SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
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 (IRS Employer ID No.)
of incorporation or organization)
16818 Marquardt Avenue
Cerritos, California 90703
(Address of principal Zip Code
executive offices)
Registrant's telephone number, including area code: (310) 921-3999
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, no par value
Class A Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
On July 28, 1997 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $1,029,315 based upon the average of the
closing bid and asked price.
Number of shares outstanding of the issuers common stock, as of July 28, 1997,
was 17,590,941.
Documents Incorporated By Reference
Document Where Incorporated
None. N/A
1
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PART I
Item 1. BUSINESS
General
Diamond Entertainment Corporation (the "Company"), formerly known as
Trans-Atlantic Video, Inc. ("TAV"), was formed under the laws of the State of
New Jersey on April 3, 1986. On July 15, 1991, the Company completed the
acquisition (the "Acquisition") of one hundred percent (100%) of the issued and
outstanding shares of Diamond Entertainment Corporation, a California
corporation (the "California Subsidiary"). At the Company's annual meeting of
July 15, 1991, the shareholders approved the change of the Company's name to
"Diamond Entertainment Corporation."
As a full-service video product duplicating, manufacturing, packaging and
distribution company, the Company was engaged in several distinct video product
activities. The Multi Level Marketing Division and Custom Video Duplication
Division were considered the Custom Duplication Division. Through its Custom
Duplication Division, the Company duplicated and packaged video cassettes on a
custom-made basis. Customers for this service included companies and individuals
within the multi-level marketing industry, who utilized video cassettes for
product information, business recruitment, training or sales and marketing
purposes. On April 13, 1995, the Board of Directors approved the spin off of the
Custom Duplication Division. (See "Markets and Customers" for additional
disclosure).
The Company's Multi-Media Division (formerly known as the "Entertainment
Division") markets and sells a variety of video cassette titles (the "Programs")
to the budget home video market, principally through the Company's New Jersey
sales office. The Company markets its Programs for sale to national and regional
chain stores, department stores, drug stores, supermarkets and similar types of
retail outlets. These outlets, in turn generally sell the Company's products to
the public at retail prices ranging from $2.99 to $9.99 per video cassette. The
Standard Video Line and the Premier Line are considered the Multi-Media
Division. This division sells products that are either owned by the Company or
licensed to the Company by licensors. Management is committed to acquiring more
licensed video titles and upgrading the quality of its packaging and pre-printed
materials in order to enhance its available products. The customer base for
these products consists predominantly of retail stores and distributors. The
Company's present inventory of Programs consists of 833 titles including
children's cartoons, motion pictures, sports highlights, educational computer
and exercise programs, 423 of which are without copyright protection ("Public
Domain Programs") and 410 of which are subject to license agreements ("Licensed
Programs"). The feature motion pictures offered by the Company include such film
classics as "Life With Father" and "The Little Princess". The Company is
continually identifying new titles to add to its Program inventory and intends
to expand its selection of Licensed Programs which have historically shown a
higher profit margin than Public Domain Programs.
2
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For the year ended March 31, 1997 and 1996, the Company had net sales to
one customer that amounted to approximately $1,154,000 and $3,121,000,
respectively. The significant customer in 1997 and 1996 is Sam's Club. The
Company sells to the non-affiliated entity on a net sixty (60) day term. The
loss of this customer would have a material adverse effect on the Company.
In July 1991, the Company entered into a non-exclusive licensing agreement
with the Victor Company of Japan, Ltd. ("JVC"), an unrelated third party, which
authorized the Company to sell and market its products as JVC licensed VHS Video
Cassettes ("JVC Agreement"). The VHS label is commonly recognized in the video
industry as a mark of JVC licensed high quality tapes, subject to stringent
technical evaluation during the manufacturing and duplication process. In
consideration of the granting of the license to the Company, the Company was
required to pay to JVC the following licensing fees: (i) an initial evaluation
fee of (Y)1,000,000 (Yen) per product (approximately $7,500), (ii) a fee to be
paid for each product using the JVC license which is sold or otherwise disposed
of by the Company, based upon the annual volume of the duplicated cassettes as
follows: (a) under 10,000,000 cassettes, (Y)5 (Yen) (approximately $.035) per
cassette, (b) 10,000,000 to 15,000,000 cassettes at the Company's option, a flat
rate fee of $350,000 per year or (Y)5 (Yen) per cassette (approximately $.035)
per cassette, (c) in excess of 15,000,000 cassettes ($.0233 for each cassette)
plus, at the Company's option, $350,000 per year or (Y)5 (Yen) per cassette
(approximately $.035) and (d) in excess of 50,000,000 cassettes ($1,000,001 per
year). Effective April 1993, JVC changed the royalty charges from (Y)5 (Yen) per
tape to (Y)3 (Yen) per tape if the video tape program was less than 30 minutes;
and to (Y)4 (Yen) per tape of the video tape program was longer than 30 minutes.
Pursuant to the JVC Agreement, the Company agreed to undertake to comply with
certain standards and specifications involved in the manufacturing and
duplicating of video tape cassettes. In the event the Company failed to comply
with the strict quality control standards of the licensor, the license could
have been revoked and the Company would have no longer be entitled to use the
VHS system. The JVC Agreement had a term of 5 years and was to expire in July of
1996. On May 12, 1993, JVC filed a lawsuit against the Company alleging breach
of contract. A settlement between JVC and the Company was reached and the
Company agreed to pay JVC (Y)40,950,370 (Yen) for the previous royalty payments
plus 10% per annum interest charges. The Company also agreed to pay JVC $50,000
on October 1, 1993, $50,000 on October 15, 1993, $50,000 on November 15, 1993
and $50,000 every Quarter afterwards until the previous royalty obligations were
completely satisfied.
The Company settled this agreement as of March 31, 1996.
Markets and Customers
Through its Custom Video Duplication Division, the Company marketed its
services to (i) multi-level marketing companies, (ii) companies which need
production, duplication and post-production services in connection with
producing a corporate or product profile video, and (iii) video production
companies which need duplication of their video tapes.
On April 13, 1995, the Company's Board of Directors approved the spin-off
of the Custom Duplication business to Central Video, a Mexican Company. The
Board believed that this spin off transaction was in the best interest of the
Company since it could not compete effectively in the
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manufacturing and duplicating of video tapes. The Company's future focus is
product development, acquisition and distribution of video related products to
mass merchandisers and retailers. Pursuant to this transaction, Thomas Cheng,
the Company's former president and the General Manager of Central Video USA
operation surrendered his employment contract and returned 146,654 shares of the
Company's Preferred Stock back to the Company as treasury stock in exchange for
equipment with a carrying value of approximately $170,000 being transferred from
the Company and Mr. Cheng assuming all remaining obligations on these assets.
Management believes that the terms of this transaction were comparable to those
that could have been reached from sources unrelated to the Company. Mr. Cheng no
longer desired to be an officer of the Company since the Company would no longer
be in the custom duplicating business. Instead, Mr. Cheng would return his
shares of preferred stock to the Company and devote his future efforts in a
duplicating business.
On May 8, 1995, the Company completed the sale of Multi-Media
manufacturing and duplicating equipment and related assets to Central Video for
$750,000. The Company did not sell program inventory, customer lists or accounts
receivable. The Company has guaranteed Central Video a minimum of $2,500,000 a
year of production orders for a three year period. The Company satisfied this
obligation in fiscal 1996, however, in 1997, the Company did not fulfill this
obligation and is delinquent in payments to Central Video. The Company has
agreed to pay Thomas Cheng a 3% commission on orders placed with Central Video.
The Company believes this transaction will enable the Company to concentrate its
efforts and resources into product development, marketing and distribution and
at the same time reduce certain overhead costs. The Company will utilize four
contractors who specialize in video tape and CD-Rom manufacturing and
duplication. The Company believes that these arrangements will enable the
Company to meet its sales and distribution needs.
The Company presently markets its Program Inventory to large retail chain
outlets and provides each retail chain operator with brochures, advertising
materials and literature describing and promoting the Company's Program
Inventory. The Company's products are sold through approximately twenty five
(25) national retail chains primarily in the Northeast, the South and the East
Coast. These outlets sell the Company's products to the general public at retail
prices generally ranging from $2.99 to $9.99 per video cassette. For the years
ended March 31, 1997 and 1996, the Company has derived revenues from its Program
Inventory of approximately $6,400,000 and $9,100,000, respectively.
The Company markets certain of its Programs on a non-guaranteed sales
basis, net 30 to 60 days. Non-guaranteed sales entitle the Company to be paid by
the retail outlet regardless of whether the Programs are ultimately sold to the
general public and does not permit returns. The Company also has consignment
arrangements with certain catalog companies to deliver tapes to their facilities
pending their receipt of orders by customers. The Company only books sales after
the catalog Company delivers the actual funds from such sales.
The Company's marketing strategy of distributing directly to retail chain
outlets has allowed the Company to market its products at all consumer levels.
In particular, the Company seeks to attract retail customers in department,
drug, discount, electronic, music, toy and book stores as well
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as supermarkets and convenience stores. The Company has implemented a new sales
method which seeks to improve the name recognition of the Company as a video
Company specializing in educational, children and film classic video titles. In
addition, through its sales program, the Company sought to place increased focus
on the promotion of sales to major mass merchandising which would increase the
delivery of high volume orders. The Company seeks to have sales personnel at
various locations to improve sales which were previously hampered by
geographical differences.
The Company believes the future will hold technological changes,
alternative entertainment sources and distribution channels along with shifting
customer preferences. The Company's plan to enter into different types of
product distribution or different distribution is to acquire DVD titles and
introduce these titles in the 1997 CES Show. The Company also intends to be on
line with the Internet and secure a World Wide Web site for its products in
1997. In addition, the Company plans to put together an Audio Book operation in
1997 to increase sales of new audio products. These plans are to help the
Company to handle the competitiveness in the entertainment marketplace.
Program Inventory
The Company's Program Inventory consists of a total of 823 titles
appealing to all age groups. The Programs include cartoons, horror films,
science fiction, dramas, adventure stories, mysteries, musicals, comedies, fairy
tale adaptations, educational programs, sports highlights, instructional and
exercise programs. Public Domain Programs account for 51% and Licensed Programs
account for 49%of the Company's Program Inventory.
Motion Pictures in the Public Domain. The Company offers a total of 193
feature motion picture titles including many film classics, such as Life with
Father, and The Little Princess, which generally appeal to an adult audience.
The Company also markets its own special collection of favorite performers
"Festivals," including The Three Stooges, Shirley Temple, Bob Hope, Jack Benny
and Milton Berle. The Company has recently added The Our Gang Comedy Festival
and Sherlock Holmes Double Feature, as well as a science fiction category.
Children's Programs - Licensed and/or in the Public Domain. All of the
Company's cartoons are in the Public Domain including 21 cartoon Programs
redubbed in Spanish. The Company also recently licensed an animated version of
Beauty and the Beast. These Programs are generally 30 minutes in length and
consist of a series of cartoons selected by the Company. The Company also
markets 19 holiday children's features, including A Christmas Carol. The Company
has recently released eighteen Fabulous Fables which it has licenses for such as
Snow White, Cinderella, Robin Hood and Thumbelina.
In August 1995, the Company signed an agreement with Time Warner
Entertainment Company, L.P. ("Time Warner") to cease any further production or
sale of certain video cassettes and to return the cassettes and materials to
Time Warner for storage of up to three years.
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Educational Programs - Licensed. The Company has licenses to market a
total of 148 educational videos which instruct preschoolers and school age
children on topics such as learning numbers, telling time, simple mathematics,
color identification and other practical skills. In addition, the Company has
just introduced a new series of Adventures in Learning featuring such animated
classics as Johnny Appleseed, Paul Revere's Ride and King Midas.
Sports Programs - Licensed. The Company has licenses to market ten sports
videos Thrilling Moments in Basketball.
Computer Software Learning Tutorial Programs - Licensed. The Company has
licensed to market a total of 42 titles of computer tutorial videos including
titles like Quicken for Windows, etc.
The costs associated with "film masters and artworks" include the purchase
cost of masters, initial fee for right to duplicate, shooting costs and
developing costs. During the year ended March 31, 1997, the Company acquired in
excess of 75 new titles for a cost of $531,277. As of March 31, 1997, the
Company valued its Film Masters and Artwork at approximately $800,000. The
Company believes that its Film Masters and Artwork is a significant asset since
the Company derives all of its revenues from their utilization.
Licensed Programs
The licensed programs that the Company has acquired do contain limitations
from the licensors regarding the customer base where the Company can distribute
its products.
Under its licensing agreement with Aims Media, Inc. ("Aims Media"), the
Company may sell educational Programs produced by Aims Media to the home market
but is limited in its distribution so as not to sell to schools, public
libraries or government agencies. This license agreement expired on October 1,
1995 and is exclusive in the United States and "non-exclusive" in Canada. The
Company obtained an extension of its Licensing Agreement to October 1, 1997 and
has acquired thirteen new titles for distribution such as The Life of Lou
Gehrig, The Life of Louis Armstrong, The Life of Knute Rockne, plus two all star
sports videos featuring Babe Ruth, Jackie Robinson and Joe Louis. The Company
has also just released four Music Video Programs starring such internationally
known artists as Nat King Cole, Count Basie and Spike Jones. Pursuant to the
terms of the licensing agreement, the Company pays Aims Media a fee based on
both the length of the Programs and the cost of producing the master delivered
to the Company. This fee is paid fifty (50%) percent upon selection of the
Program and the balance upon receipt of the master. The Company credits this fee
and production costs against a royalty fee payable to Aims Media equal to ten
(10%) percent of gross revenues generated from the sale of the Licensed
Programs.
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The various licensing agreements provide for an advance payments ranging
from $1,500 to $15,000 and subsequent royalty payments based upon either a per
video sold fee or a percentage of wholesale price fee. As of March 31, 1997, the
Company expended $135,141 on the various licensing agreements.
Operations and Production
The Company continuously seeks to expand its Program inventory by
identifying titles which appeal to children and those which include popular
performers, characters or themes. The Company also identifies videos which are
classic films, are educational or instructional videos or which have been
requested by distributors. The Company enters into a licensing agreement with
respect to those Programs that are subject to copyright protection or obtains
documentation confirming public domain status from various unaffiliated Program
suppliers.
Raw Materials
The Company imports certain of the raw materials for its products.
Accordingly, the Company is vulnerable to the possibility of stoppage, delays or
interruptions of supplies due to foreign conditions, such as shipping delays,
acts of war, political instability or restrictions on foreign trade over which
the Company has no control. The Company's operations have not previously been
affected by foreign or political unrest.
Competition
The Company competes with many other companies which are better
established, have broader public and industry recognition, have financial
resources substantially greater than those of the Company and have manufacturing
and advanced distribution facilities than those which now or in the foreseeable
future will become available to the Company. The Company competes with all
distributors of video tapes, including the major film studios and independent
production companies. The Company's competed with many custom duplication
companies, including Cassette Duplicating Co., Celebrity Duplicating and VCA
Technicolor. In order to effectively compete in the marketplace the Company has
implemented better quality control procedures to ensure its standard quality. A
cost reduction plan has also been established to reduce its raw material cost in
order to be more competitive in price. In June of 1995, the Company spun off its
Custom Duplication Division and sold its manufacturing equipment to Central
Video. The Company continues its efforts to acquire and license and better
quality titles and thus improve the performance of the Company's products in
retail stores. The Company, has acquired a series of computer software learning
videos and a series of animal related tapes to further provide products with
strength to penetrate additional markets. The Company also acquired CD-ROM
titles and introduced these titles in the January 1996 CES Show.
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Financing Debt
In July 1996, the Company received a new financing agreement to provide
the Company with ongoing working capital. The credit line is for $2,500,000 of
which $500,000 will be guaranteed by the Company's President. The Company will
assign their accounts receivable and inventory and will pay interest at 3% per
annum plus the lender's prime rate. Fees and charges may be charged in addition
to interest. As of March 31, 1997 the outstanding loan balance was $1,918,135.
The Company is technically in default on this loan because it did not meet
certain net income criteria. The line of credit continues to be reduced by
$2,500 per day commencing May 1997.
During the quarter ended June 30, 1996, the Company issued convertible
promissory notes with 10% interest per annum and a 7% commission. The principle
amount is convertible in whole or in part into shares of common stock of the
Company at a conversion price equal to 65% of the average closing bid price for
the common stock for five 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. In connection with the debentures, the Company granted 1,000,000 warrants
exercisable at $.25 per share to two consultants. Warrants for 46,000 shares
were exercised for $11,500 during the year ended March 31, 1997.As of March 31,
1997, convertible promissory notes of $290,000 were converted into 1,450,000
shares of the Company's common stock by several offshore companies under
Regulation S and $967,988 of convertible promissory notes payable are
outstanding and as of May 1997 are in default by the Company.
American Top Real Estate, Inc. ("ATRE")
ATRE was formed in March 1989 for the purposes of acquiring, owning and
holding real property for commercial development. ATRE does not engage in any
other business operations. Since its organization, ATRE has acquired two (2)
parcels of land as hereinafter described ("Parcel 1" and "Parcel 2,"
respectively). ATRE is owned fifty percent (50%) by the Company and twenty five
percent (25%) by each of Mr. Steven Chen and Mr. Henry Kuo. Mr. Chen and Mr. Kuo
are not related or affiliated with the Company. The Company has a balance due
from ATRE in the amount of $1,588,068 and $1,519,838 on March 31, 1997 and March
31, 1996, respectively, (exclusive of an initial $50,000 investment). In May
1995, ATRE entered into a sales agreement for two acres of land for
approximately $940,000. In December 1995, the sale for one parcel of land was
closed and the Company received their portion from ATRE of $48,475, which was
used to reduce the receivable from ATRE. In September 1996 the sale of the other
parcel of land was closed and the proceeds were retained for future sewage
construction needed for the remaining property, however, the Company did receive
$121,600 from ATRE. It is anticipated that in 1997 monies will be received by
the Company for reimbursement of monies reinvested from the proceeds of prior
sales of property. There are two additional parcels of property to be sold. In
June 1997 the Company commenced negotiations for the sale of land parcels
totaling 10 acres for approximately $2,500,000. The Company anticipates the
realization of approximately $1,000,000 from this sale in 1998.
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Parcel 1 consists of 20 acres of undeveloped land in Clark County in the
State of Washington (83rd Street and I-205) and is owned seventy percent (70%)
by ATRE and thirty percent (30%) by unrelated third parties. Parcel 1 was
purchased for $1,280,086 in 1989, of which $930,086 has been paid as of March
31, 1997 and a balance of $350,000 remains outstanding. Over the last five years
the Company has contributed 50% of the $930,086 or $465,043 for Parcel I and the
remaining 50% was contributed by four private investors. The Company has
guaranteed up to $175,000 on the outstanding balance and two of the other
investors are obligated for the balance. The outstanding balance owed to the
unrelated sellers of Parcel 1 is evidenced by promissory notes bearing interest
at the approximate average annual rate of 9.5%. The promissory notes are secured
by Parcel 1 and had terms which expired in 1995 and 1996.
Parcel 2 consists of 5 1/2 acres of undeveloped property also in the
County of Clark, State of Washington. Parcel 2 is owned twenty five percent
(25%) by ATRE, twenty-five percent (25%) by Addie Soo and fifty percent (50%) by
One Pacific Corp. Ms. Soo and One Pacific Corp. are unaffiliated with the
Company. The property was purchased for a total of approximately $729,000 in
1989 of which $568,551 of the principal has been paid as of March 31, 1995 and
$162,030 remains outstanding. ATRE is obligated for $65,415 on the outstanding
balance of which the Company has guaranteed payment of $65,415. The outstanding
balance owed to the unrelated sellers of Parcel 2 is evidenced by promissory
note bearing interest at the approximate average annual rate of 9.5%. The
promissory note is secured by Parcel 2 and has terms which expired April 1,
1995. As of July 1997, one parcel was sold in September 1996.
The Promissory Note maturity dates and original land owners are as
follows:
(a) Kasma $-0- Parcel 1
(b) Swanson $-0- Parcel 1
(c) Knable $204,000.00 extended Parcel 1
(d) Fisher $ 53,316.00 01/01/98 Parcel 1
Upon the sale or development of the land, the proceeds will be repaid to
all the lenders that loaned ATRE money for land acquisition costs and advances
based on their ownership percentage. The remaining balance will be distributed
among all the shareholders of ATRE based on their ownership percentage.
The partnership agreement requires that all partners contribute capital or
loans according to the shareholders' percentages required by ATRE whenever they
are due either for land acquisition, principal, interest, property taxes or
other expenses. As of March 31, 1997, Mr. Kuo has contributed a balance of
$479,075, Mr. Chen has contributed $459,863 and DEC is owed $1,588,068,
including accrued interest. The source of the Company's contributions have been
primarily from the financing activities of the Company.
In June 1997 the Company commenced negotiations for the sale of land
parcels totaling 10 acres for approximately $2,500,000. The Company anticipates
the realization of approximately $1,000,000 from this sale in 1998. The Company
intends to use the funds it receives from the consummation of the sale to
improve the Company's cash flow for use in the Company's operations.
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Employees
As of March 31, 1997, the Company employed 28 people, 3 executives; 17 in
warehousing and related activities; and 8 in administration, sales and related
activities. During the peak season the Company has employed additional
individuals in the manufacturing operations to help with the surge for Christmas
sales orders. The Company reduces its manufacturing force after the peak season
to improve the profitability of the operations when sales orders decline.
Neither the Company's or the California Subsidiary's employees are unionized.
Management believes that it has good working relations with its employees.
Item 2. PROPERTIES
The Company leased 41,500 square feet of space at 1395 Manassero Street,
Anaheim, California from a non-affiliated party at a monthly rent of $24,108.85.
Pursuant to an amendment to the lease, the Company agreed to extend the lease
until July 31, 1996 subject to a five (5%) percent annual increase commencing at
the end of the current term. The Company subleases the facility to Central Video
for the remainder of the lease terms. The Company previously used the facility
as its headquarters. After completing the transaction with Central Video, the
Company moved its headquarters to its previous Custom Duplicating Division
office located at 3961 E. Miraloma Avenue, Anaheim, California 92806 until the
lease expired on January 31, 1996. The Company currently leases approximately
22,080 square feet of space located at 16818 Marquardt, Cerritos, California
from a non-affiliated party at a monthly rent of $9,273.60. The lease expires on
December 31, 2000.
The Company leased 5,805 square feet at 3961 Miraloma Avenue, Anaheim,
California from a non-affiliated party for a monthly rent of $3,250. The lease
expired on January 31, 1996.
The Company leases 1,200 square feet at 4400 Route 9 South, Freehold, New
Jersey from a non-affiliated party for a monthly rent of $1,950 for the purpose
of marketing and sales of the video tape products for its Multi-Media Division.
The lease expired in May 1997, however, such lease has been extended on a
month-to-month basis.
The Company leases 13,000 square feet at 1501 East Street, Anaheim,
California from Central Video for a monthly rent of $5,850 for the purpose of
storage and receiving goods. The lease expires September 1998.
The Company believes that it has sufficient space for operations for the
next twelve months.
Item 3. LEGAL PROCEEDINGS
Desktop Images, Inc. v. Diamond Entertainment Corporation, et al.
(United States District Court, District of Colorado). On August 29, 1995,
Desktop Images, Inc. filed a civil action against eight defendants including the
Company alleging infringement of Plaintiff's federally registered
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copyright, unfair and false advertising under federal law, and fraudulent
misrepresentation under Colorado common law. The complaint involves one video
tutorial product that was licensed to the Company. The license agreement
contains an indemnification of the Company in the event that the licensor did
not own the rights to the product. On or about October 5, 1995, one of the
defendants filed a motion to dismiss the complaint or in the alternative to stay
the proceedings and to compel arbitration. The Company joined the pending
motion. On June 18, 1996, the Court denied the pending motion and denied the
alternative motion to stay the motion and compel arbitration. On June 20, 1996,
the Company filed its answer denying that the Company intentionally infringed or
intentionally unfairly competed. On June 28, 1996, the Company filed an appeal
of the District Court's order and a motion to stay the proceedings in the
District Court until the appeal can be heard by the Appellate Court. On May 8,
1997, the Appellate Court granted the Company's motion to be voluntarily
dismissed as a party to the appeal. As of May 15, 1997, each of the defendants
who had joined the appeal had been voluntarily dismissed by the Appellate Court
except for Anthony Ames, an individual, and Silicon/Ames, Inc. While the Company
may have liability to the plaintiff, the Company will seek partial or full
indemnification from the licensor. The Company is not distributing the product
which is the subject of the lawsuit. Plaintiff is seeking to enjoin the Company
from infringing Plaintiff's copyright, using Plaintiff's trade name, and
claiming rights in the subject product; damages including the Company's profits
or statutory damages; an increase of damages due to alleged willful
infringement; damages for unfair competition and fraudulent misrepresentation
including exemplary and punitive damages, attorney fees; costs; interest; treble
damages and punitive damages. Discovery has been taken and was scheduled to
conclude on May 29, 1997. The parties have been involved in settlement
discussions, but settlement does not appear to be likely.
Superior Fast Freight, Inc. v. Diamond Entertainment Corporation (United
States Bankruptcy Court, Central District of California). On or about March 21,
1996, a default judgment was entered against the Company awarding damages in the
amount of $65,286.63. The suit was filed on behalf of Superior Fast Freight,
Inc., a carrier that is no longer in existence, against the Company. The Company
was not properly served, and filed a motion to set aside the default which was
granted by the court. The Company does not believe that Plaintiff is entitled to
any monies. The case arises out of a carrier bankruptcy and involves claims that
the carrier undercharged a number of companies, including the Company, for
freight services. The Company has been advised by special counsel that the judge
has written an opinion that would wipe out all the undercharged actions filed by
the Plaintiff in this bankruptcy case, and the judge has entered a blanket stay
on the further prosecution on all those cases.
Famous Music Corporation v. Diamond Entertainment Corporation and James
K.T. Lu (United States District Court, Southern District of New York). On May 1,
1997, Famous Music Corporation filed a civil action against the Company and its
President alleging infringement of the Plaintiff's federally registered
copyright in the musical composition entitled "I'm Popeye the Sailor Man" (the
"Composition"). The Complaint involves the making and distribution of a
videogram entitled "Diamond Entertainment Corporation Presents Popeye (Two
Pack)" which allegedly contains the Composition. The videogram in question is in
the public domain which is not contested by the Plaintiff, however, the
Plaintiff is claiming the making and distributing of the public domain videogram
infringes Plaintiff's alleged ownership in the Composition. The Company's answer
was due on July 7, 1997. Since December 11, 1986, the Company ceased production
and distribution of any product which contained the Composition.
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On July 25, 1996 the Company and Fun Time, Inc. entered into a
distribution agreement with Centre Entertainment, Inc. relating to a program
entitled "A Norman Rockwell Christmas Story." Centre Entertainment, Inc. claimed
that the Company was in breach of the agreement and on May 12, 1997 the parties
participated in a non-binding mediation relating to the contractual dispute. As
a result of the mediation, the parties executed a Memorandum of Understanding,
pursuant to which the parties settled the contractual dispute. In June of 1997,
licenses for Norman Rockwell Christmas Story and celebration of Christmas were
terminated. As a result all masters and inventory for these titles were returned
to the licensor in June of 1997.
The Company does not believe that an adverse decision in any one lawsuit
would 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is traded in the over-the-counter market
and was quoted on the NASDAQ system until it was delisted on August 16,1994. The
high and low bid quotations for the Common Stock for each quarterly period of
the Company's last two fiscal years are listed below. There is no public trading
market for the Units or the Class B Warrants contained therein, offered pursuant
to this Prospectus, or the Preferred Stock.
Common Stock
High Low
1991
1st quarter 1/2 1-3/8
2nd quarter 1-3/8 1/8
3rd quarter 1/8 3/4
4th quarter 3/4 3/8
Common Stock
High Low
1992
1st quarter 1 1/4
2nd quarter 13/16 1/2
3rd quarter 13/16 1/2
4th quarter 23/32 9/32
<PAGE>
1993
1st quarter 11/32 7/32
2nd quarter 13/32 5/32
3rd quarter 4-3/8 1-1/8
4th quart 2-1/4 7/8
1994
1st quarter 7/8 5/8
2nd quarter 5/8 1/4
3rd quarter 5/16 1/10
4th quarter 11/16 1/4
1995
1st quarter 1/4 1/8
2nd quarter 1/8 1/10
3rd quarter 1/8 0
4th quarter 0 0
1996
1st quarter 7/16 0
2nd quarter 11/16 .22
3rd quarter 13/16 .28
4th quarter 3/8 .15
1997
1st quarter .27 .17
2nd quarter .27 .13
The quotations set forth in the table above reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
On July 28, 1997 the closing price of the Common Stock was $.11.
As of July 28, 1997, there were approximately 1239 holders of record of
the Company's Common Stock.
<PAGE>
Item 6:
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Year ended March 31, 1997 compared with the year ended March 31, 1996
Results of Operations
The Company's operating loss for the year ended March 31, 1997 was $1,186,472 as
compared to an operating loss of $571,303 for the same period last year. This
increase in operating loss was primarily attributable to a 29% reduction in
sales that could not support the operating expenses of the Company.
The Company's sales for the years ended March 31, 1997 and 1996 were $6,444,586
and $9,117,113, respectively. The decrease in sales of approximately $2,700,000
is primarily attributable to the Company's lack of working capital to provide
the Company the ability to deliver orders. Management believes its customer
base, has decreased over the prior year, however, it also believes it could
recover to previous levels based upon managements intent to expand its product
offerings into higher growth and higher margin products with licensed title
CD-ROM and DVD distribution, or through the acquisition of an existing
distribution company.
Cost of sales for the years ended March 31, 1997 and 1996 were $3,761,175 and
$5,678,340 or 58% and 61% of sales, respectively.
Gross profit for the years ended March 31, 1997 and 1996 were $2,683,411 and
$3,438,773, or 42% and 39% of sales, respectively. Depreciation and
amortization, included in the cost of sales, for the years ended March 31, 1997
and 1996 were $64,872 and $67,216, respectively.
Operating expenses for the years ended March 31, 1997 and 1996 were $3,869,883
and $4,010,076, respectively. The Company has instituted a plan to reduce
operating expenses by streamlining its operations and reducing personnel from 32
to 22 employees.
Interest expense for the years ended March 31, 1997 and 1996 was $267,798 and
$221,140, respectively. As of March 31, 1997, the outstanding debt of the
Company was approximately $7,000,000 primarily all of which is classified as
current.
The Company's auditors have issued a going concern report. There can be no
assurance that management's plans to reduce operating losses or obtain
additional financing will be successful.
Liquidity and Capital Resources
The Company's working capital [deficit] at March 31, 1997 was $(2,722,958) as
compared with a working capital [deficit] of $(1,711,626) at March 31, 1996.
This increase in the working capital [deficit] of approximately $1,000,000 is
primarily the result of the Company's net losses.
Operations
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 general manager 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. The
Company guaranteed Central Video's general manager a minimum of $2,500,000 a
year of production orders for three years and agreed to pay Central Video's
general manager a 3% commission on orders the Company places with Central Video.
The Company satisfied this obligation in fiscal 1996, however, in 1997, the
Company did not fulfill this obligation and is delinquent in payments to Central
Video.
On December 21, 1995, the Company entered into a production agreement for annual
minimum orders totaling $500,000 with a company whose sole owner is a former
director and officer of the Company. In January 1996, the Company sold
production equipment with a book value of $64,744 to this entity for $45,000.
<PAGE>
Year ended March 31, 1997 compared with the year ended March 31, 1996
Liquidity and Capital Resources [Continued]
Operations [Continued]
For the year ended March 31, 1997, cash utilized for operations was $962,527 as
compared to $1,433,641 of cash generated from operations for the year ended
March 31, 1996. 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.
During fiscal year end March 31, 1997, the Company did engage various financial
consultants to assist the Company with its debt financing. These consultants
were issued options as consideration for partial payment of these services.
In May of 1997, the Company entered into an agreement and plan of merger between
BDC Acquisition, Inc., a newly formed wholly-owned subsidiary of the Company,
and Beyond Design Corporation ["BDC"]. The Company's subsidiary has acquired all
of the issued and outstanding stock of BDC for the issuance of an aggregate of
2,200,000 shares of the Company's common stock and the assumption of certain
outstanding obligations of BDC. Management believes that this merger will
contribute an additional $1,000,000 in sales revenue. The Company is pursuing
moving all locations to one premises which will enable the Company to further
reduce expenses.
Investing
Capital expenditures for the years ended March 31, 1997 and 1996 were $47,638
and $87,524, respectively. For the years ended March 31, 1997 and 1996,
investments in masters and artwork were $531,277 and $415,422, respectively.
Management continues to seek to acquire new titles to enhance its product lines.
The Company has a 50% real estate interest in ATRE. In May of 1995, the Company
entered into a sales agreement for two acres of land for approximately $940,000.
The Company received proceeds of $48,475 from ATRE on one parcel which closed in
December of 1995. These proceeds reduced the receivable from ATRE. In September
1996, the Company closed the escrow on the second parcel at $550,000 and
retained proceeds for the construction of the sewage requirement of this whole
parcel of 20 acres, in order to sell the remaining pieces successfully. The
Company received $121,600 from ATRE during fiscal 1997. As of July 9, 1997, ATRE
is negotiating for the sale of three parcels of property with three different
non-affiliated entities. The Company believes that contracts will be finalized
for these properties and be signed by the end of July and closed with net
proceeds of approximately $900,000 by May of 1998 and an additional $1,000,000
by August of 2000. The Company is required by the partnership agreement to make
additional advances to the ATRE partnership. A further delay in the sales of
these parcels will require additional capital contributions to be made. These
additional capital contributions by the Company and any further delay in the
sales of these parcels will have a negative impact on the Company's financial
position. Therefore, ATRE and the Company continue to seek additional equity
partners to inject capital to be used for ATRE's short- and long-term needs.
<PAGE>
Year ended March 31, 1997 compared with the year ended March 31, 1996
Liquidity and Capital Resources [Continued]
Financing
On August 30, 1996, the Company obtained an asset based lending credit line of
$2,500,000 at interest rate of 3% above prime rate. The Company used this line
to repay a revolving credit line provided by a private lender. The Company owes
approximately $2,000,000 on the line of credit. This amount is backed by pledged
the Company's receivables and inventory and $500,000 is guaranteed by the
Company's president. The Company is technically in default on this loan because
it did not meet certain net income criteria. The line of credit is reduced by
$2,500 per day commencing May of 1997. The Company believes that achieving
improved debt financing, sales growth and obtaining profitability could 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.
During fiscal 1997, 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. In
conjunction with the debentures, the Company granted 1,000,000 options
exercisable at $.25 per share to two consultants. The Company recorded a
financing cost of $25,000 for the fair value of the options granted. As of March
31, 1997, debentures of $290,000 were converted into 1,450,000 shares of the
Company's common stock by several off shore companies under Regulation S and
$967,988 of convertible promissory notes payable are outstanding and in default
as of May 1997. Interest expense of $24,702 was recorded for the year ended
March 31, 1997.
The fair value of the options was determined based upon the fair value of
services received by the Company.
The Company owes approximately $3,000,000 in debt financing by March 31, 1998.
New Authoritative Pronouncements
The FASB has also issued SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which the Company adopted on April 1, 1995. SFAS
No. 115 requires management to classify its investments in debt and equity
securities as trading, held-to-maturity, and/or available-for-sale at the time
of purchase and to reevaluate such determination at each balance sheet date. The
Company does not anticipate that it will have many investments that will qualify
as trading or held-to-maturity investments. Debt securities for which the
Company does not have the intent or ability to hold to maturity will be
classified as available-for-sale, along with most investments in equity
securities. Securities available-for-sale are to be carried at fair vale, with
any unrealized holding gains and losses, net of tax, reported in a separate
component of shareholders' equity until realized.
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March of 1995.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. The Company adopted SFAS No. 121 on April 1,
1996. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial statements. In the future, if the sum of the expected undiscounted
cash flows is less than the carrying amount of the asset, an impairment loss
would be recognized.
<PAGE>
Year ended March 31, 1997 compared with the year ended March 31, 1996
Liquidity and Capital Resources [Continued]
New Authoritative Pronouncements [Continued]
The FASB has also issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
in October 1995. SFAS No. 123 uses a fair value based method of recognition for
stock options and similar equity instruments issued to employees as contrasted
to the intrinsic valued based method of accounting prescribed by Accounting
Principles board ["APB"]Opinion No. 25, "Accounting for Stock Issued to
Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company adopted the disclosure requirements on April 1, 1996. SFAS 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounting for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
Impact of Inflation
The Company does not believe that inflation had an impact on sales or income
during the past several years. Increases in supplies or other operating costs
could adversely affect the Company's operations; however, the Company believes
it could increase prices to offset increases in costs of goods sold or other
operating costs.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following Item 13 of this Annual Report on Form 10-K.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are listed below, followed
by a brief description of their business experience during the past five years.
Name Age Position
- ------------- --- ------------------------------
James K.T. Lu 50 Chairman of The Board;
Chief Executive Officer;
Secretary and Director
Jeffrey I. Schillen 51 Executive Vice President Sales
and Marketing and Director
Murray T. Scott 75 Director
<PAGE>
All directors hold office for terms of three (3) years and until the next
annual meeting of stockholders scheduled to vote on such class of Directors and
the election and qualification of their respective successors. Directors receive
no compensation for serving on the Board, except for reimbursement of reasonable
expenses incurred in attending meetings. Officers are elected annually by the
Board of Directors and, subject to existing employment agreements, serve at the
discretion of the Board.
Under the certificate of incorporation of the Company ("Certificate of
Incorporation"), the Board of Directors of the Company is divided into three (3)
classes, with each class to be elected by the shareholders every three years.
The Company's Board presently consists of three (3) directors: one (1) Class 1
director whose term expired in 1995, two (2) Class 2 directors whose terms
expired in 1994.
Background of Executive Officers and Directors
Jeffrey I. Schillen (Class 1 Director). Mr. Schillen is Executive Vice
President of Sales and Marketing of the Company and has been a Director of the
Company since inception in April of 1986. Prior to the Acquisition, Mr. Schillen
was the President and Treasurer of the Company since April 1986. From May 1984
to April 1986, Mr. Schillen was President and Chief Operating Officer of Music
Corner Inc., a retail record, tape and video chain which he co-founded. From
1974 to April 1984, Mr. Schillen founded and served as Vice President in charge
of purchasing, store openings and acquisitions of Platter Puss Records, Inc., a
retail record, tape and video chain.
James Lu (Class 2 Director). Mr. Lu has been a director of the Company since
February 1989. Mr. Lu was elected as Chairman of the Board, Chief Executive
Officer and Secretary of the Company as of March 1, 1990. In July 1991, Mr. Lu
was appointed to the additional position of President. In order to involve
other executives in the management of the Company, Mr. Lu resigned in September
1991 as President and Chief Operating Officer and Mr. Cheng was appointed to
such positions. Mr. Lu was President and Chief Executive Officer of the
California Subsidiary from 1985 to 1990. In May 1995, Mr. Lu was appointed as
President of the Company upon Mr. Cheng's departure from the Company. Mr. Lu
received his B.S.I.E. degree from Chung Yuen University Taiwan in 1969, his
M.S.I.E. degree from the Illinois Institute of Technology in 1972 and a Masters
of Business Administration (M.B.A.) from California State University in 1981.
Murray T. Scott (Class 2 Director). Mr. Scott was appointed as a director by
the Board of Directors in November 1993 when the Board was increased to
seven (7) members. Mr. Scott has been the President and Chief Executive Officer
of Gregg's Furniture, a custom furniture building business in Victoria, Canada,
since 1958. His involvement with Gregg's Furniture today is currently in a
consulting and advisory capacity.
The Company has no standing audit, nominating or compensation committee, or
committees performing similar functions except with respect to the Company's
stock option plan. See "RESTRICTED STOCK PLAN." During the year ended March 31,
1997, the Company held one Board meeting. No director attended less than 75% of
such meetings. No director of the Company has resigned or declined to stand for
re-election due to a disagreement on any matter relating to the Company's
operations, policies or practices. [UPDATE]
Item 10. Executive Compensation [Update]
SUMMARY COMPENSATION TABLE
<TABLE>
Annual Compensation Long-Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Principal Posit Year Salary Bonus Compensation Award Options/SARs Payouts Compensation
- ----------------------- ---- -------- ----- ----------- --------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Lu 1996 $130,500 0 0 0 0 0 $33,742
Chief Executive Officer 1995 167,885 0 0 0 0 0 37,290
1994 185,718 0 0 0 0 0 37,988
Jeffrey I. Schille 1996 $ 93,000 0 0 0 0 0 $12,547
Executive Vice Presiden 1995 122,308 0 0 0 0 0 19,631
1994 113,550 0 0 0 0 0 26,340
</TABLE>
<PAGE>
Employment Agreements
Mr. Lu entered into an employment agreement with the Company for a period
of ten (10) years commencing on January 1, 1991. Mr. Lu shall receive $150,000
per year, subject to annual adjustments. The Company also maintains two life
insurance policies on Mr. Lu, both of which total $1,500,000 one of which names
the Company as beneficiary. Beginning June, 1992, the amount was reduced to an
aggregate of $1,000,000. The Company also pays Mr. Lu's medical insurance
premiums, and leasing and insurance payments for Mr. Lu's automobile,
aggregating $15,752.81 per annum.
The Company has an employment agreement with Jeffrey I. Schillen expiring
on December 31, 2000. Pursuant to the agreement, Mr. Schillen will receive an
annual salary of $90,000 subject to a consumer price index increase and a
discretionary bonus as determined by the Board of Directors which may not exceed
2% of the Company's annual pre-tax income from operations. In addition, the
Company maintains a $1,000,000 life insurance policy for the benefit of Mr.
Schillen's designated beneficiary.
On April 23, 1996, the Board of Directors reserved 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.
None of the employment agreements which the Company has with any of the
executives, indicated above, provides for any specific compensation to such
individuals should their respective employment agreements be terminated prior to
expiration of the term of such agreements.
Beginning January 1, 1997, both Mr. Lu and Mr. Schillen agreed to
temporarily reduce their monthly salary to $1,000 each until the end of 1997
when the condition of the Company becomes more stable and each will resume
receiving salary at their normal levels.
Restricted Stock Plan
On May 25, 1989, the Company's directors and stockholders approved the
Company's 1989 restricted stock plan (the "Restricted Plan") authorizing the
granting of shares of Common Stock. Pursuant to the Restricted Plan, up to
100,000 shares of Common Stock subject to certain restrictions, (the "Restricted
Shares") could be granted to officers and other key employees of the Company
until May 2, 1994. The Board of Directors is responsible for determining the
individual who will be granted Restricted Shares, the consideration, if any, to
be paid by the grantee, and the terms and conditions of the Restricted Shares.
The terms and conditions of each grant of Restricted Shares need not be
identical to previous grants. No officer who serves as a director will
participate in the granting of Restricted Shares to himself.
On May 25, 1989, the Board of Directors granted a total of 85,000
Restricted Shares to certain officers of the Company. The foregoing Restricted
Shares are not transferable unless certain financial performance goals of the
Company are met. Such goals have been set based upon after-tax income of
$350,000 for fiscal 1989; $600,000 for fiscal 1990 and $1,000,000 for fiscal
1991. In the event such income levels are not met in any year, one-third of each
of the grantee's Restricted Shares will be forfeited and returned to the
Company. The Company did not meet any of the financial performance goals.
Accordingly, all of the Restricted Shares have been forfeited as a result of the
Company's failure to meet the performance goals for fiscal 1989, 1990 and 1991,
respectively.
<PAGE>
Stock Options
On October 12, 1988, the Company's directors and stockholders approved the
Company's 1988 Stock Option Plan (the "Option Plan") authorizing the granting of
incentive options and non-qualified options. The incentive options are intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended.
Pursuant to the Option Plan, options to purchase up to 10,000 shares of Common
Stock may be granted to officers, directors and key employees of the Company.
The Stock Option Committee, consisting of Messrs. Lu and Schillen, is
responsible for determining the individuals who will be granted options, the
number of shares to be subject to each option, the option price per share, and
the exercise period of each option. The option price will not be less than the
fair market value of the Company's Common Stock on the date the option is
granted. Options may be exercised by payment of cash. No option will have a term
in excess of ten years.
As to any stockholder who owns 10% or more of the Company's Common Stock,
the option price per share of an incentive option will be no less than 110% of
the fair market value of the Company's Common Stock on the date the incentive
options are granted and such options shall not have a term in excess of five
years. No stock options have been granted to date.
Item 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT [Update]
The following table sets forth information as of July __, 1997, with
respect to the beneficial ownership of the outstanding shares of the Company's
Preferred Stock and Common Stock by each person known by the Company to be the
beneficial owner of more than 5% of the outstanding shares, each of the
directors and all directors and executive officers as a group. See "DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT." Unless otherwise indicated below,
such individuals have the sole power to control the vote and dispose of such
shares of capital stock.
<TABLE>
Percentage
Shares of (%) of
Shares Percentage Common Stock Common Stock
of (%) of Shares Assuming Assuming
Common Total of Conversion of Conversion
Stock Common Preferred Preferred of Preferred
Name Owned Stock Stock 3) Stock(3) Stock
- ---- ------ ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
James K.T. Lu (1)........ 4,412,785 34.22% 209,287 408,110 3.16%
c/o Diamond Entertainment
Corporation
16818 Marquardt Avenue
Cerritos CA 90703
Jeffrey I. Schillen
(2)............. 3,020,750 28.43% 36,282 70,750 0.955%
c/o Diamond Entertainment
Corporation
4400 Route 9 South
Freehold, NJ 07728
Murray Scott (4)........ 800,000 6.20% 75,796 147,802 1.15%
c/o Diamond Entertainment
Corporation
16818 Marquardt Avenue
Cerritos, CA 90703
Pacesetter Int'l Co..... 2,538,446 19.68% -0- -0- -0-
Hong Kong
All directors and
officers as a group
(3 persons)............ 8,233,535 63.85% 321,365 626,662 4.86%
(1) Mr. Lu is the Chief Executive Officer; Secretary and Director of the Company.
</TABLE>
<PAGE>
(2) Mr. Schillen may be deemed a "parent" or "promoter" of the Company as such
terms are defined in the Securities Act of 1933, as amended, by virtue of
being a founder and a Senior Executive Vice President of the Company.
(3) The Preferred Stock entitles the holder to 1.95 votes for each share owned
and each share may be converted into 1.95 shares of Common Stock.
(4) Mr. Scott is a Director of the Company.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 31, 1990, in consideration for the issuance of 60,000 shares of
capital stock of the California Subsidiary, certain individuals including
Messrs. Lu, Cheng and Winters issued unsecured promissory notes to the
California Subsidiary for $1,380,000. The promissory notes provided interest at
the annual rate of 9% and were due March 31, 1995. Pursuant to such transaction,
the following individuals issued promissory notes to the California Subsidiary:
James Lu - $529,000; Thomas Cheng - $368,000; Edward Winters, Sam Chang and
Murray Scott - $160,000 each. On March 31, 1994, the Company canceled the
promissory notes which had an aggregate principal balance of $865,836 and
recorded compensation expense of the same amount. On December 20, 1994, the
Board of Directors revoked its June 23, 1994 election to forgive the receivable
and reduced the price on the unpaid shares of stock to $.125 per share. In March
1995, the Company forgave the accrued interest receivable of $274,115 on the
stock subscription receivable.
On July 15, 1991 as a part of a business combination with Trans-Atlantic
Video, Inc., the Company issued 1,000,000 shares of voting preferred stock which
were convertible into 1,950,000 shares of voting common stock.
The Company has advanced approximately $1,200,000 to ATRE in order to
enable American Top Real Estate to meet the obligations and thereby protecting
the Company's 50% owned 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 earning and losses. On January
19, 1994, ATRE entered into an amended agreement to sell a parcel of land for
$4,400,000. ATRE has a 70% interest in this land. In August of 1994, the escrow
agreement for $4,400,000 was canceled on this contract due to the final user's
request for a two year delay. ATRE declined to accommodate this request.
In May 1995, ATRE entered into a sales agreement for two acres of land for
approximately $940,000. In December 1995, the sale of one parcel of land was
closed and the Company received its portion of the proceeds from ATRE of
$48,475, which was used to reduce the accounts receivable from ATRE. In
September 1996 the sale of the other parcel of land was closed and the proceeds
were retained for future sewage construction needed for the remaining property,
however, the Company did receive $121,600 from ATRE. It is anticipated that in
1997 monies will be received by the Company for reimbursement of monies
reinvested from the proceeds of prior sales of property. There are two
additional parcels of property to be sold. In June 1997 the Company commenced
negotiations for the sale of land parcels totaling 10 acres for approximately
$2,500,000. The Company anticipates the realization of approximately $1,000,000
from this sale in 1998.
The Company has loaned money to its President in the form of a note
receivable totaling $61,986 at an annual interest rate of 10% for the year ended
March 31, 1997. The note is due in March 1998.
<PAGE>
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 of the entire amount. On August 28, 1992, the former Underwriter
voluntarily surrendered these warrants to the Company and the warrants were
canceled. The total indebtedness of $676,031 was due April 1, 1995 and on June
15, 1995 this obligation 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. 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.
On August 12, 1992 the Company obtained two (2) lines of credit from a
private investor. Interest is twelve (12%) percent interest 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 in connection 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 into shares of common stock and the $60,413 of accrued
interest was expensed.
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.
On August 30, 1996 the Company established a line of credit up to
$2,500,000. Of this amount, $2,000,000 is backed by pledged receivables and
inventory and $500,000 is guaranteed by the Company's President. Interest,
billed quarterly, is at Chemical Bank's prime rate plus 3%. The prime rate at
March 31, 1997 was 8.5%. The Company is technically in default on this loan
because it did not meet certain ent income criteria. The line of credit
continues to be reduced by $2,500 per day commencing May 1997.
During the quarter ended June 30, 1996 the Company issued convertible
promissory notes with 10% per annum and a 7% commission. The principal amount is
convertible in whole or in part into shares of the Company's Common Stock at a
conversion price equal to 65% of the average closing bid price for the Common
Stock for five 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. In
conjunction with the debentures, the Company granted 1,000,000 warrants
exercisable at $.25 per share to two consultants. Warrants for 46,000 shares
were exercised for $11,500 during the year ended March 31, 1997. As of March 31,
1997, convertible promissory notes of $290,000 were converted into 1,450,000
shares of the Company's Common Stock by several offshore companies under
Regulation S and $967,988 of convertible promissory notes payable are
outstanding and as of May 1997 are in default by the Company. Interest expense
of $24,702 was recorded for the year ended March 31, 1997.
<PAGE>
In March 1993, a loan was renegotiated for the sum $292,058 with principal
payments of $5,000 per month with interest of 10% per annum until November 14,
1999. The balance due at March 31, 1997 was $137,720.
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 March 31, 1996, the
outstanding balance on this loan was $150,000. The Company was in default on the
loan agreement. As of July 10, 1996, this loan was paid off.
Louis Chase, the former Senior Vice President and a Director of the
Company is an owner of National Media, Inc. ("National Media"). On January
8,1990, the Company entered into a ten year agreement with National Media,
whereby the Company agreed to manage all phases of National Media's production
equipment. The Company has been paying National Media $88,032.36 annually for
the use of all production equipment. In addition, on January 6, 1992, the
Company signed an agreement with Sony Corp. of America to guarantee an equipment
lease that Sony extended to National Media, Inc. In the event National Media
Inc. fails to pay Sony, the Company will be responsible for the payments. The
monthly lease payment was $8,285 and expired on December 31, 1993. For the year
ended March 31, 1994, the Company has paid $99,420 to Sony on behalf of NMI. The
Company treated this payment as equipment rental expense. Commencing April 1,
1994, the Company pays NMI $161,999.76 annually for the use of all their
equipment. National Media has agreed to replace an equipment which becomes
obsolete, based on industry standards. the company also has an option to
purchase the production equipment during the length of the agreement at an
agreed upon fair market value. On December 21, 1995, Louis Chase 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 der 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.
On April 13, 1995, the Company's Board of Directors approved the spin-off
of the Custom Duplication business to Central Video, a Mexican company. Pursuant
to this transaction, Thomas Cheng, the Company's former President and the
General Manager of Central Video, USA Operations surrendered his employment
contract and returned 146,654 shares of the Company's Preferred Stock back to
the Company as treasury stock. The consideration for the sale was $750,000 of
future duplication services.
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 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 production orders for the next three years. For
the year ended March 31, 1997 the Company did not meet the annual minimum order
requirement. The Company has agreed to pay the Company's former President a 3%
commission on orders the Company places with Central Video.
As of December 31, 1996, there are two employment agreements in effect 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.
<PAGE>
The common stock can be purchased in installment payments with a five year
promissory note with interest at 6% per annum at $.25 per share.
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 was 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 April 23, 1996, the Board of Directors agreed to cancel an existing
$86,636 stock subscription receivable.
The Company engaged Wharton Capital for three months commencing April 1,
1996 to arrange a line of credit of $2,000,000 or more for a 2% commission at
closing.
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 not
to exceed $750 per month.
One of the consultants, Trenwith Company, also received an aggregate of
1,000,000 warrants with an exercise price of $.25 per share.
In October 1996 the Company entered into a joint venture agreement with an
unrelated party whereby the parties distribute each other's catalogues of
products and share equally in any profits of such distribution. The agreement
will expire in October 1997. In connection with the joint venture agreement, the
Company loaned $18,000 at a 6% interest rate to the other party. The loan was
due in January 1997 and remains unpaid as of March 31, 1997.
On April 30, 1997 the Company through its wholly owned subsidiary BDC
Acquisition Corp., a New Jersey corporation (the "Subsidiary"), closed on the
merger with Beyond Design Corporation, a California corporation ("BDC"),
pursuant to an Agreement and Plan of Merger which had been executed on February
27, 1997. According to the terms of the Agreement and Plan of Merger, the
Subsidiary acquired all of the issued and outstanding capital stock of BDC for
the issuance of an aggregate of 2,200,000 shares of Common Stock of the Company
and the assumption of certain outstanding obligations of BDC.
The Company believes each of the foregoing transactions are on terms no
less favorable than could be obtained from unaffiliated third parties.
<PAGE>
Item 13. Exhibits, Lists and Reports on Form 8-K
Reports on Form 8-K
The Company filed a report on Form 8-K on April 30, 1997. Such report
covered the Company's merger with Beyond Design Corporation, a California
corporation, ("BDC")whereby the Company acquired all of the issued and
outstanding capital stock of BDC in exchange for the issuance of an aggregate of
2,200,000 shares of common stock of the Company and the assumption of certain
outstanding obligations.
Exhibits.
The following is a list of exhibits filed as part of this filing. Where so
indicated by footnote, the exhibits have been previously filed and are hereby
incorporated by reference.
Exhibit No.
2.1 Agreement dated December 28, 1990, by and among the Company, the
California Subsidiary and the shareholders of the California
Subsidiary*****
3.1 Articles of Incorporation, as amended**
3.2 By-laws, as amended**
4.1 Certificate for shares of Common Stock**
10.1 Agreement between the Registrant and the California Subsidiary, as
amended on March 13, 1989***
10.2 Agreement between the Registrant and Aims Media, Inc., dated
October 12, 1988**
10.3 Agreement between Registrant and Hollywood Video, Inc., dated
May 18, 1988**
10.4 Employment Agreement between the Registrant and Jeffrey I. Schillen,
dated January 1, 1989**
10.5 Sublease agreement between National Media and the Registrant, dated
March 1, 1989, for property leased at 920 Route 33, Freehold, New
Jersey**
10.6 Registrant's Incentive Stock Option Plan, effective January 1, 1989**
10.7 Registrant's Restricted Stock Plan, effective May 25, 1989**
10.8 Consulting Agreement between Registrant and Hibbard Brown & Co., Inc**
10.9 Amended Agreement between the Registrant and the California Subsidiary
dated September 9, 1989****
10.10 Agreement between the Registrant and Imageways, Inc., dated February 1,
1990****
<PAGE>
10.11 Agreement between the Registrant and Majestic Entertainment, Inc., dated
February 2, 1990****
10.12 Agreement between the Registrant and American Media, Inc., dated
January 1, 1990****
10.13 Agreement between the Registrant and Coe Films, Inc., dated
February 15, 1990****
10.14 Agreement between the Registrant and the California Subsidiary, dated
December 29, 1990****
10.15 Employment Agreement between James Lu and the Company's California
Subsidiary*
10.16 Form of Exclusive Agreement with Independent Distributors of Multi-Level
Marketing Company*
10.17 Lease for Office Space in Anaheim, California*
10.18 Employment Agreement between Edward Winters and the Company's California
Subsidiary*
<PAGE>
10.19 Employment Agreement between Thomas Cheng and the Company's California
Subsidiary*
10.20 Loan Agreement and Related Documents between General Bank and the
California Subsidiary dated December 27, 1990*
10.21 Unsecured Promissory Notes of certain stockholders of the Company,
aggregating $1,380,000*
10.22 $150,000 Promissory Note to Hibbard Brown & Co., Inc. dated
September 11, 1991*
10.23 $50,000 Promissory Note to Hibbard Brown & Co., Inc. dated
September 24, 1991*
10.24 $100,000 Promissory Note to Hibbard Brown & Co., Inc. dated
October 2, 1991*
10.25 Form of Agreement by and between JVC and the Company dated June 25,1991*
10.26 Agreement by and between Macrovision Corporation and the Company dated
May 23, 1991*
10.27 General Bank Loan Extension Agreements*
10.28 Employment Agreement between Roger Wu and the Company's California
Subsidiary*
10.29 $500,000 Promissory Note to First National Realty Associates, Inc. dated
June 28, 1991*
10.31 Form of Financial Consulting Agreement by and between the Company and
Hibbard Brown & Co., Inc.(1)
10.32 $510,000 Promissory Note to Hibbard Brown & Co., Inc. dated as of
July 9, 1992.
10.33 Agreement and Plan of Merger by and between BDC Acquisition Corp. and
Beyond Design Corporation, dated February 27, 1997.
22.1 Subsidiaries*
* Incorporated by reference to Registrant's Registration Statement on
Form S-1, No. 33-4213 dated November 29, 1991.
** Incorporated by reference to Registrant's Registration Statement on
Form S-18, No. 33-33997.
*** Incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-18 filed with the Securities and
Exchange Commission on June 14, 1989 under Registration Number 33-27596.
**** Incorporated by reference to Amendment No. 3 to the Registrant's
Registration Statement on Form S-18 filed with the Securities and
Exchange Commission on August 11, 1989 under Registration Number
33-27596.
***** Incorporated by reference to the Company's proxy statement dated June 11,
1991.
<PAGE>
Financials Statements
The following financial statements are included in Item 7:
Independent Auditor's Report......................................F-1
Balance Sheet as of March 31, 1997 ...............................F-2....F-3
Statements of Operations for the years ended March 31, 1997
and 1996..........................................................F-4
Statements of Stockholders' Equity [Deficit] for the years ended
March 31, 1997 and 1996...........................................F-5
Statements of Cash Flows for years ended March 31, 1997 and 1996..F-6....F-7
Notes to Financial Statements.....................................F-8....F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Diamond Entertainment Corporation
We have audited the accompanying balance sheet of Diamond
Entertainment Corporation as of March 31, 1997, and the related statements of
operations, stockholders' equity [deficit], and cash flows for each of the two
fiscal years in the period ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Diamond
Entertainment Corporation as of March 31, 1997, and the results of its
operations and its cash flows for each of the two fiscal years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 15 to
the financial statements, the Company has suffered recurring losses from
operations, has a significant working capital deficiency, has encountered
difficulties in paying its creditors on a timely basis, and is in default on the
convertible debentures and a production agreement. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 15. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
May 20, 1997
F-1
<PAGE>
Item 7: Financials
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
BALANCE SHEET AS OF MARCH 31, 1997.
- ------------------------------------------------------------------------------
Assets:
Current Assets:
Accounts Receivable - Net $ 2,121,579
Inventory 1,858,420
Prepaid Expenses and Deposits 33,542
Related Party Receivable 61,986
Other Receivables 18,802
-----------
Total Current Assets 4,094,329
Property and Equipment:
Leasehold Improvements 28,258
Furniture, Fixtures and Equipment 762,060
Total - At Cost 790,318
Less: Accumulated Depreciation 568,428
Property and Equipment - Net 221,890
-----------
Film Masters and Artwork 4,590,445
Less: Accumulated Amortization 3,780,634
Total Film Masters and Artwork - Net 809,811
-----------
Other Assets:
Accounts Receivable - ATRE 1,588,068
Investment in ATRE 50,000
Security Deposits 43,491
-----------
Total Other Assets 1,681,559
Total Assets $ 6,807,589
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
F-2
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
BALANCE SHEET AS OF MARCH 31, 1997.
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Cash Overdraft $ 157,746
Accounts Payable 2,842,152
Convertible Promissory Notes Payable 967,988
Notes Payable 2,043,859
Royalties Payable 23,278
Lease Obligations Payable 14,770
Accrued Expenses 424,356
Customer Deposit 322,450
Related Party Payable 20,688
-----------
Total Current Liabilities 6,817,287
Long-Term Liabilities:
Notes Payable 89,313
Lease Obligations Payable 14,355
Total Long-Term Liabilities 103,668
Total Liabilities 6,920,955
Commitments and Contingencies [5] --
Stockholders' Equity [Deficit]:
Convertible Preferred Stock - No Par Value, 5,000,000
Shares Authorized, 483,251 Issued as of March 31,
1997 [of which 172,923 are held in Treasury] 376,593
Common Stock - No Par Value, 100,000,000 Shares
Authorized; 15,390,941 Shares Issued and Outstanding 10,013,334
Additional Paid-in Capital (1,310,231)
Retained Earnings [Deficit] (9,129,401)
Sub-Total (49,705)
Less: Treasury Stock [Preferred] - At Cost 48,803
Deferred Costs [5I] 14,858
Total Stockholders' Equity [Deficit] (113,366)
Total Liabilities and Stockholders' Equity [Deficit] $ 6,807,589
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
F-3
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Years ended
March 31,
1 9 9 7 1 9 9 6
------- -------
Sales - Net $6,444,586 $ 9,117,113
Cost of Sales 3,761,175 5,678,340
---------- -----------
Gross Profit 2,683,411 3,438,773
---------- -----------
Operating Expenses:
Selling Expenses 1,676,506 1,478,772
General and Administrative Expenses 1,837,450 1,853,837
Factoring Fees 236,119 556,445
Bad Debt Expense 119,808 121,022
---------- -----------
Total Operating Expenses 3,869,883 4,010,076
---------- -----------
Operating [Loss] (1,186,472) (571,303)
---------- -----------
Other Expenses [Income]:
Interest Expense 267,798 221,140
Interest Income - Related Party (106,391) (116,440)
Other Income (44,333) --
---------- -----------
Other Expenses - Net 117,074 104,700
---------- -----------
[Loss] Before Extraordinary Item (1,303,546) (676,003)
Extraordinary Item -- 390,000
---------- -----------
Net [Loss] $(1,303,546) $ (286,003)
=========== ===========
Net Income [Loss] Per Share:
Before Extraordinary Item $ (.08) $ (.08)
Extraordinary Item -- .05
---------- -----------
Net [Loss] Per Share $ (.08) $ (.03)
========== ===========
Weighted Average Number of Shares Outstanding 16,287.280 8,605,246
========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
F-4
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- ------------------------------------------------------------------------------
<TABLE>
Convertible Treasury Total
Preferred Stock Common Stock Additional Retained Stock Stock Stockholders'
Number of Number of Paid-in Earning Subscription[Preferred]Deferred Equity
Shares Amount Shares Amount Capital [Deficit] Receivable At Cost Costs [Deficit]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31,1995 629,905 $376,593 2,143,710 $7,804,369 $(1,410,231) $(7,539,852) $(125,000) (13,000) -- $(907,121)
Preferred Stock Returned (146,654) -- -- -- -- -- -- (35,803) -- (35,803)
Stock Subscription
Canceled -- -- -- -- -- -- 38,364 -- -- 38,364
Conversion of Debt to
Equity -- -- 10,751,231 1,807,465 -- -- -- -- -- 1,807,465
Net [Loss] for the year
ended March 31, 1996 -- -- -- -- -- (286,003) -- -- -- (286,003)
------- ------ -------- -------- --------- ------ ------- ------- ---- --------
Balance - April 1,1996 483,251 376,593 12,894,941 9,611,834 (1,410,231) (7,825,855) (86,636) (48,803) -- 616,902
Stock Options Issued
[5I][7E][13D] -- -- -- -- 100,000 -- -- -- (100,000) --
Stock Options Exercised
[13D] -- -- 1,000,000 100,000 -- -- -- -- -- 100,000
Financing Expense
[7E][13D] -- -- -- -- -- -- -- -- 50,000 50,000
Consulting Expense [5I] -- -- -- -- -- -- -- -- 35,142 35,142
Stock Subscription
Canceled -- -- -- -- -- -- 86,636 -- -- 86,636
Exercise of Options [7E] -- -- 46,000 11,500 -- -- -- -- -- 11,500
Debt Converted to Shares
of Common Stock [7E] -- -- 1,450,000 290,000 -- -- -- -- -- 290,000
Net [Loss] for the year
ended March 31, 1997 -- -- -- -- -- (1,303,546) -- -- -- (1,303,546)
------ ------- -------- -------- --------- ---------- ------ ------- ------- ---------
Balance - March 31, 1997 483,251 376,593 15,390,941 10,013,334 (1,310,231) (9,129,401) -- (48,803) (14,858) (113,366)
======= ======= ========== ========== ========= ========= ====== ======= ======== ========
The Accompanying Notes are an Integral Part of These Financial Statements.
</TABLE>
F-5
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
March 31,
1 9 9 7 1 9 9 6
------- -------
Operating Activities:
Net [Loss] $(1,303,546) $ (286,003)
----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Provided by Operating Activities:
Depreciation 64,872 67,216
Amortization of Film Masters and Artwork 269,420 385,016
Provision for Doubtful Accounts 119,808 121,022
Losses Resulting from Write-off of Fixed Assets
and Film Masters and Artwork -- 933,123
Cancellation of Stock Subscription Receivable 86,636 38,364
Increase in Inventory Valuation Allowance 90,931 --
Amortization of Deferred Compensation 85,142 --
Services Received for Payment on Exercise of Options 111,500 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable - Trade (661,654) 1,523,874
Inventory (505,807) 431,473
Prepaid Expenses and Deposits 6,190 (6,000)
Other Assets (24,217) (19,274)
Accounts Receivable - Related Party (18,801) (13,561)
Other Receivables -- (40,280)
Increase [Decrease] in:
Accrued Payable -- (628,499)
Accounts Payable 648,328 (1,216,435)
Related Party Payable 20,688 (40,537)
Deposits 258,054 64,397
Accrued Expenses (210,071) 119,745
---------- -----------
Total Adjustments 341,019 1,719,644
---------- -----------
Net Cash - Operating Activities - Forward (962,527) 1,433,641
---------- -----------
Investing Activities:
Advances to ATRE (189,830) (464,664)
Repayments by ATRE 121,600 55,475
Proceeds from Sale of Equipment -- 60,500
Payment of Officers' Loans Receivable (48,426) --
Capital Expenditures (47,638) (87,524)
Masters and Artwork (531,277) (415,442)
Maturity of Certificate of Deposit -- 600,000
---------- -----------
Net Cash - Investing Activities - Forward $ (695,571) $ (251,655)
The Accompanying Notes are an Integral Part of These Financial Statements.
F-6
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
March 31,
1 9 9 7 1 9 9 6
------- -------
Net Cash - Operating Activities - Forwarded $ (962,527) $ 1,433,641
---------- -----------
Net Cash - Investing Activities - Forwarded (695,571) (251,655)
---------- -----------
Financing Activities:
Proceeds from Notes Payable 6,204,232 5,664,128
Payments of Notes Payable (4,695,401) (6,403,262)
Payments of Lease Payable (8,479) (193,296)
Cash Overdraft 157,746 (213,753)
Purchase of Treasury Stock -- (35,803)
---------- -----------
Net Cash - Financing Activities 1,658,098 (1,181,986)
---------- -----------
Net [Decrease] Increase in Cash and Cash Equivalen -- --
Cash - Beginning of Years -- --
---------- -----------
Cash - End of Years $ -- $ --
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 259,247 $ 750,620
Income Taxes $ 1,900 $ --
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 to the officer 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 to the underwriter for this obligation.
In December 1995, the Company settled a debt with a creditor for $390,000 less
than the carrying amount.
During the year ended March 31, 1997, the Company entered into a capital lease
agreements for equipment totaling $25,900.
During 1997, $290,000 in convertible debt was converted into 1,450,000 shares
of common stock. During the year ended March 31, 1997, 46,000 options were
exercised and the Company received $11,500 in consulting services in lieu of
cash for the exercise price. Additionally, 1,000,000 options were exercised and
the Company received $100,000 in advertising services in lieu of cash for the
exercise price.
The Accompanying Notes are an Integral Part of These Financial Statements.
F-7
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
Organization and Business - The Company is engaged in the distribution of video
tapes for the budget home video market including children's cartoons,
educational programs, motion picture, television programs, instructional
computer videos, as well as computer software and principally markets its
products to national and regional chain stores, department stores, drug stores,
supermarkets and similar types of retail outlets. Its products are sold through
national retail chains primarily in the northeast, the south and the east coast.
The Company has licensing agreements with numerous entities and in addition
maintains products without licensing agreements. The licensing agreements grant
the Company the right to manufacture, duplicate, distribute and advertise the
video or computer software. Prior to August 21, 1990, the Company was known as
ATI Mark V Products, Inc. On July 15, 1991, it completed a reverse acquisition
with Trans-Atlantic Video, Inc. ["TAV"]. On April 13, 1995, the Board of
Directors approved the spin-off of its custom duplication business.
Revenue Recognition - Sales are recorded by the Company when products are
shipped to customers and are shown net of returns and allowances.
Inventories - Inventories are stated at the lower of cost [under the first-in,
first-out method] or market.
Depreciation - Property and equipment are presented at cost less accumulated
depreciation. Depreciation is computed by the straight-line method for all
furnniture, fixtures, and equipment over 5-10 years, which represents the
estimated useful lives of the respective asset.
Leasehold improvements are being amortized over the lesser of their estimated
useful lives or the remaining term of the lease.
Depreciation expense for the years ended March 31, 1997 and 1996 is $64,872 and
$67,216, respectively.
On sale or retirement, the asset cost and related accumulated depreciation are
removed from the respective accounts, and any related gain or loss is reflected
in income. Repairs and maintenance are charged to expense when incurred.
Film Masters and Artwork - The cost of film masters and related artwork is
capitalized and amortized using the individual-film-forecast computation method
which amortizes costs in the ratio that current gross revenues bear to
anticipated total gross revenues over a period of up to three years. The Company
periodically reviews its estimates of future revenues for each master and if
necessary a revision is made to amortization rates and a writedown to net
realizable value may occur. The net film masters and artwork are presented on
the balance sheet at the net realizable value for each master. Film masters
consist of original "masters" which are purchased for the purpose of
reproduction and sale.
Amortization expense for the years ended March 31, 1997 and 1996 is $269,420 and
$385,016, respectively.
Advertising Costs - Adverting cost are expensed as incurred. Advertising costs
of $65,000 and $8,888 were expensed for the years ended March 31, 1997 and 1996,
respectively.
Bad Debts - An allowance for doubtful accounts is computed based on a review of
each individual account receivable and its respective collectibility. The
allowance for doubtful accounts is $656,112 at March 31, 1997.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Stock Options Issued to Employees - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue to
apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion
No. 25, "Accounting for Stock Issued to Employees" for financial reporting
purposes.
Deferred Taxes - There are no material temporary differences that will result in
taxable amounts in future years. The Company has sustained losses in recent
years and has a large net operating loss carryforward. No deferred taxes are
reflected in these financial statements [See Note 9].
Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to concentrations of credit risk are cash and cash equivalents and
accounts receivable arising from its normal business activities. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowance is limited. The Company places its cash and
cash equivalents with high credit quality financial institutions. The amount on
deposit in any one institution that exceeds federally insured limits is subject
to credit risk. The Company had no deposits as of March 31, 1997, with financial
institutions subject to a credit risk beyond the insured amount.
[2] Accounts Receivable
Accounts receivable at March 31, 1997 net of allowance for doubtful accounts
were $2,121,579. Substantially all of the accounts receivable at March 31, 1997,
have been pledged as collateral for the line of credit [See Note 7B].
[3] Inventory
Inventory as of March 31, 1997 consists of:
Raw Materials $ 163,080
Finished Goods 1,695,340
Totals $1,858,420
An allowance of $280,000 has been established for idle inventory of
approximately $280,000.
[4A] Related Parties Receivables
At March 31, 1997, the Company was owed $61,986 from the President of the
Company for advances and loans. Simple interest is accrued monthly at an annual
rate of 10% on the outstanding balance. This amount is due in March 1998.
[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.
F-9
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[4B] American Top Real Estate ["ATRE"] [Continued]
Sale of ATRE Real Estate Parcel - In May 1995, ATRE entered into a sales
agreement for two acres of land for approximately $940,000. In December of 1995,
the sale for one parcel of land was closed and the Company received $48,475. In
September 1996, the other parcel was sold and proceeds were retained for future
sewage construction needed for this 20 acre property, however, the Company
received $121,600 from ATRE [See Note 19C].
Accounts Receivable - The Company has a receivable [including interest] from
ATRE of $1,588,068 as of March 31, 1997. This balance includes interest income
of $102,592 for the year ended March 31, 1997 at an annual rate of 10%.
[5] Commitments
[A] Royalty Commitments - The Company has entered into various royalty
agreements for exclusive licensing of titles for terms of one to five years.
Certain agreements include minimum guaranteed payments. For the years ended
March 31, 1997 and 1996, royalty expense was $135,141 and $213,541,
respectively, pursuant to these agreements.
[B] Video Agreements - The Company has entered into various agreements to
manufacture, duplicate and distribute videos. Commissions are paid based upon
the number of videos sold.
[C] Accounts Payable - The Company is currently delinquent on a significant
amount of its accounts payable.
[D] Employment Agreements - As of December 31, 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 at $.25 per share in
installment payments with a five year promissory note with interest at 6% per
annum. These shares have not been issued.
[E] 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 general manager 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. The Company guaranteed Central Video's general manager a
minimum of $2,500,000 a year of production orders for three years and agreed to
pay Central Video's general manager a 3% commission on orders the Company places
with Central Video. The Company satisfied this obligation in fiscal 1996,
however, in 1997, the Company did not fulfill this obligation and is delinquent
in payments to Central Video.
[F] 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.
[G] Production Agreement - On December 21, 1995, the Company entered into a
production agreement for annual minimum orders totaling $500,000 with a company
whose sole owner is a former director and officer of the Company. In January
1996, the Company sold production equipment with a book value of $64,744 to this
entity for $45,000.
F-10
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[5] Commitments [Continued]
[H] 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 line of credit was unused at March 31,
1997.
[I] Financial Consultant Commitments - In June of 1996, the Company engaged
three consultants for a period of two years. The Company will reimburse the
consultants' business expenses not to exceed $750 per month. The financial
consultants received a total of 1,000,000 warrants with an exercise price of
$.25 per share in exchange for services to be rendered. The Company recorded
deferred consulting costs of $50,000 for the fair value of the warrants to
purchase the 1,000,000 shares of common stock and expensed $35,142 for the year
ended March 31, 1997. The fair value of the warrants was determined based upon
the fair value of services to be rendered by the consultant [See Note 13B].
[J] 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 competition agreement with this new custom duplication
venture by the Company's former President.
[K] Joint Venture - In October 1996, the Company entered into a joint venture
agreement with an unrelated party whereby the parties distribute each others
catalogues of products and share in the profits of any such distribution
equally. The agreement will expire in October 1997.
In connection with the joint venture agreement, the Company loaned $18,000 at a
6% interest rate to the related party. The loan receivable was due in January
1997 and remains unpaid as of March 31, 1997.
This amount is included in other receivables on the balance sheet.
[6] Lease Commitments
[A] Operating Leases - The Company leases various office and storage facilities,
automobiles and equipment under operating leases expiring between 1996 and 2001.
The following schedules shows the composition of total rental expense for all
operating leases except those with terms of a month or less that were not
renewed:
Years ended
March 31,
1 9 9 7 1 9 9 6
------- -------
Minimum Rentals $ 151,983 $ 314,890
Less: Sublease Rentals 15,000 143,087
---------- ----------
Totals $ 136,983 $ 171,803
------ ========== ==========
F-11
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[6] Lease Commitments [Continued]
The following is the approximate aggregate future minimum rentals for the next
five years for operating leases:
March 31,
1998 $ 155,438
1999 155,673
2000 128,664
2001 119,231
2002 --
----------
Total Future Minimum Lease Payments $ 559,006
The operating leases also provide for cost escalation payments.
[B] 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.
[C] On January 3, 1996, the Company entered into a two year and three month
sublease agreement for approximately 2,500 square feet with a non-affiliated
duplicating company for monthly base rent of $1,500 to be received by the
Company. The lease was canceled in October 1996.
[D] The Company leases office space in Freehold, New Jersey on a month-to-month
basis for $1,950 per month.
[7] Notes Payable
Notes payable consist of the following:
<TABLE>
M a r c h 31, 1 9 9 7
-----------------------------------------
Interest
Type of Loan Expense Amount Current Long-Term Rate Due Date
-------- ------- ------- --------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Note Payable (F) $ -- $ 75,000 $ 75,000 $ -- 9% July 1997
Installment Loan (C) 11,593 137,720 48,407 89,313 10% November 14, 1999
Notes Payable (D) 558 2,317 2,317 -- 1997
Line of Credit (B) 67,999 1,918,135 1,918,135 -- Prime + 3 Revolving Line of Credit
Convertible Debenture (E ) 24,702 967,988 967,988 -- 10% May 1997
-------- ---------- --------- ---------
Totals $104,852 $3,101,160 $3,011,847 $ 89,313
======== ========== ========= =========
</TABLE>
[A] 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 and on June 15, 1995, this obligation 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 in settlement of 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.
F-12
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[7] Notes Payable [Continued]
[B] Private Investor - Line of Credit - On August 30, 1996, the Company
established a line of credit up to $2,500,000. Of this amount, $2,000,000 is
backed by pledged receivables and inventory and $500,000 is guaranteed by the
Company's President. Interest, billed quarterly, is at Chemical Banks' prime
rate plus 3%. The prime rate at March 31, 1997 was 8.5%. The Company is
technically in default on this loan because it did not meet certain net income
criteria. Their line of credit continues to be reduced by $2,500 per day
commencing May of 1997.
[C] Installment Loan - In March 1993 a loan was renegotiated for the sum of
$292,058 with principal payments of $5,000 per month with an interest rate of
10% per annum due November 14, 1999.
[D] Note Payable for Equipment - On May 8, 1995, the Company closed a 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 [See Note
5E]. The Company has classified the obligation options as notes payable.
[E] Convertible Promissory Notes Payable - During the quarter ended June 30,
1996, the Company issued convertible promissory notes with 10% interest per
annum and a 7% commission. The principle 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. In conjunction with the
debentures, the Company granted 1,000,000 warrants exercisable at $.25 per share
to two consultants. Warrants for 46,000 shares were exercised for $11,500 during
the year ended March 31, 1997. The Company recorded a financing cost of $25,000
for the fair value of the warrants granted. As of March 31, 1997, convertible
promissory notes of $290,000 were converted into 1,450,000 shares of the
Company's common stock by several off shore companies under Regulation S and
$967,988 of convertible promissory notes payable are outstanding and as of May
1997 are in default by the Company. Interest expense of $24,702 was recorded for
the year ended March 31, 1997. The fair value of the warrants was determined
based upon the fair value of services received by the Company in May and June of
1996 [See Note 19B].
[F] Note Payable - The Company arranged financing totaling $75,000 payable in
four installments of principle plus interest from June to July of 1997. Interest
is calculated at an annual rate of 9% on actual days outstanding.
Following are maturities of debt for each of the next five years:
Current $3,011,847
1999 53,475
2000 35,838
Thereafter --
----------
Total $3,101,160
F-13
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[8] Capital Leases
The Company is the lessee of equipment under capital leases expiring in various
years through 2000. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the assets. The assets are depreciated over the lower of their related
lease terms or their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense for 1996 and 1995.
Following is a summary of property held under capital leases as of March 31,
1997:
Furniture, Fixtures and Equipment $ 60,150
Less: Accumulated Depreciation 32,385
Totals $ 27,765
------ ==========
Minimum future lease payments under capital leases as of March 31,1997 for each
of the next five years and in the aggregate are:
Year Ending March 31,
1998 $ 15,624
1999 4,679
2000 4,169
2001 3,474
2002 3,044
----------
Total Minimum Lease Payments 32,115
Less: Amount Representing Interest 2,990
Present Value of Net Minimum Lease Payments $ 29,125
------------------------------------------- ==========
[9] Income Taxes
The Company has net operating loss carryforwards of approximately $7,613,000
which expire through the year 2011. As a result of these carryforwards, the
Company has a deferred tax asset of approximately $2,641,800, which has been
offset by a valuation allowance of $2,641,800 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 for.
As of March 31, 1997, 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
2011 1,300,000
----------
Total $7,613,000
F-14
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[10] Capital Stock
[A] In May of 1995, three debt obligations totaling $1,131,434 were assumed by
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 was 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.
[B] Stock Subscription Receivable - On April 23, 1996, the Board of Directors
agreed to cancel the existing $86,636 stock subscription receivable from
officers of the Company. The Company accepted services performed by the officers
of the Company in lieu of cash in collection of the stock subscription and,
therefore, recorded the $86,636 as compensation expense.
[C] Authorized Shares - The Board of Directors agreed on April 23, 1996 to
increase its authorized shares to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock, which was approved at the August 23, 1996
annual shareholders meeting.
[D] Preferred Stock - The preferred stock has no (i) dividend rights, (ii)
sinking fund provisions, (iii) rights of redemption, (iv) classification
provisions for voting, (vi) preemptive rights, (vi) liability to further calls
or to assessments by the Company, or (vii) any provision discriminating against
any existing or prospective holder. Holders of shares of preferred stock are not
entitled to any dividend preference. In the event of liquidation, holders of
shares of preferred stock shall be entitled to a preference of $.01 per share,
and any other remaining proceeds of liquidation shall be distributed shares and
shares alike to holders of all capital stock. The issued and outstanding
preferred stock are restricted and have not been registered.
[11] Earnings Per Share
Earnings per share is based on the weighted average number of common shares
outstanding for the years ended March 31, 1997 and 1996 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
effect of warrants has not been included as its effect would be anti-dilutive.
[12] Major Supplier
For the year ended March 31, 1996, the Company had purchases from one supplier
that amounted to approximately $2,178,000 or 48% of net purchases. For the year
ended March 31, 1997, the Company had purchases from three suppliers that
amounted to approximately $2,940,211 or 83% of net purchases.
Loss of these suppliers would not significantly adversely affect the company
because sufficient replacement vendors exist in the open market.
[13] Stock Options and Warrants
During 1997, the Company issued 3,000,000 stock options to nonemployees at
exercise prices below market prices at the date of grant, ranging from $.10 to
$.25, and having a weighted average exercise price of $.20. Of these options,
1,000,000 options have a 2 year vesting period and 2,000,000 options vested at
date of grant. The total cost of issuing these stock options to nonemployees
during 1997 was approximately $100,000. The entire amount is being amortized
over the aforementioned respective vesting periods, resulting in a $85,142
charge to operations for the year ended December 31, 1997. The weighted average
fair value of stock options granted to consultants during 1997 is estimated at
$.04 using the fair value of services at date of grant.
F-15
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[13] Stock Options and Warrants [Continued]
[A] On October 12, 1988, the Company's directors and stockholders approved the
Company's 1988 Stock Option Plan [the "Option Plan"] authorizing the granting of
incentive options and non-qualified options. The incentive options are intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended.
Pursuant to the Option Plan, options to purchase up to 10,000 shares of common
stock may be granted to officers, directors and key employees of the Company.
The Stock Option Committee, consisting of Messrs. Lu and Schillen, is
responsible for determining the individuals who will be granted options, the
number of shares to be subject to each option, the option price per share, and
the exercise period of each option. The option price will not be less than the
fair market value of the Company's common stock on the date the option is
granted. Options may be exercised by payment of cash. No option will have a term
in excess of ten years. No stock options have been issued.
[B] In June 1996, the Company issued 1,000,000 common stock warrants at an
exercise price of $.25 per share as part of a consulting agreement entered into,
which term ends June 1998. As of March 31, 1997, 625,000 of those warrants are
vested. Deferred compensation resulting from this transaction was recorded at
the fair market value of the services rendered [See Note 5I].
[C] In April 1996, in connection with the convertible debentures, the Company
entered into two separate consulting agreements. As per the terms of both
contracts, the Company issued 1,000,000 common stock warrants [500,000 warrants
per contract] at an exercise price of $.25 per share [See Note 7E].
[D] 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. These options were exercised in June of 1996 for a total of 1,000,000
shares of common stock as a result of consulting services performed in 1996 by
the consultant.
[14] 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.
[15] Going Concern
The Company's financial statements are prepared in conformity with generally
accepted accounting principles, which contemplates the realization of assets and
settlements of liabilities in the normal course of business and continuation of
the Company as a going concern. The Company has incurred net losses for the
years ended March 31, 1997 and 1996 of $1,303,546 and $286,003, respectively and
has a working capital deficit at March 31, 1997 of $2,722,958. The Company has
also been experiencing difficulties in paying its vendors on a timely basis and
is in default on the convertible debentures and a production agreement [See
Notes 5E and 7B]. 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 continue 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 through a potential merger with another entity, (iii)
to seek another asset base lending line of credit and (iv) to continue to
negotiate with several reliable investors to provide the Company with debt and
equity financing for working capital purposes.
F-16
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[15] Going Concern [Continued]
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. There can be
no assurance that management's plans to reduce operating losses or obtain
additional financing to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
[16] Major Customers
For the years ended March 31, 1997 and 1996, the Company had net sales to one
customer that amounted to approximately $1,154,000 or 17.9% and $3,121,000 or
34% of net sales, respectively.
[17] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. Earlier
application is not allowed. The provisions of SFAS No. 125 must be applied
prospectively; retroactive application is prohibited. Adoption on
January 1, 1997 is not expected to have a material impact on the Company. The
FASB deferred some provisions of SFAS No. 125, which are not expected to be
relevant to the Company.
The FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
F-17
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[18] 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:
March 31, 1997
Carrying Estimated
Amount Fair Value
Other Receivable $ 80,788 $ 80,788
Long-Term Debt $ 103,668 $ 103,668
In assessing the fair value of other receivables, it was estimated 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.
[19] Subsequent Events [Unaudited]
[A] Plan of Merger - In May of 1997, the Company entered into an agreement and
plan of merger between BDC Acquisition, Inc., a newly formed wholly-owned
subsidiary of the Company, and Beyond Design Corporation ["BDC"]. The Company's
subsidiary has acquired all of the issued and outstanding stock of BDC for the
issuance of an aggregate of 2,200,000 shares of the Company's common stock and
the assumption of certain outstanding obligations of BDC.
[B] Convertible Debentures -The Company is pursuing the extension of interest
and principal payments on the $967,000 in convertible debentures that are in
default as of May 1997 and consideration by the debenture holders to convert
their debt to an equity position. No agreement has been reached.
[C] ATRE Real Estate Transactions - In July of 1997, ATRE is negotiating with
three different non-affiliated entities for the sale of three parcels of
property. The Company believes that contracts will be finalized for these
properties and be signed by the end of August and closed with net proceeds of
approximately $900,000 by May of 1998 and an additional $1,000,000 by July 2000.
[D] Settlement on Licensing Agreement - On July 25, 1996 the Company and Fun
Time, Inc. entered into a distribution agreement with Centre Entertainment, Inc.
relating to a program entitled "A Norman Rockwell Christmas Story." Centre
Entertainment, Inc. claimed that the Company was in breach of the agreement and
on May 12, 1997 the parties participated in a non-binding mediation relating to
the contractual dispute. As a result of the mediation, the parties executed a
Memorandum of Understanding, pursuant to which the parties settled the
contractual dispute. In June of 1997, licenses for Norman Rockwell Christmas
Story and celebration of Christmas were terminated. As a result all masters and
inventory for these titles were returned to the licensor in June of 1997.
. . . . . . . . . . . . . .
F-18
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: Cerritos, California
August 12, 1997
DIAMOND ENTERTAINMENT CORP.
By:/s/ James. K.T. Lu
James K.T. Lu
Chairman of the Board,
Chief Executive Officer;
President; Secretary and
Director
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
/s/ James K.T. LU Chairman of the Board August 12, 1997
- -------------------------
James K.T. Lu Chief Executive
Officer; President;
Secretary and Director
/s/ Jeffery I. Schillen Executive Vice August 12, 1997
- ----------------------------
Jeffrey I. Schillen President Sales and
Marketing and Director
/s/ Murray T. Scott
- ----------------------------
Murray T. Scott Director August 12, 1997
F-19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the consolidated
balance sheet and the consolidated statement of operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> mar-31-1997
<PERIOD-END> mar-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,121,579
<ALLOWANCES> 0
<INVENTORY> 1,858,420
<CURRENT-ASSETS> 4,094,329
<PP&E> 790,398
<DEPRECIATION> 568,428
<TOTAL-ASSETS> 6,807,589
<CURRENT-LIABILITIES> 6,817,287
<BONDS> 0
0
376,593
<COMMON> 10,013,334
<OTHER-SE> (10,503,293)
<TOTAL-LIABILITY-AND-EQUITY> 6,807,589
<SALES> 6,444,586
<TOTAL-REVENUES> 6,444,586
<CGS> 3,761,175
<TOTAL-COSTS> 3,869,883
<OTHER-EXPENSES> (150,724)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 267,798
<INCOME-PRETAX> (1,303,546)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,303,546)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,303,546)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
