Form 10-Q\A
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 December 31, 1995
------------------------------------------------
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
---------------------------
3961 Miraloma Avenue, Anaheim California 92806 (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 February 13, 1995
----------------- -----------------------------------
Common Stock, No Par Value 12,894,941
Convertible Preferred Stock, No Par Value 483,251
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
INDEX
- ------------------------------------------------------------------------------
Part I: FINANCIAL INFORMATION
Item 1:..........................................Financial Statements
Balance Sheets as of December 31, 1995 and March 31, 1995 [Unaudited]
1 2
Statements of Operations for the three months and nine months
ended December 31, 1995 and 1994 [Unaudited].............. 3.....
Statement of Stockholders' Equity for the nine months ended December 31,
1995 [Unaudited].......................................... 4
Statements of Cash Flows for nine months ended December 31, 1995
and 1994 [Unaudited]...................................... 5.....6
Notes to Financial Statements [Unaudited]................. 7.....12
Item 2:...............nagement's Discussion and Analysis of Financial Condition
and Results of Operations................................ 13....17
Signature................................................. 18....
. . . . . . . .
<PAGE>
Item 1:
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
BALANCE SHEETS [UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
December 31, March 31,
1 9 9 5 1 9 9 5
<S> <C> <C>
Assets:
Current Assets:
Certificates of Deposit $ -- $ 600,000
Accounts Receivable - Trade - Net 962,750 3,184,349
Accounts Receivable - Related Parties 19,932 --
Inventory 1,340,985 1,836,600
Prepaid Expenses and Deposits 65,893 33,732
---------- -----------
Total Current Assets 2,389,560 5,654,681
---------- -----------
Property, Plant and Equipment:
Furniture, Fixtures and Equipment 873,747 2,040,550
Less: Accumulated Depreciation 568,430 954,593
---------- -----------
Property, Plant and Equipment - Net 305,317 1,085,957
---------- -----------
Film Masters and Artwork 4,402,332 4,423,711
Less: Accumulated Amortization 3,917,329 3,741,290
---------- -----------
Total Film Masters and Artwork - Net 485,003 682,421
---------- -----------
Other Assets:
Investment in ATRE 50,000 50,000
Accounts Receivable - ATRE 1,163,481 1,110,656
Idle Assets 90,931 --
---------- -----------
Total Other Assets 1,304,412 1,160,656
---------- -----------
Total Assets $4,484,292 $ 8,583,715
========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
</TABLE>
1
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
BALANCE SHEETS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
December 31, March 31,
1 9 9 5 1 9 9 5
<S> <C> <C>
1
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Cash Overdraft $ 51,130 $ 269,134
Accounts Payable 2,328,822 3,354,875
Notes Payable 776,395 4,150,205
Lease Payable 91,965 143,316
Royalties Payable 29,404 628,499
Accrued Expenses 220,665 563,859
Related Party Payable 4,259 40,537
---------- -----------
Total Current Liabilities 3,502,640 9,150,425
---------- -----------
Long-Term Liabilities:
Notes Payable 160,174 181,538
Lease Payable 89,102 158,873
---------- -----------
Total Long-Term Liabilities 249,276 340,411
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Stockholders' Equity [Deficit]
Convertible Preferred Stock - No Par Value, 1,000,000 Shares Authorized,
656,174 issued [of which 172,923 are held in Treasury] at December 31, 1995
and 656,174 Issued [of which 26,269 are held in Treasury] and Outstanding at
March 31, 1995, Respectively376,593 376,593
Common Stock - No Par Value, 15,000,000 Shares Authorized;
12,894,941 and 2,143,710 Shares Issued and Outstanding at
December 31, 1995 and March 31, 1995, Respectively 9,611,834 7,804,369
Additional Paid-in Capital (1,410,231) (1,410,231)
Retained Earnings [Deficit] (7,672,017) (7,539,852)
---------- -----------
Totals 906,179 (769,121)
Less:Stock Subscriptions Receivable (125,000) (125,000)
Treasury Stock [Preferred] - At Cost (48,803) (13,000)
---------- -----------
Total Stockholders' Equity [Deficit] 732,376 (907,121)
---------- -----------
Total Liabilities and Stockholders' Equity [Deficit] $4,484,292 $ 8,583,715
========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
</TABLE>
2
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Three months ended Nine months ended
December 31, December 31,
------------ ------------
1 9 9 5 1 9 9 4 1 9 9 5 1 9 9 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales - Net $1,140,990 $ 2,922,026 $7,774,511 $ 9,676,811
Cost of Goods Sold 724,995 1,750,110 4,801,303 6,580,977
---------- ----------- ---------- -----------
Gross Profit 415,995 1,171,916 2,973,208 3,095,834
---------- ----------- ---------- -----------
Operating Expenses:
Selling Expenses 419,809 529,574 1,920,892 1,520,908
General and Administrative Expenses637,556 838,095 1,439,521 2,262,838
Bad Debt Expense 11,907 40,000 30,400 120,000
---------- ----------- ---------- -----------
Total Operating Expenses 1,069,272 1,407,669 3,390,813 3,903,746
---------- ----------- ---------- -----------
Operating [Loss] Income (653,277) (235,753) (417,605) (807,912)
---------- ----------- ---------- -----------
Other [Income] Expenses:
Interest Expense 36,082 81,466 189,310 291,939
Interest Income (69,950) (20,499) (84,750) (88,122)
---------- ----------- ---------- -----------
Total Other [Income] Expenses -
Net (33,868) 60,967 104,560 203,817
---------- ----------- ---------- -----------
[Loss] Income Before
Extraordinary Item (619,409) (296,720) (522,165) (1,011,729)
Extraordinary Item [3G] 390,000 -- 390,000 --
---------- ----------- ---------- -----------
Net [Loss] Income $ (229,409) $ (296,720) $ (132,165) $(1,011,729)
========== =========== ========== ===========
Net Income [Loss] Per Share:
Before Extraordinary Item $ (.04) $ (.09) $ (.04) $ (.33)
Extraordinary Item .02 -- .03 --
---------- ----------- ---------- -----------
Net Income [Loss] Per Share $ (.02) $ (.09) $ (.01) $ (.33)
========== =========== ========== ===========
Average Number of Shares
Outstanding 13,837,280 3,372,025 11,505,683 3,094,953
========== =========== ========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
</TABLE>
3
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Preferred Stock Common Stock AdditionalRetained Stock Total
Number of Number of Paid-in EarningsSubscriptioTreasury Stockholders'
Shares Amount Shares Amount Capital [DeficitReceivable Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1995 629,905 $ 376,593 2,143,710 $7,804,369$(1,410,2$1)(7,539,$52)(125,0$0)(13,000$(907,121)
Preferred Stock Returned (146,654) -- -- -- -- -- -- (35,803) (35,803)
Conversions of Debt to Equity -- -- 10,751,2311,807,465 -- -- -- -- 1,807,465
Net [Loss] for the nine months
ended December 31, 1995 -- -- -- -- -- (132,165) -- -- (132,165)
-------- --------- -------- -------- -------- --------- -------- -------- --------
Balance - December 31, 1995
[Unaudited] 483,251 $ 376,593 12,894,941$9,611,834$(1,410,2$1)(7,672,$17)(125,0$0)(48,803$732,376
======== ========= =============================== ========== ======== ===============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
4
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Three months ended Nine months ended
December 31, December 31,
------------ ------------
1 9 9 5 1 9 9 4 1 9 9 5 1 9 9 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Cash - Operating Activities $ 333,897 $ 938,970 $1,389,302 $ 879,703
---------- ---------- ---------- -----------
Investing Activities:
Proceeds from Maturity of CD -- -- 600,000 --
Advances to ATRE (39,000) -- (101,300) (81,321)
Payment of Officers Loans Receivable -- -- -- (29,073)
Employee Advances 498 (12,183) (332) --
Capital Expenditures (27,217) (47,130) (75,063) (110,861)
Masters and Artwork Expenditures (64,646) (89,132) (231,676) (272,001)
Repayment from ATRE 48,475 28,113 48,475 84,863
---------- ---------- ---------- -----------
Net Cash - Investing Activities (81,890) (120,332) 240,104 (408,393)
---------- ---------- ---------- -----------
Financing Activities:
Purchase of Treasury Stock -- -- (35,803) (13,000)
Proceeds from Notes Payable 1,132,772 2,391,137 4,895,115 6,786,002
Payments of Notes Payable (1,317,396) (3,252,448) (6,419,441) (7,165,865)
Payment of Lease Payable (43,781) (30,000) (121,122) (89,499)
Cash Overdraft (23,602) 72,673 51,845 265,130
---------- ---------- ---------- -----------
Net Cash - Financing Activities (252,007) (818,638) (1,629,406) (217,232)
---------- ---------- ---------- -----------
Net Increase in Cash and Cash
Equivalents -- -- -- 254,078
Cash and Cash Equivalents -
Beginning of Periods -- -- -- (254,078)
---------- ---------- ---------- -----------
Cash and Cash Equivalents -
End of Periods $ -- $ -- $ -- $ --
========== ========== ========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 26,040 $ 81,466 $ 179,268 $ 291,939
Income Taxes $ -- $ -- $ -- $ --
The Accompanying Notes are an Integral Part of These Financial Statements.
5
<PAGE>
</TABLE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
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 a Mexican
company, Central Video, for $750,000 by allowing credit to the Company for
future duplication services. The Company is receiving $750,000 of future
duplication services and is giving up equipment with 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
$676,031 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.
The Accompanying Notes are an Integral Part of These Financial Statements.
6
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
- ------------------------------------------------------------------------------
[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-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the management of the Company, all adjustments
consisting of normal recurring adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the nine months
ended December 31, 1995 and 1994, have been made. 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-K for the year ended March 31, 1995.
[2] Inventories
Inventories consist of:
December 31, March 31,
1 9 9 5 1 9 9 5
Raw Materials $ 392,787 $ 484,206
Work-In Process -- 2,261
Finished Goods 1,098,629 1,350,133
---------- ----------
Totals $1,491,416 $1,836,600
------ ========== ==========
[3] Notes Payable
D e c e m b e r 3 1, 1 9 9 5
-------------------------------
Type of Loan Amount Current Long-Term
Bank Line of Credit (A) $ -- $ -- $ --
Former Underwriter Loan (B) -- -- --
Line of Credit - Private Investor (C) -- -- --
Installment Loan (D) 191,828 31,654 160,174
Line of Credit (E) 744,741 744,741 --
Line of Credit (F) -- -- --
--------- --------- ---------
Totals $ 936,569 $ 776,395 $ 160,174
------ ========= ========= =========
[A] Bank Line of Credit - As of March 31, 1995, the Company had not been granted
an extension beyond its extended due date of February 28, 1995 and was not in
compliance with various financial requirements under the line of credit.
Therefore, this debt was classified as a current liability. The banks prime rate
at March 31, 1995 was 9.5%.
The certificates of deposit, the accounts receivable and inventory were pledged
as collateral against the bank loans of $1,598,973 at March 31, 1995.
On July 14, 1995, the Company paid off the bank line of credit in its entirety.
7
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS [UNAUDITED], Sheet #2
- ------------------------------------------------------------------------------
[3] Notes Payable [Continued]
[B] Former Underwriter Loan - On July 15, 1992, the Company signed a promissory
note for $510,000 with a former Underwriter. The interest rate for the note was
ten [10%] percent per annum. The former Underwriter received a total of 25,500
shares of common stock purchase warrants exercisable at $15 per share, for a
term of three [3] years in consideration for the entire amount. On August 28,
1992, the former Underwriter voluntarily surrendered to the Company these
warrants and the warrants were canceled. The total indebtedness of $676,031 was
due April 1, 1995.
Pursuant to the June 15, 1995 assignment of debt agreement, the Company's
$676,031 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. The conversion is effectuated at
.26 per share of common stock. The market value at the time of conversion was
.10 per share of common stock.
[C] Private Investor - Line of Credit - On August 12, 1992, the Company obtained
two lines of credit from a private investor. Interest is 12% per annum. As
additional consideration for the line of credit, the Company issued a total of
25,000 warrants to purchase 25,000 shares of common stock at $30 per share on or
before August 12, 1997. The lines of credit are collateralized by (i) a first
security interest [subordinate to the bank] in certain accounts receivable,
inventory, and equipment and (ii) a security interest in the Company's shares of
ATRE. These loans are personally guaranteed by two of the officers of the
Company. On October 27, 1993, the Company was granted an extension on the total
indebtedness of $752,042 to the private investor until April 15, 1995 or from
the net proceeds of a public offering, whichever was earlier. On March 31, 1995,
the Company owed a total of $812,455 of which $752,042 was principal and $60,413
was accrued interest payable. The Company was in default on the due date,
however these obligations were assigned to the Company's Chief Executive Officer
in May 1995. In July 1995, this obligation of $752,042 was converted to shares
of common stock.
[D] Installment Loan - In January 1991, the Company entered into a loan
transaction with a vendor for the principal sum of $369,633 payable in 24
consecutive equal monthly installments of $17,747 at an interest rate of 14% per
annum commencing February 15, 1991. This loan was renegotiated in December 1991
for the principal sum of $301,657 and calls for 30 consecutive equal monthly
installments of $11,618 at a reduced interest rate of 11.5% per annum commencing
January 15, 1992. This loan was renegotiated in March 1993 for the principal sum
of $292,058.12 and calls for a payment in the amount of $5,000 per month until
full payment has been completed. The balance due at March 31, 1995 and December
31, 1995 was $221,203 and $191,828, respectively.
[E] Line of Credit - On August 19, 1992, the Company renewed the revolving line
of credit with an investor. The revolving line of credit is for up to a maximum
of $600,000 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 (i) a first security interest in certain
accounts receivable from two specific customers, (ii) personally guaranteed by
two of the officers of the Company. Repayment is to be made upon receipt of any
payment of pledged invoice, 115% of the amount borrowed. On June 20, 1995, this
percentage was reduced to 111% and on September 1, 1995, was further reduced to
109% if repayment is made within 90 days, 106% if within 60 days, and 103% if
within 30 days. As of March 31, 1995 and December 31, 1995, the outstanding loan
balances were $968,494 and $744,741, respectively.
8
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS [UNAUDITED], Sheet #3
- ------------------------------------------------------------------------------
[3] Notes Payable [Continued]
[F] Line of Credit - On November 10, 1993, the Company obtained an additional
revolving line of credit up to a maximum of $400,000 from another private
investor. This loan is made in amounts equal to 92.75% of the pledged invoices
amount and is secured by (i) a first interest in certain accounts receivable
from five specific customers, (ii) personal guarantee by two of the officers of
the Company. As of March 31, 1994, the Company owed $414,475 including accrued
loan fee of 7.25% from pledged invoice amounts. Interest rate shall be 18% per
annum for repayment not made within 90 days. As of March 31, 1995 and December
31, 1995, the Company owed $115,000 and $-0-, respectively.
All loans were subordinate to the bank's line of credit at March 31, 1995.
[G] Extraordinary Item - In December 1995, the Company settled a debt with a
creditor for $390,000 less than the carrying amount.
[4] Income Taxes
As of March 31, 1995, the Company had approximately $7,700,000 in net operating
losses expiring in various years ending 2009 that will be carried forward to be
utilized against future Company earnings.
Effective April 1, 1993, the Company adopted FAS No. 109 "Accounting for Income
Taxes." The Company has a deferred tax asset of approximately $3,000,000 arising
from the net operating loss carry forward. However, due to the uncertainty that
the Company will generate income in the future sufficient to fully or partially
utilize these carryforwards, an allowance of $3,000,000 has been established to
offset this asset. The effect of adoption on current and prior financial
statements is immaterial.
[5] Capital Stock
In July 1994, the Company entered into a settlement agreement with a former
employee and director of the Company. Under the settlement agreement, the former
employee and director returned 26,269 shares of convertible preferred stock to
the Company. The Company assigned a value of $13,000 to these treasury shares
based on fair value of the stock.
In May 1995, the Company entered into a settlement agreement with a former
employee and director of the Company. Under the settlement, the former employee
and director returned 146,654 shares of convertible preferred stock to the
Company. The Company assigned a value of $35,803 to these treasury shares based
on fair value of the stock.
[6] Earnings Per Share
Earnings per share are based on the weighted average number of common shares
outstanding 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.
9
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS [UNAUDITED], Sheet #4
- ------------------------------------------------------------------------------
[7] 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.
On May 12, 1993, the Company was named as a defendant in claim for a breach of a
license agreement along with infringement on the licensor's patent and trademark
rights and failure to pay royalties pursuant to the license agreement. The
complaint was settled for $400,000, which was charged to fiscal 1994 operations.
[8] 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, 1995, 1994 and 1993 of $1,958,468, $3,371,116 and $1,601,353,
respectively. The Company has also encountered difficulties in complying with
financial requirements under its bank line of credit and has been experiencing
difficulties in paying its vendors on a timely basis. 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) the successful
reduction of its operating expenses in fiscal 1996 by elimination of its 1395
Manasero Street, California facility while still maintaining its sales volume,
(ii) to sell a parcel or all of 2 parcels of property owned by ATRE [50% owned
by the Co.] located in Vancouver, WA, (iii) to further upgrade and increase its
products lines and thus reach a consistently higher gross profit margin mix and
realize profitability, (iv) to pledge sales invoices against the bank line of
credit and pay off the bank line of credit, and seek another asset base lending
line of credit (v) to successfully convert debt obligations into equity, and
(vi) to negotiate with several reliable investors to provide the Company with
additional working capital
Management believes that these plans can be effectively implemented for the year
ended March 31, 1996. The Company will continue to seek additional interim
financing from private sources to supplementary support 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.
[9] 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 will be
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". The Company will adopt SFAS No. 121 on April 1, 1996. The FASB has also
issued SFAS No. 123, "Accounting for Stock Based Compensation." The Company will
adopt SFAS No. 123 on April 1, 1996. Adoption is not expected to be material for
the Company.
10
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS [UNAUDITED], Sheet #5
- ------------------------------------------------------------------------------
[10] Stock Subscription Receivable
On December 20, 1994, the Board of Directors revoked its June 23, 1994 election
to forgive a receivable due from its shareholders for approximately $866,000
relating to their subscription of shares of common stock of the Company. The
Board resolved on December 20, 1994 that the Company would reduce the price on
the unpaid shares of stock to $.125 per share. In March of 1995, the Company
forgave the accrued interest receivable of $205,342 on the stock subscription
receivable.
[11] 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.
[12] Sale of Multi Media Assets
On May 8, 1995, the Company closed the sales agreement with a Mexican company,
Central Video, for $750,000 by allowing credit to the Company for future
duplication services. The General Manager of Central Video is the former
President of the Company. The Company is receiving $750,000 of future
duplication services and is giving up equipment with 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.
[13] Proposed Sale of ATRE Real Estate Parcel
In May 1995, the Company 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 April of 1996.
[14] Debt Obligations Converted to Equity Conversion
In May of 1995, three debt obligations totaling $1,131,434 were assigned to the
Company's Chief Executive Officer. This officer issued promissory notes to the
three entities. On July 19, 1995, the Chief Executive Officer of the Company
converted the three debt obligations 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.
11
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS [UNAUDITED], Sheet #6
- ------------------------------------------------------------------------------
[15] Commitments
[A] Effective 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.
[B] On December 21, 1995, the Company entered into a production contract
agreement with a Company, whose sole owner is a former director and officer of
the Company who resigned December 31, 1995, for annual minimum orders totaling
$500,000. The Company also sold production equipment to this entity on January
1, 1996 for $45,000.
[C] On June 27, 1995, the Company entered into a lease for additional warehouse
space for a monthly rental of $3,637, for six months, which the Company
terminated in January of 1996. On December 1, 1995, the Company entered into a
new lease for warehouse space for monthly rental of $9,274 for 5 years.
[16] Idle Assets
In August 1995, the Company signed an agreement to cease any further production
or sale of certain videocassettes and to return the cassettes and maters for
storage of up 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.
[17] Subsequent Events
On January 3, 1996, the Company entered into a two year Duplication Agreement
with a $200,000 revolving line of credit. In addition, a two year and three
month lease agreement for approximately $2,500 square feet was entered into with
this duplicator for monthly base rent of $1,500.
. . . . . . . . . . . . . . . . . .
12
<PAGE>
Item 2:
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Nine months ended December 31, 1995 compared with the nine months ended December
31, 1994.
Results of Operations
The Company's operating [loss] for the nine months ended December 31, 1995 was
$(573,498) as compared to an operating [loss] of $(807,912) for the nine months
ended December 31, 1994. This is an improvement of approximately $234,000
resulting from a decreases in operating expenses.
The Company's sales for the nine months ended December 31, 1995 and 1994 were
$7,774,511 and $9,676,811, respectively. 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.
At March 31, 1995, the Company's business had two major divisions. A brief
description of these two divisions is as follows:
The Multi Media Division sells products that are either owned by the Company or
licensed. The customer base is predominantly retail stores or distributors.
Sales for the nine months ended December 31, 1995 for the Multi Media Division
was approximately $7,700,000. On May 8, 1995, the Company closed a $750,000
sales agreement with a Mexican company for equipment with a book value of
approximately $630,000 by allowing credit to the Company for future duplication
services. The Company has guaranteed a minimum of $2,500,000 a year production
orders for the next three years. The Mexican company has agreed to provide a
maximum $3,000,000 90 day credit line to the Company.
The Custom Duplication Division sold mainly custom duplication services to
companies that required video duplication, packaging and fulfillment services.
Sales for the nine months ended December 31, 1995 for the Custom Duplication
Division was approximately $100,000. On April 13, 1995, the Board of Directors
approved the transfer of its custom duplication business to the Company's former
President in order to concentrate and focus its resources to the MultiMedia
Division. Equipment with a book value of approximately $170,000 was transferred
from the Company and the Company's former President assumed all the 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.
Cost of sales for the nine months ended December 31, 1995 and 1994 were
$4,801,303 and $6,580,977 or 62% and 68% of sales, respectively. This
improvement is the result of improved cost reduction.
Gross profit for the nine months ended December 31, 1995 and 1994 were
$2,973,208 and $3,095,834, or 38% and 32% of sales, respectively. The Company's
gross profit increased by 5% as a percentage of sales, for the nine months ended
December 31, 1995 as compared to December 31, 1994. Depreciation and
amortization, included in the cost of goods sold, for the nine months ended
December 31, 1995 and 1994 were $422,127 and $718,438, 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 maters for
storage of up 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.
13
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Nine months ended December 31, 1995 compared with the nine months ended December
31, 1994.
Results of Operations [Continued]
Operating expenses for the nine months ended December 31, 1995 and 1994 were
$3,390,813 and $3,903,746, respectively.
Interest expense for the nine months ended December 31, 1995 and 1994 was
$189,310 and $291,939, respectively. As of December 31, 1995, the outstanding
bank debt was $-0-.
Liquidity and Capital Resources
The Company's working capital [deficit] at December 31, 1995 was $(822,649) as
compared with a working capital [deficit] of $(3,495,744) at March 31, 1995. The
improvement of approximately $2,700,000 is primarily the result of the Company
successfully negotiating current debt obligations totaling approximately
$1,400,000 into an equity conversion in July of 1995 and the reduction of bank
debt by approximately $1,600,000.
Operations
For the nine months ended December 31, 1995, cash generated from operations was
$1,389,302 as compared to $880,000 of cash generated from operations for the
nine months ended December 31, 1994. 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 was not 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.
Investing
Capital expenditures and leases for the nine months ended December 31, 1995 and
1994 were $75,063 and $110,861, respectively. For December 31, 1995 and 1994,
investments in masters and artwork were $231,676 and $272,001, respectively.
Management continues to seek to acquire new titles to enhance its product lines.
14
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Nine months ended December 31, 1995 compared with the nine months ended December
31, 1994.
Liquidity and Capital Resources [Continued]
Financing
The Company has paid off the bank line of credit to lower its interest burden in
July of 1995. The Company has realized an improved collection cycle of its
accounts receivable and has added quality and new products to its video library.
The Company believes with an injection of capital, the Company would be in an
improved financial position. The Company anticipates achieving improved bank
financing, sales growth and obtaining profitability to 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. The Company believes
that should these adverse effects materialize, management will seek additional
financing through perhaps a private placement or vendor support in order to
survive. There can be no guarantee that the Company will be successful in these
efforts.
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, then the Company's liquidity
and capital resources could be adversely affected.
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 anticipated to be April of 1996. The Company is
required by the partnership agreement to make additional advances to the ATRE
partnership in the next twelve 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.
On August 12, 1992, the Company obtained two lines of credit totaling $1,205,035
from a private investor. The balance at March 31, 1995 of $812,455 was due April
1, 1995. Interest was at 12% per annum. As additional consideration for the
lines of credit, the Company issued a total of 25,000 warrants to purchase
25,000 shares of common stock at $30 per share on or before August 12, 1997. The
lines of credit will terminate upon default by the Company and are
collateralized by (i) a first security interest [subordinate to the bank] in
certain accounts receivable, inventory, and equipment and (ii) a security
interest in the Company's shares of American Top Real Estate. These loans are
personally guaranteed by two of the officers of the Company. On March 31, 1995,
the Company was in default on the due date, however, these obligations were
assigned to the Company's Chief Executive Officer in May 1995 and in July 1995
the Officer converted this obligation to the Company's common stock.
On November 6, 1992, the Company obtained an additional revolving line of credit
up to a maximum of $600,000 from another private investor. This loan is made in
amounts equal to 70% of the pledged invoice's amount and is secured by (i) a
first security interest in certain accounts receivable from five specific
customers and (ii) personal guarantees by two of the officers of the Company. As
of March 31, 1994, there were no loans outstanding under this revolving line of
credit. Repayment of 115% of the amount borrowed is to be made upon receipt of
any payment of pledged invoices. However, on June 20, 1995, this interest was
reduced to 11% and on September 1, 1995 it was further reduced to 9% if
repayment is made within 90 days, and 6% within 60 days, and 3% within 30 days.
As of December 31, 1995, the Company owed $744,741 plus interest.
15
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Nine months ended December 31, 1995 compared with the nine months ended December
31, 1994.
Liquidity and Capital Resources [Continued]
On November 10, 1993, the Company obtained an additional revolving line of
credit up to a maximum of $400,000 from another private investor. This loan is
made in amounts equal to 92.75% of the pledged invoice's amount and is secured
by (i) a first interest in certain accounts receivable from five specific
customers and (ii) personal guarantees by two of the officers of the Company. As
of December 31, 1995, the Company owed $-0-.
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 12, 1992, the Company obtained two lines of credit from a private
investor. Interest is 12% per annum. As additional consideration for the line of
credit, the Company issued a total of 25,000 warrants to purchase 25,000 shares
of common stock at $30 per share on or before August 12, 1997. The lines of
credit are collateralized by (i) a first security interest [subordinate to the
bank] in certain accounts receivable, inventory, and equipment and (ii) a
security interest in the Company's shares of ATRE. These loans are personally
guaranteed by two of the officers of the Company. On October 27, 1993, the
Company was granted an extension on the total indebtedness of $752,042 to a
private investor until April 15, 1995 or from the net proceeds of the proposed
public offering, whichever was earlier. On March 31, 1995, the Company owes a
total of $812,455 of which $752,042 is principal and $60,413 is 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.
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 will be
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". The Company will adopt SFAS No. 121 on April 1, 1996. The FASB has also
issued SFAS No. 123, "Accounting for Stock Based Compensation." The Company will
adopt SFAS No. 123 on April 1, 1996. Adoption is not expected to be material for
the Company.
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-Q 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
June 21, 1996
17
<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> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 982,682
<ALLOWANCES> 0
<INVENTORY> 1,340,985
<CURRENT-ASSETS> 2,389,560
<PP&E> 873,747
<DEPRECIATION> 568,430
<TOTAL-ASSETS> 4,484,292
<CURRENT-LIABILITIES> 3,502,640
<BONDS> 0
0
376,593
<COMMON> 9,611,834
<OTHER-SE> 9,256,051
<TOTAL-LIABILITY-AND-EQUITY> 4,484,292
<SALES> 1,140,990
<TOTAL-REVENUES> 1,140,990
<CGS> 724,995
<TOTAL-COSTS> 1,069,272
<OTHER-EXPENSES> (36,082)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,950
<INCOME-PRETAX> (619,409)
<INCOME-TAX> 0
<INCOME-CONTINUING> (619,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 390,000
<CHANGES> 0
<NET-INCOME> (229,409)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
