Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
------------------------------------------------
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended 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 Identification No.)
incorporation or organization)
16818 Marquardt Avenue, Cerritos, California 90703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 921-3999
-----------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 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 August 9, 1996
------------- --------------------------------
Common Stock, No Par Value 12,894,941
Convertible Preferred Stock, No Par Value 483,251
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
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INDEX
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Part I: FINANCIAL INFORMATION
Item 1:...................................................Financial Statements
Balance Sheet as of June 30, 1996 [Unaudited] .............. 1.....2
Statements of Operations for the three months ended June 30,
1996 and 1995 [Unaudited]................................... 3.....
Statement of Stockholders' Equity for the three months ended June 30,
1996 [Unaudited]............................................ 4.....
Statements of Cash Flows for three months ended June 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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<TABLE>
Item 1:
DIAMOND ENTERTAINMENT CORPORATION
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BALANCE SHEET AS OF JUNE 30, 1996.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Current Assets:
Accounts Receivable - Trade - Net $ 1,150,803
Inventory 1,576,639
Prepaid Expenses and Deposits 39,732
Other Receivables 11,972
-----------
Total Current Assets 2,779,146
Property and Equipment:
Leasehold Improvements 21,599
Furniture, Fixtures and Equipment 726,021
Total - At Cost 747,620
Less: Accumulated Depreciation 519,402
Property and Equipment - Net 228,218
-----------
Film Masters and Artwork 4,126,275
Less: Accumulated Amortization 3,607,468
Total Film Masters and Artwork - Net 518,807
-----------
Other Assets:
Accounts Receivable - ATRE 1,557,838
Investment in ATRE 50,000
Idle Assets 90,931
Officer's Loan Receivable 13,969
Other Assets 23,814
-----------
Total Other Assets 1,736,552
Total Assets $ 5,262,723
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
1
</TABLE>
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<TABLE>
DIAMOND ENTERTAINMENT CORPORATION
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BALANCE SHEET AS OF JUNE 30, 1996.
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ 206,548
Accounts Payable 1,957,063
Convertible Promissory Notes Payable 1,108,488
Notes Payable 1,037,233
Royalties Payable 52,181
Lease Obligations Payable 5,586
Accrued Expenses 588,154
Customer Deposit 3,372
-----------
Total Current Liabilities 4,958,625
Long-Term Liabilities:
Notes Payable 129,721
Lease Obligations Payable 4,500
Total Long-Term Liabilities 134,221
Commitments and Contingencies [5] --
Stockholders' Equity:
Convertible Preferred Stock - No Par Value, 1,000,000 Shares Authorized,
656,174 Issued as of June 30, 1996 [of which 172,923 are held in
Treasury]376,593
Common Stock - No Par Value, 15,000,000 Shares Authorized; 12,894,941 Shares
Issued and Outstanding at June 30, 1996 9,611,834
Additional Paid-in Capital (1,310,231)
Retained Earnings [Deficit] (8,433,516)
Totals 244,680
Less: Treasury Stock [Preferred] - At Cost (48,803)
Deferred Costs [5H] (26,000)
Total Stockholders' Equity 169,877
Total Liabilities and Stockholders' Equity $ 5,262,723
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
2
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<TABLE>
DIAMOND ENTERTAINMENT CORPORATION
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STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
June 30,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Sales - Net $1,430,221 $ 3,632,000
Cost of Sales 908,122 2,252,858
---------- -----------
Gross Profit 522,099 1,379,142
---------- -----------
Operating Expenses:
Selling Expenses 343,710 735,233
General and Administrative Expenses 573,211 391,664
Provision for Doubtful Accounts 30,208 8,493
Factoring Fees 124,684 206,300
Financing Costs - Non-Cash [6F][8C] 50,000 --
Consulting Costs - Non-Cash [5H] 24,000 --
---------- -----------
Total Operating Expenses 1,145,813 1,341,690
---------- -----------
Operating [Loss] Income (623,714) 37,452
---------- -----------
Other [Income] Expenses:
Interest Expense 22,355 131,726
Interest Income - Related Party (38,408) (117,082)
---------- -----------
Total Other [Income] Expenses - Net (16,053) 14,644
---------- -----------
[Loss] Income Before Taxes (607,661) 22,808
Provision for Income Taxes -- --
---------- -----------
Net [Loss] Income $ (607,661) $ 22,808
========== ===========
Net [Loss] Income Per Share $ (.04) $ .01
========== ===========
Weighted Average Number of Shares Outstanding 13,837,280 3,086,049
========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
</TABLE>
3
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<TABLE>
DIAMOND ENTERTAINMENT CORPORATION
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STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
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Convertible Treasury
Preferred Stock Common Stock Additional Retained Stock Stock Total
Number of Number of Paid-in Earnings Subscription [Preferred]Deferred Stockholders'
Shares Amount Shares Amount Capital [Deficit] ReceivableAt Cost Costs Equity
<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 $(1,410,23$)(7,825,855) (86,636) (48,803) -- $616,902
Stock Options Issued [5H][6F][8C]-- -- -- -- 100,000 -- -- -- (100,000) --
Financing Expense [6F][8C] -- -- -- -- -- -- -- -- 50,000 50,000
Consulting Expense [5H] -- -- -- -- -- -- -- -- 24,000 24,000
Stock Subscription Canceled -- -- -- -- -- -- 86,636 86,636
Net [Loss] for the three months
ended June 30, 1996 -- -- -- -- -- (607,661) -- -- (607,661)
------- ------- -------- -------- --------- -------- ------ ------- -------
balance - June 30, 1996 483,251 376,593 12,894,941 $9,611,834 $(1,310,23$)(8,433,516) -- $(48,803)$(26,000) $169,877
============== =============================== ========== === ======== ======== ========
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]
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<TABLE>
Three months ended
June 30,
1 9 9 6 1 9 9 5
<S> <C> <C>
------- -------
Net Cash - Operating Activities $ (471,072) $ 99,850
---------- -----------
Investing Activities:
Advances to ATRE -- (47,300)
Proceeds from Sale of Equipment -- 4,000
Capital Expenditures (4,941) (20,904)
Masters and Artwork (67,106) (35,286)
Maturity of Certificate of Deposit -- 600,000
Proceeds from Employee Advances (4,540) (3,345)
---------- -----------
Net Cash - Investing Activities (76,587) 497,165
---------- -----------
Financing Activities:
Proceeds from Convertible Promissory Notes 1,108,488 --
Proceeds from Notes Payable 1,693,016 --
Payments of Notes Payable (2,403,391) (1,298,667)
Payments of Leases Payable (1,620) (32,952)
Cash Overdraft 151,166 734,604
---------- -----------
Net Cash - Financing Activities 547,659 (597,015)
---------- -----------
Net [Decrease] Increase in Cash and Cash Equivalents -- --
Cash and Cash Equivalents - Beginning of Years -- --
---------- -----------
Cash and Cash Equivalents - End of Years $ -- $ --
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 10,580 $ 121,000
Income Taxes $ -- $ --
The Accompanying Notes are an Integral Part of These Financial Statements.
</TABLE>
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 three months ended June 30, 1996, the Company recorded a non-cash
consulting expense of $24,000 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 consultants in connection with commitments for additional
financing for the Company [See Notes 5H, 6F 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 June 30, 1996 are shown net of an allowance for doubtful
accounts of approximately $366,000. Substantially all of the accounts receivable
at June 30, 1996, have been pledged as collateral for the line of credit [See
Note 6B].
[3] Inventory
Inventory consists of:
June 30, March 31,
1 9 9 6 1 9 9 6
Raw Materials $ 146,101 $ 137,765
Finished Goods 1,430,538 1,214,848
---------- ----------
Totals $1,576,639 $1,352,613
------ ========== ==========
[4A] Related Parties Receivables
At June 30, 1996, the Company was owed $13,969 from the President of the
Company. Interest of $408 was accrued for the June 30, 1996 quarter 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.
Proposed 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 their
portion of the proceeds from ATRE of $48,475, which was used to reduce the
accounts receivable from ATRE. The closing for the other parcel of land is
anticipated to be August of 1996 with proceeds to be reinvested into property
improvements. 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. There are two additional parcels of property to be sold.
7
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[4B] American Top Real Estate ["ATRE"] [Continued]
Accounts Receivable - The Company has a receivable [including interest] from
ATRE of $1,557,838 as of June 30, 1996. This balance includes interest income of
$38,000 for the three months ended June 30, 1996 at an annual rate of 10%.
[5] Commitments
[A] Accounts Payable - The Company is currently delinquent on a significant
amount of its accounts payable.
[B] Employment Agreements - As of June 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 21, 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 21, 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]
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[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 of the line of credit at June
30, 1996 was $188,300.
[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 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 $24,000 in the three
months ended June 30,1996. The balance of $26,000 will be expensed over the
remaining twenty-one 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 in
April, May and June of 1996 by the consultant.
[6] Notes Payable
Notes payable consist of the following:
<TABLE>
J u n e 3 0, 1 9 9 6
-------------------------------------------
Factor Interest
Type of Loan Fee Expense Amount Current Long-Term Rate Due Date
<S> <C> <C> <C> <C> <C> <C> <C>
Loan Agreement $C) -- $3,000 $ -- $ -- $ -- 50% February. 18, 1996
Installment Loan (A)-- 4,400 170,989 44,923 126,066 10% November 14, 1999
Line of Credit (B)124,684 -- 915,987 915,987 -- Various Revolving Line of Credit
Auto Loan -- 455 5,542 4,366 1,176 12% September 3, 1997
Notes Payable (D) -- 3,000 74,436 71,957 2,479 14% 1997
Convertible
Debenture (F) -- 11,500 1,108,488 1,108,488 -- 10% October 1996
------ ------ --------- ----------------
Totals $124,684 $22,355 $2,275,442$2,145,72$129,721
------ ======== ======= ===========================
</TABLE>
[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 June 30, 1996 was
approximately $171,000.
[B] Line of Credit - 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 June 30, 1996, the outstanding loan balance was $915,987.
[C] Loan Agreement - On November 18, 1995, the Company entered into a loan
agreement for $200,000 with an individual and a Company with interest at a rate
of 50%. Principal and interest were due on February 18, 1996. At June 30, 1996,
this loan was repaid.
[D] 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.
9
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[6] Notes Payable [Continued]
[E] 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. Fees and charges may be charged in addition to interest.
[F] 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 June 30, 1996, the Company received approximately
$1,108,488 on these debentures. Interest expense of $11,500 and a commission fee
of approximately $78,000 was recorded for the three months ended June 30, 1996.
For the three months ended June 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.
In July of 1996, the Company received an additional $149,500 on the convertible
debentures.
[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.
10
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DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
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[8] Capital Stock and Options [Continued]
[B] Authorized Shares - The Board of Directors agreed on April 23, 1996, to
propose at its next annual meeting to increase its authorized shares to
100,000,000 shares of common stock and 5,000,000 shares of preferred stock.
[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]
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[12] New Authoritative Pronouncements
The FASB has issued SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," which the Company adopted on April 1,1995. The adoption did
not have a material impact on the Company's financial position or results of
operations. In October of 1994, the FASB issued SFAS No. 119, "Disclosure above
Derivative Financial Instruments and Fair Value of Financial Instruments." While
SFAS No. 119 primarily creates new disclosure requirements for derivative
financial instruments which the Company does not trade in at this time, the
technical disclosure amendments to SFAS No. 107 created by SFAS No. 119 were
implemented on April 1,1996. The FASB has also issued SFAS No. 121, "Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed
of" and SFAS No. 123, "Accounting for Stock Based Compensation." The Company
adopted SFAS No. 121 and SFAS No. 123 on April 1, 1996. The FASB has also issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." which is effective for transactions occurring
after December 31, 1996. SFAS No. 125 is not expected to have a material impact
on the Company's financial statements.
[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:
June 30, 1996
Carrying Estimated
Amount Fair Value
Other Receivable $ 11,972 $ 11,972
Long-Term Debt $ 134,221 $ 134,221
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
- ------------------------------------------------------------------------------
Three months ended June 30, 1996 compared with the three months ended June 30,
1995
Results of Operations
The Company's operating loss for the three months ended June 30, 1996 was
$623,714 as compared to an operating income of $37,452 for the same period last
year. This decrease in operating income was primarily attributable to a reduced
gross profit that could not support the operating expenses of the Company.
The Company's sales for the three months ended June 30, 1996 and 1995 were
$1,430,221 and $3,632,000, respectively. The decrease in sales of approximately
$2,200,000 is primarily attributable to the Company's lack of working capital to
provide the Company the ability to deliver orders. Management believes it has a
well established customer base, including some of the nation's leading national
and regional chain stores, department stores, supermarkets and similar types of
retail outlets. This customer base could provide a platform to grow its business
by expanding the number and variety of products sold through its existing
channels, as well as expand them to new customers, both domestically and
overseas. Additionally, management intends to expand its product offerings into
higher growth and higher margin business of CD-ROM distribution, through the
licensing of family entertainment or "Edu-tainment" CD-ROM titles, either
individually or on a bundled basis, or through the acquisition on an existing
distribution company focused on the distribution of these products.
Cost of sales for the three months ended June 30, 1996 and 1995 were $908,122
and $2,252,858 or 63% and 62% of sales, respectively.
Gross profit for the three months ended June 30, 1996 and 1995 were $522,099 and
$1,379,142, or 37% and 38% of sales, respectively. The Company's gross profit
decreased by 1% as a percentage of sales, for the three months ended June 30,
1996 as compared to June 30, 1995. Depreciation and amortization, included in
the cost of sales, for the three months ended June 30, 1996 and 1995 were
$112,100 and $220,814, 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 three months ended June 30, 1996 and 1995 were
$1,145,813 and $1,341,690, respectively.
Interest expense for the three months ended June 30, 1996 and 1995 was $22,355
and $131,726, respectively. As of June 30, 1996, the outstanding bank debt was
$-0-.
Liquidity and Capital Resources
The Company's working capital [deficit] at June 30, 1996 was $(2,179,479) as
compared with a working capital [deficit] of $(1,711,626) at June 30, 1995. This
increase in the working capital [deficit] of approximately $500,000 is primarily
the result of the Company's net loss.
13
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Three months ended June 30, 1996 compared with the three months ended June 30,
1995
Liquidity and Capital Resources [Continued]
Operations
For the three months ended June 30, 1995, cash generated from operations was
$99,850 as compared to $471,072 of cash utilized for operations for the three
months ended June 30, 1996. The primary reason for the increase in the deficit
is the additional debt incurred to sustain operations. 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.
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 $24,000 in the three months ended June 30,1996.
Investing
Capital expenditures and leases for the three months ended June 30, 1996 and
1995 were $4,941 and $20,904, respectively. For the three months ended June 30,
1996 and 1995, investments in masters and artwork were $67,106 and $35,286,
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 lowering its
interest burden. The Company believes that achieving improved bank 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.
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. The closing
for the other parcel of land is expected to be $550,000. The Company is required
by the partnership agreement to make additional advances to the ATRE partnership
in the next six months. 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
- ------------------------------------------------------------------------------
Three months ended June 30, 1996 compared with the three months ended June 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 June 30,
1996, the outstanding loan balance was $915,987.
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. Fees and charges may be charged in
addition to interest.
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 June 30, 1996, the
Company received approximately $1,108,488 on these debentures. Interest expense
of $11,500 and a commission fee of approximately $78,000 was recorded for the
three months ended June 30, 1996. For the three months ended June 30, 1996, the
Company recorded a financing cost of $25,000 for the fair value of the options
granted. In July of 1996, the Company received an additional $149,500 on the
convertible debentures.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Three months ended June 30, 1996 compared with the three months ended June 30,
1995
Liquidity and Capital Resources [Continued]
New Authoritative Pronouncements
The FASB has issued SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," which the Company adopted on April 1,1995. The adoption did
not have a material impact on the Company's financial position or results of
operations. In October of 1994, the FASB issued SFAS No. 119, "Disclosure above
Derivative Financial Instruments and Fair Value of Financial Instruments." While
SFAS No. 119 primarily creates new disclosure requirements for derivative
financial instruments which the Company does not trade in at this time, the
technical disclosure amendments to SFAS No. 107 created by SFAS No. 119 were
implemented on April 1,1996. The FASB has also issued SFAS No. 121, "Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed
of" and SFAS No. 123, "Accounting for Stock Based Compensation." The Company
adopted SFAS No. 121 and SFAS No. 123 on April 1, 1996. The FASB has also issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." which is effective for transactions occurring
after December 31, 1996. SFAS No. 125 is not expected to have a material impact
on the Company's financial statements.
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
s/s James K.T. Lu
James K.T. Lu
Chief Executive Officer, Secretary
and Director
August 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
this schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations
and is qualified in its entirety by refernece to such fuinancial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> mar-31-1996
<PERIOD-END> jun-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,150,803
<ALLOWANCES> 0
<INVENTORY> 1,576,639
<CURRENT-ASSETS> 2,779,146
<PP&E> 747,620
<DEPRECIATION> 519,402
<TOTAL-ASSETS> 5,262,723
<CURRENT-LIABILITIES> 4,958,625
<BONDS> 0
0
376,593
<COMMON> 9,611,834
<OTHER-SE> (9,818,550)
<TOTAL-LIABILITY-AND-EQUITY> 5,262,723
<SALES> 1,430,221
<TOTAL-REVENUES> 1,430,221
<CGS> 908,122
<TOTAL-COSTS> 1,145,813
<OTHER-EXPENSES> 38,408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (22,325)
<INCOME-PRETAX> (607,661)
<INCOME-TAX> 0
<INCOME-CONTINUING> (607,661)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (607,661)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
