C] Commitment for Line of Credit - The Company engaged an entity for three
months commencing April 1, 1996 to arrange a line of credit for working capital
purposes of $2,000,000 or more with a 2% commission at closing. The Company
received a commitment for a credit line of $2,500,000 of which $500,000 is
guaranteed by the Company's President. The Company will assign the accounts
receivable and inventory and will pay interest at 3% per annum plus the lenders
prime rate. Prime rate at balance sheet date was 8.25%. Fees and charges may be
charged in addition to interest. On August 30, 1996, this line of credit was
successfully established.
9
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
- ------------------------------------------------------------------------------
[6] Notes Payable [Continued]
[D] Convertible Promissory Notes Payable - During the June 1996 quarter, the
Company negotiated convertible promissory notes with 10% interest per annum and
a 7% commission. The principal amount is convertible in whole or in part into
shares of the common stock of the Company at a conversion price equal to 65% of
the average closing bid price for the common stock for five trading days
immediately prior to the conversion. In no event shall the conversion price be
less than $.20 per share or more than $.75 per share. If the notes are converted
they will be purchased by several off shore Companies under Regulation S. In
conjunction with the debentures, the company granted options for a total of
1,000,000 options exercisable at $.25 per share to two consultants for
consulting agreements. As of September 30, 1996, the Company received
approximately $1,258,000 on these debentures. Interest expense of $37,993 and a
commission fee of approximately $88,000 was recorded for the six months ended
September 30, 1996. For the six months ended September 30, 1996, the Company
recorded a financing cost of $25,000 for the fair value of the options granted.
The fair value of the options was determined based upon the fair value of
services received by the Company in May and June of 1996.
[7] Income Taxes
The Company has net operating loss carryforwards of approximately $6,313,000
which expire through the year 2010. As a result of these carryforwards, the
Company has a deferred tax asset of approximately $2,146,000, which has been
offset by a valuation allowance of $2,146,000 resulting in a deferred asset of
$-0-. Future tax benefits related to this loss have not been recognized because
its realization is not assured. No current or deferred federal or state income
taxes have been provided.
As of March 31, 1996, the approximate amount of the net operating loss income
tax carryforwards and their expiration dates are as follows:
Expiration
in Years ending Net Operating Loss
March 31, Carryforwards
2007 $1,317,000
2008 2,693,000
2009 2,015,000
2010 288,000
----------
Total $6,313,000
[8] Capital Stock and Options
[A] Stock Subscription Receivable - On April 23, 1996, the Board of Directors
agreed to cancel the existing $86,636 stock subscription receivable. The Company
recorded the $86,636 as compensation expense.
[B] Authorized Shares - The Board of Directors agreed on April 23, 1996 to
increase its authorized shares to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock, which was approved at the August 23, 1996
annual shareholders meeting.
10
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
- ------------------------------------------------------------------------------
[8] Capital Stock and Options [Continued]
[C] Options Granted - On April 23, 1996, the Company engaged an entity to
arrange either debt or equity financing for the Company and agreed to grant a
total of 1,000,000 options exercisable within three years of grant at $.10 per
share. The Company recorded a financing cost of $25,000 in June of 1996 for the
fair value of the options granted. The fair value of the options was determined
based upon the fair value of services received by the Company in May and June of
1996.
[D] Stock Options and Similar Equity Instruments Issued to Employees - The
Company uses the intrinsic value method to recognize cost in accordance with APB
25 [Accounting for Stock Issued to Employees].
[9] Earnings Per Share
Earnings per share are based on the weighted average number of common shares
outstanding for the three months ended June 30, 1996 and 1995 as restated to
include the number of shares issued in the business combination with TAV
reflecting conversion for a preferred share of stock into 1.95 shares of common
stock. The weighted average number of shares have been adjusted for all periods
to reflect the one-for-twenty reverse stock split effected on July 2, 1993. The
effect of share equivalents is included when dilutive.
[10] Litigation
The Company has been named as defendant and co-defendant in various legal
actions filed against the Company in the normal course of business. The Company
believes that it has adequate legal defenses and intends to vigorously defend
itself in these actions. The Company believes after consulting with counsel that
an adverse decision in any one lawsuit would not have a material adverse impact
on the Company, however, the aggregate affect of an adverse decision in a
majority of the lawsuits outstanding could have a material adverse impact on the
Company.
[11] Going Concern
The Company's financial statements are prepared in conformity with generally
accepted accounting principles, which contemplates continuation of the Company
as a going concern. The Company has incurred net losses for the years ended
March 31, 1996 and 1995 of $286,003 and $1,958,468, respectively and has a
negative working capital deficit at March 31, 1996 of $1,711,626. The Company
has also been experiencing difficulties in paying its vendors on a timely basis
and was in default on a loan agreement. These factors create uncertainty whether
the Company can continue as a going concern. The Company's plans to mitigate the
effects of the uncertainties are (i) to sell parcels of property owned by ATRE
[50% owned by the Co.] located in Vancouver, WA, (ii) to further upgrade and
increase its products lines and thus reach a consistently higher gross profit
margin mix and realize profitability, (iii) to seek another asset base lending
line of credit and (iv) to negotiate with several reliable investors to provide
the Company with debt and equity financing for working capital purposes.
Management believes that these plans can be effectively implemented in the next
twelve months. The Company will continue to seek additional interim financing
from private sources to supplement its cash needs for the next twelve months
during the implementation of these plans to achieve profitability. The Company's
ability to continue as a going concern is dependent on the implementation and
success of these plans. The financial statements do not include any adjustments
in the event the Company is unable to continue as a going concern.
11
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------
[12] New Authoritative Pronouncements
The FASB has also issued SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which the Company adopted on April 1, 1995. SFAS
No. 115 requires management to classify its investments in debt and equity
securities as trading, held-to-maturity, and/or available-for-sale at the time
of purchase and to reevaluate such determination at each balance sheet date. The
Company does not anticipate that it will have many investments that will qualify
as trading or held-to-maturity investments. Debt securities for which the
Company does not have the intent or ability to hold to maturity will be
classified as available-for-sale, along with most investments in equity
securities. Securities available-for-sale are to be carried at fair vale, with
any unrealized holding gains and losses, net of tax, reported in a separate
component of shareholders' equity until realized.
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March of 1995.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. The Company adopted SFAS No. 121 on April 1,
1996. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial statements. In the future, if the sum of the expected undiscounted
cash flows is less than the carrying amount of the asset, an impairment loss
would be recognized.
The FASB has also issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
in October 1995. SFAS No. 123 uses a fair value based method of recognition for
stock options and similar equity instruments issued to employees as contrasted
to the intrinsic valued based method of accounting prescribed by Accounting
Principles board ["APB"]Opinion No. 25, "Accounting for Stock Issued to
Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company adopted the disclosure requirements on April 1, 1996. SFAS 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounting for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
[13] Financial Instruments
The following table summarizes the carrying amount and estimated fair value of
the company's significant financial instruments all of which are held for
nontrading purposes:
September 30, 1996
Carrying Estimated
Amount Fair Value
Other Receivable $ 26,697 $ 26,697
Long-Term Debt $ 116,258 $ 116,258
In assessing the fair value of these financial instruments, the Company has used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
other receivables, it was assumed that the carrying amount approximated fair
value because of their short maturities. The fair value of long-term debt is
based on current rates at which the Company could borrow funds with similar
remaining maturities.
. . . . . . . . . . . . . .
12
<PAGE>
Item 2:
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended September 30, 1996 compared with the six months ended September
30, 1995
Results of Operations
The Company's operating loss for the six months ended September 30, 1996 was
$983,472 as compared to an operating income of $232,672 for the same period last
year. This decrease in operating income was primarily attributable to a
reduction in sales that could not support the operating expenses of the Company.
The Company's sales for the six months ended September 30, 1996 and 1995 were
$3,139,119 and $6,530,521, respectively. The decrease in sales of approximately
$3,400,000 is primarily attributable to the Company's lack of working capital to
provide the Company the ability to deliver orders. Management believes its
customer base has decreased over the prior year, however, it also believes it
could recover to previous levels based upon management's intent to expand its
product offerings into higher growth and higher margin products with licensed
title CD-ROM and DVD distribution, or through the acquisition of an existing
distribution company.
Cost of sales for the six months ended September 30, 1996 and 1995 were
$1,969,280 and $3,976,308 or 63% and 61% of sales, respectively.
Gross profit for the six months ended September 30, 1996 and 1995 were
$1,169,839 and $2,554,213, or 37% and 39% of sales, respectively. The Company's
gross profit decreased by 2% as a percentage of sales, for the six months ended
September 30, 1996, as compared to September 30, 1995. Depreciation and
amortization, included in the cost of sales, for the six months ended September
30, 1996 and 1995 were $224,464 and $321,314, respectively.
In August 1995, the Company signed an agreement to cease any further production
or sale of certain videocassettes and to return the cassettes and masters to
storage for to three years. The Company has written down the masters and
inventory by approximately $100,000. The net realizable value for these idle
assets is $90,931.
Operating expenses for the six months ended September 30, 1996 and 1995 were
$2,153,311 and $2,321,541, respectively.
Interest expense for the six months ended September 30, 1996 and 1995 was
$86,089 and $153,228, respectively. As of September 30, 1996, the outstanding
debt of the Company was approximately $3,400,000 primarily all of which is
classified as short-term.
Liquidity and Capital Resources
The Company's working capital [deficit] at September 30, 1996 was $2,571,311 as
compared with a working capital [deficit] of $736,403 at September 30, 1995.
This increase in the working capital [deficit] of approximately $1,800,000 is
primarily the result of the Company's net losses.
Operations
For the six months ended September 30, 1996, cash utilized for operations was
$1,058,556 as compared to $1,055,405 of cash generated from operations for the
six months ended September 30, 1995. The Company intends to utilize future debt
or equity financing or debt to equity conversions to help satisfy past due
obligations and to pay down its debt obligations.
13
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended September 30, 1996 compared with the six months ended September
30, 1995
Liquidity and Capital Resources [Continued]
Operations [Continued]
The Company has frequently been unable to pay its obligations for merchandise
and services as they become due. The Company has not been operating profitably
and it cannot be certain that it will earn sufficient profits in the foreseeable
future which would permit the Company to meet its anticipated working capital
needs. A lack of working capital has inhibited the Company's ability to deliver
orders. Should the Company experience continued cash flow deficiencies and lack
of profitability, additional financing may be required.
In May and June of 1996, the Company engaged three consultants for total fees of
$11,000 monthly for a period of six months. In addition to the monthly
compensation, the Company will repay the consultants for business expenses. All
parties agreed that total expenses will not exceed $5,000 per month. Another
financial consultant received 400,000 options with an exercise price of $.25 per
share and options for 25,000 shares per month for 24 months exercisable at $.25
per share for three years after the services are rendered. The Company recorded
deferred consulting costs of $50,000 for the options to purchase 1,000,000
shares and expensed $27,714 in the six months ended September 30,1996.
Investing
Capital expenditures for the six months ended September 30, 1996 and 1995 were
$18,609 and $47,846, respectively. For the six months ended September 30, 1996
and 1995, investments in masters and artwork were $175,604 and $167,030,
respectively. Management continues to seek to acquire new titles to enhance its
product lines.
Financing
The Company paid off the bank line of credit in July of 1995. The Company
believes that achieving improved debt financing, sales growth and obtaining
profitability would provide the means of financial and operational support for
the next twelve months. If any of these factors are not achieved, adverse
effects could result. Should these adverse effects materialize, management
intends to seek additional equity financing from unaffiliated individuals in
private offerings and to secure an additional line of credit until operations
generate a positive cash flow. If the Company is unsuccessful in obtaining
additional equity or debt financing, the Company's liquidity and capital
resources could be adversely affected. There can be no guarantee that the
Company will be successful in these efforts. On August 30, 1996, the Company
obtained an asset based lending credit line of $2,500,000 at interest rate of 3%
above prime rate. The Company used this line to repay the existing revolving
credit line provided by a private lender.
The Company has a 50% real estate interest in ATRE. In May of 1995, the Company
entered into a sales agreement for two acres of land for approximately $940,000.
The Company received proceeds of $48,475 from ATRE on one parcel which closed in
December of 1995. These proceeds reduced the receivable from ATRE. In September
1996, the Company closed the escrow on the second parcel at $550,000 and
retained proceeds for the construction of the sewage requirement of this whole
parcel of 20 acres, in order to sell the remaining pieces successfully. The
Company received $80,600 from ATRE for the six months ended September 30, 1996.
The Company is required by the partnership agreement to make additional advances
to the ATRE partnership. A further delay in the sales of these parcels will
require additional capital contributions to be made. These additional capital
contributions by the Company and any further delay in the sales of these parcels
will have a negative impact on the Company's financial position. Therefore, ATRE
and the Company are seeking additional equity partners to inject capital to be
used for ATRE's short- and long-term needs.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended September 30, 1996 compared with the six months ended September
30, 1995
Liquidity and Capital Resources [Continued]
Financing [Continued]
On July 15, 1992, the Company signed a promissory note for $510,000 with a
former Underwriter. $676,031 that was due April 1, 1995 and on June 15, 1995 was
purchased by an unaffiliated company. On June 2, 1995, an agreement was reached
to issue 2,538,446 shares of the Company's common stock for this obligation.
On August 12, 1992, the Company obtained two lines of credit from a private
investor. On March 31, 1995, the Company owed a total of $812,455 of which
$752,042 was principal and $60,413 was accrued interest. The Company was in
default on the due date, however in May of 1995, these obligations were assigned
to the Company's Chief Executive Officer. On July 19, 1995, the officer agreed
to convert this debt obligation into shares of common stock.
On June 20, 1995, the Company accepted an offer by the Company's Chief Executive
Officer to convert an outstanding obligation to him totaling $1,131,434 into
8,212,785 shares of the Company's common stock. The conversion is effectuated at
a 38% premium rate of .138 per share of common stock. The market value at the
time of conversion was .10 per share of common stock.
On August 31, 1995, the Company renewed a revolving line of credit with an
investor. The revolving line of credit is for up to a maximum of $1,250,000 with
a commitment to borrow a minimum of $2,000,000 during a one year period. This
loan is made in amounts which is equal to 70% of the pledged invoice's amount
and it is secured by a first security interest in certain accounts receivable
and personally guaranteed by an officer of the Company. Repayment is to be made
upon receipt of any payment of pledged invoices, with interest rates of 3% for
within 30 days, 6% for within 60 days, and 9% for after 60 days. As of September
30, 1996, the outstanding loan balance was $-0-.
The Company engaged an entity for three months commencing April 1, 1996 to
arrange a line of credit for working capital purposes of $2,000,000 or more with
a 2% commission at closing. The Company received a commitment for a credit line
of $2,500,000 of which $500,000 is guaranteed by the Company's President. The
Company assigned the accounts receivable and inventory and pays interest at 3%
per annum plus the lenders prime rate. Fees and charges may be charged in
addition to interest. On August 30, 1996, this line of credit was successfully
established, as of September 30, 1996, the outstanding loan balance was
$1,534,073.
On April 23, 1996, the Company engaged an entity to arrange either debt or
equity financing for the Company and agreed to grant a total of 1,000,000
options exercisable within three years of grant at $.10 per share. The Company
recorded a financing cost of $25,000 in June of 1996 for the fair value of the
options granted. The fair value of the options was determined based upon the
fair value of services received by the Company in May and June of 1996.
During the June 1996 quarter, the Company negotiated convertible promissory
notes with 10% interest per annum and a 7% commission. The principal amount is
convertible in whole or in part into shares of the common stock of the Company
at a conversion price equal to 65% of the average closing bid price for the
common stock for five trading days immediately prior to the conversion. In no
event shall the conversion price be less than $.20 per share or more than $.75
per share. If the notes are converted they will be purchased by several off
shore Companies under Regulation S. In conjunction with the debentures, the
company granted options for a total of 1,000,000 options exercisable at $.25 per
share to two consultants for consulting agreements. As of September 30, 1996,
the Company received approximately $1,258,000 on these debentures. Interest
expense of $37,993 and a commission fee of approximately $88,000 was recorded
for the six months ended September 30, 1996. For the six months ended September
30, 1996, the Company recorded a financing cost of $25,000 for the fair value of
the options granted.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended September 30, 1996 compared with the six months ended September
30, 1995
Liquidity and Capital Resources [Continued]
New Authoritative Pronouncements
The FASB has also issued SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which the Company adopted on April 1, 1995. SFAS
No. 115 requires management to classify its investments in debt and equity
securities as trading, held-to-maturity, and/or available-for-sale at the time
of purchase and to reevaluate such determination at each balance sheet date. The
Company does not anticipate that it will have many investments that will qualify
as trading or held-to-maturity investments. Debt securities for which the
Company does not have the intent or ability to hold to maturity will be
classified as available-for-sale, along with most investments in equity
securities. Securities available-for-sale are to be carried at fair vale, with
any unrealized holding gains and losses, net of tax, reported in a separate
component of shareholders' equity until realized.
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March of 1995.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. The Company adopted SFAS No. 121 on April 1,
1996. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial statements. In the future, if the sum of the expected undiscounted
cash flows is less than the carrying amount of the asset, an impairment loss
would be recognized.
The FASB has also issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
in October 1995. SFAS No. 123 uses a fair value based method of recognition for
stock options and similar equity instruments issued to employees as contrasted
to the intrinsic valued based method of accounting prescribed by Accounting
Principles board ["APB"]Opinion No. 25, "Accounting for Stock Issued to
Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company adopted the disclosure requirements on April 1, 1996. SFAS 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounting for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
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.
16
<PAGE>
SIGNATURE
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereon duly authorized.
Diamond Entertainment Corporation
November 13, 1996 s/s James K.T. Lu
-----------------
James K.T. Lu
Chief Executive Officer, Secretary
and Director
17
<PAGE>
SIGNATURE
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereon duly authorized.
Diamond Entertainment Corporation
November 13, 1996
James K.T. Lu
Chief Executive Officer, Secretary
and Director
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
this schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statements of operations and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> mar-31-1996
<PERIOD-END> sep-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,557,496
<ALLOWANCES> 0
<INVENTORY> 1,716,156
<CURRENT-ASSETS> 3,340,081
<PP&E> 761,289
<DEPRECIATION> 535,512
<TOTAL-ASSETS> 5,820,257
<CURRENT-LIABILITIES> 5,911,392
<BONDS> 0
0
376,593
<COMMON> 9,611,834
<OTHER-SE> (10,195,820)
<TOTAL-LIABILITY-AND-EQUITY> 5,820,257
<SALES> 1,708,898
<TOTAL-REVENUES> 1,708,898
<CGS> 1,061,158
<TOTAL-COSTS> 1,007,498
<OTHER-EXPENSES> (42,508)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,374
<INCOME-PRETAX> (380,984)
<INCOME-TAX> 0
<INCOME-CONTINUING> (380,984)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (380,984)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
