UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1997 Commission File Numbe
0-17953
DIAMOND ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2748019
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16818 Marquardt Avenue
Cerritos, California 90703
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (562) 921-3999
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. As of November 19, 1997 there were 22,411,864 shares of common
stock outstanding.
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
- ------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Item 1: Financials
Balance Sheet as of September 30, 1997 [Unaudited]................ 1.....2
Statements of Operations for the three and six months ended
September 30, 1997 and 1996 [Unaudited]........................... 3.....
Statements of Stockholders' Equity for the six months
ended September 30, 1997 [Unaudited].............................. 4.....
Statements of Cash Flows for six months ended September 30, 1997
and 1996 [Unaudited].............................................. 5.....6
Notes to Financial Statements [Unaudited]......................... 7.....17
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................18.....21
Signature...........................................................22
. . . . . . . .
<PAGE>
Item 1: Financials
DIAMOND ENTERTAINMENT CORPORATION
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BALANCE SHEET AS OF SEPTEMBER 30, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
Assets:
Current Assets:
Cash $ 468,189
Accounts Receivable - Net 2,286,716
Inventory 2,819,168
Prepaid Expenses and Deposits 103,765
Related Party Receivable 7,111
-----------
Total Current Assets 5,684,949
-----------
Property and Equipment:
Leasehold Improvements 28,258
Furniture, Fixtures and Equipment 946,521
-----------
Total - At Cost 974,779
Less: Accumulated Depreciation 604,643
-----------
Property and Equipment - Net 370,136
-----------
Film Masters and Artwork 4,437,431
Less: Accumulated Amortization 3,915,343
-----------
Total Film Masters and Artwork - Net 522,088
-----------
Other Assets:
Accounts Receivable - ATRE 1,623,688
Investment in ATRE 50,000
Related Party Receivable 87,457
Other Assets 100,801
-----------
Total Other Assets 1,861,946
-----------
Total Assets $ 8,439,119
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
1
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
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BALANCE SHEET AS OF SEPTEMBER 30, 1997.
[UNAUDITED]
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 4,649,558
Convertible Promissory Notes Payable 957,075
Notes Payable 1,861,478
Lease Obligations Payable 6,755
Accrued Expenses 550,670
Customer Deposit 3,000
Related Party Payable 96,901
-----------
Total Current Liabilities 8,125,437
-----------
Long-Term Liabilities:
Notes Payable 63,241
Lease Obligations Payable 12,475
-----------
Total Long-Term Liabilities 75,716
-----------
Total Liabilities 8,201,153
-----------
Commitments and Contingencies [5] --
-----------
Stockholders' Equity:
Convertible Preferred Stock - No Par Value, 5,000,000 Shares Authorized,
483,251 Issued [of which 172,923 are held in Treasury] 376,593
Common Stock - No Par Value, 100,000,000 Shares
Authorized; 22,411,864 Shares Issued and Outstanding 10,204,614
Additional Paid-in Capital (1,210,231)
Retained Earnings [Deficit] (8,928,527)
-----------
Sub-Total 442,449
Less: Treasury Stock [Preferred] - At Cost (48,803)
Deferred Costs [5D] [5I] (155,680)
-----------
Total Stockholders' Equity 237,966
-----------
Total Liabilities and Stockholders' Equity $ 8,439,119
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
2
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
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STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Three months ended Six months ended
September 30, September 30,
------------- -------------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales - Net $2,356,894 $ 1,708,898 $4,565,683 $ 3,139,119
Cost of Sales 1,798,362 1,061,158 3,054,536 1,969,280
---------- ----------- ---------- -----------
Gross Profit 558,532 647,740 1,511,147 1,169,839
---------- ----------- ---------- -----------
Operating Expenses:
Selling Expenses 336,951 381,712 586,038 725,422
General and Administrative
Expenses 273,765 484,180 723,220 1,131,391
Factoring Fees 327 111,606 327 236,290
Bad Debt Expense 30,000 30,000 60,000 60,208
---------- ----------- ---------- -----------
Total Operating Expenses 641,043 1,007,498 1,369,585 2,153,311
---------- ----------- ---------- -----------
Operating [Loss] Income (82,511) (359,758) 141.562 (983,472)
---------- ----------- ---------- -----------
Other Expenses [Income]:
Interest Expense 75,122 63,734 139,927 86,089
Interest Income - Related Party (31,809) (42,508) (63,391) (80,916)
Other Income (135,412) -- (135,848) --
---------- ----------- ---------- -----------
Other [Income] Expenses - Net (92,099) 21,226 (59,312) 5,173
---------- ----------- ---------- -----------
Net [Loss] Income $ 9,588 $ (380,984) $ 200,874 $ (988,645)
========== =========== ========== ===========
Net [Loss] Per Share $ -- $ (.03) $ .01 $ (.07)
========== =========== ========== ===========
Weighted Average Number of
Shares Outstanding 19,909,048 13,837,280 19,150,716 13,837,280
========== =========== ========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
3
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
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STATEMENTS OF STOCKHOLDERS' EQUITY
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Convertible Treasury
Preferred Stock Common Stock Additional Retained Stock Total
Number of Number of Paid-in Earnings [Preferred] Deferred Stockholders'
Shares Amount Shares Amount Capital [Deficit] At Cost Costs Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1997 483,251 376,593 15,390,941 10,013,334 (1,310,231) (9,129,401) (48,803) (14,858) (113,366)
Stock Issued for Acquisition of
BDC -- -- 2,427,273 89,368 -- -- -- -- 89,368
Deferred Consulting Costs -- -- -- -- 100,000 -- -- (100,000) --
Shares Issued to Two Officers
for Deferral of Salary [5D] -- -- 3,750,000 75,000 -- -- -- (75,000) --
Shares Issued to Employees for
Past Services [5D] -- -- 550,000 11,000 -- -- -- -- 11,000
Shares Issued to Consultant -
Signing Bonus [5D] -- -- 250,000 5,000 -- -- -- -- 5,000
Consulting Expense -- -- -- -- -- -- -- 15,428 15,428
Compensation Expense [5D] -- -- -- -- -- -- -- 18,750 18,750
Debt Converted -- -- 43,650 10,912 -- -- -- -- 10,912
Net Income for the six months
ended September 30, 1997 -- -- -- -- -- 200,874 -- -- 200,874
------- -------- ---------- --------- ----------- ---------- -------- --------- --------
Balance - September 30, 1997 483,251 $376,593 22,411,864 $10,204,614 $(1,210,231) $(8,928,527) $(48,803) $(155,680) $237,966
======= ======== ========== =========== ============ =========== ======== ========= ========
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
4
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
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STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Six months ended
September 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Net Cash - Operating Activities $1,038,402 $(1,058,556)
---------- -----------
Investing Activities:
Advances to ATRE (75,620) (30,000)
Proceeds by ATRE 40,000 80,600
Advances to Officers (131,541) --
Payment of Officers' Loans Receivable 129,900 (38,448)
Capital Expenditures (3,953) (18,609)
Masters and Artwork (101,993) (175,604)
---------- -----------
Net Cash - Investing Activities (143,207) (182,061)
---------- -----------
Financing Activities:
Net Payments - Notes Payable (259,365) (183,468)
Payments of Lease Payable (9,895) (3,870)
Proceeds from Convertible Promissory Note Payable -- 1,257,988
Cash Overdraft (157,746) 169,967
---------- -----------
Net Cash - Financing Activities (427,006) 1,240,617
---------- -----------
Net Increase in Cash 468,189 --
Cash - Beginning of Periods -- --
---------- -----------
Cash - End of Periods $ 468,189 $ --
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 76,430 $ 121,000
Income Taxes $ -- $ --
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
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.
In April 1997, $10,912 in convertible debt was converted into 43,650 shares
of common stock.
In August 1997, the Company granted warrants in connection with consulting
agreements and recorded $100,000 in deferred consulting costs.
The Accompanying Notes are an Integral Part of These Financial Statements.
5
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
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STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities[Continued]:
In September 1997, the two officers agreed to defer 90% of their salaries
until further notice, but not beyond March 31, 1998. As consideration, the
Company granted a total of 3,750,000 shares of common stock and warrants to
purchase 3,750,000 shares of the Company's common stock at an exercise price of
$.10 per share. The common shares granted will be fully vested on December 31,
1997 and the warrants are exercisable over a two year period beginning March 31,
1997. The Company recorded $75,000 in deferred costs for the fair value of the
shares granted and amortized $18,750 in the quarter ended September 1997. No
deferred costs were recorded for the warrants granted as the fair market value
of the underlying common shares was approximately equal to the exercise price.
In September 1997, the Company entered into employment agreements with nine
employees holding key positions. The agreements provide for an aggregate of
550,000 shares of stock with a fair value of $11,000 for past services and
semi-monthly compensation of approximately $14,000. The agreements will continue
for an indefinite period of time.
The Accompanying Notes are an Integral Part of These Financial Statements.
6
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
- ------------------------------------------------------------------------------
[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.
Basis of Reporting - The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such statements include all
adjustments which are considered necessary in order to make the interim
financial statements not misleading.
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
furniture, 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 six months ended September 30, 1997 was $37,215.
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 six months ended September 30, 1997 and 1996 was
$134,710 and $192,508, respectively.
Advertising Costs - Adverting cost are expensed as incurred. Advertising costs
of $14,028 and $23,536, were expensed for the six months ended September 30,
1997 and 1996, respectively.
7
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
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 $716,112 at September 30, 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.
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 September 30, 1997 with
financial institutions subject to a credit risk beyond the insured amount.
[2] Accounts Receivable
Accounts receivable at September 30, 1997, net of allowance for doubtful
accounts, were $2,286,716. Substantially all of the accounts receivable at
September 30, 1997, have been pledged as collateral for the line of credit [See
Note 7B].
[3] Inventory
Inventory as of September 30, 1997 consists of:
Raw Materials $ 169,626
Finished Goods 2,649,542
Total $2,819,168
An allowance of $280,576 has been established for idle inventory of
approximately $280,576.
[4A] Related Parties Receivables
At September 30, 1997, the Company owes $25,286 to 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.
8
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[4B] American Top Real Estate ["ATRE"]
Investment - The Company paid $50,000 for a 50% interest in ATRE. This
investment is accounted for on the equity method. The investee has not incurred
any significant earnings or losses to date, therefore, this investment does not
reflect any adjustments for earnings and losses.
Sale of ATRE Real Estate Parcel - In May 1995, ATRE entered into a sales
agreement for two acres of land for approximately $940,000. In December of 1995,
the sale for one parcel of land was closed and the Company received $48,475. In
September 1996, the other parcel was sold and proceeds were retained for future
sewage construction needed for this 20 acre property, however, the Company
received $121,600 from ATRE.
As of September 30, 1997, ATRE is negotiating with two different non-affiliated
entities for the sale of three parcels of property. The Company believes that
contracts will be finalized for these properties and will close with net
proceeds of approximately $900,000 in 1998.
Accounts Receivable - The Company has a receivable [including interest] from
ATRE of $1,623,688 as of September 30, 1997. This balance includes interest
income of $30,000 for the six months ended September 30, 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.
[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 September 30, 1997, there are two employment
agreements in effect for two officers for annual compensation totaling $240,000.
These agreements terminate in the year 2001 and are adjusted annually in
accordance with the Consumer Price Index. The Board of Directors agreed on April
23, 1996 to reserve 1,000,000 shares of common stock for distribution to two
officers of the Company. The common stock can be purchased in installment
payments with a five year promissory note with interest at 6% per annum.
In September 1997, the two officers agreed to defer 90% of their salaries until
further notice, but not beyond March 31, 1998. As consideration, the Company
granted a total of 3,750,000 shares of common stock and warrants to purchase
3,750,000 shares of the Company's common stock at an exercise price of $.10 per
share. The common shares granted will be fully vested on December 31, 1997 and
the warrants are exercisable over a two year period beginning March 31, 1997.
The Company recorded $75,000 in deferred costs for the fair value of the shares
granted and amortized $18,750 in the quarter ended September 1997. No deferred
costs were recorded for the warrants granted as the fair market value of the
underlying common shares was approximately equal to the exercise price.
In September 1997, the Company entered into employment agreements with nine
employees holding key positions. The agreements provide for an aggregate of
550,000 shares of stock with a fair value of $11,000 for past services and
semi-monthly compensation of approximately $14,000. The agreements will continue
for an indefinite period of time.
The Company also issued 250,000 shares of stock to a consultant in consideration
of entering into a two year consulting agreement. The Company recorded $5,000 as
a signing bonus to this consultant.
9
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
- ------------------------------------------------------------------------------
[5] Commitments [Continued]
[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] 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 September
30, 1997.
[H] 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].
In August of 1997, the Company engaged a consulting firm to provide financial
advice for a period of six months. The fee for services includes a $7,500 cash
payment, a two percent cash fee on refinancing commitments and a five percent,
non-dilutive equity interest in the Company. The consulting firm will also be
entitled to a five percent fee based on the transaction value of any concluded
merger or acquisition introduced by the consulting firm.
In August of 1997, the Company engaged four consultants for a period of two
years to provide assistance in restructuring and designing the Company's
operations and long-term strategic plan. The consultants received warrants to
purchase an aggregate 2,050,000 shares of the Company's common stock at an
exercise price of $.10 per share. The warrants expire at the end of the two year
consulting period. The Company recorded deferred consulting costs of $100,000
for the fair value of the warrants and expensed $8,000 for the six months ended
September 30, 1997. The fair value of the warrants was determined based upon the
fair value of services to be rendered by the consultant [See Note 13E].
10
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
- ------------------------------------------------------------------------------
[5] Commitments [Continued]
[I] 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 September 30, 1997. This amount is included in
other receivables on the balance sheet.
[J] 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.
[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
------ ========== ==========
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.
11
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------
[6] Lease Commitments [Continued]
[B] 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.
[C] The Company leases office space in Freehold, New Jersey on a month-to-month
basis.
[7] Notes Payable
Notes payable consist of the following:
<TABLE>
S e p t e m b e r 30, 1 9 9 7
-------------------------------------------------------------------------------
Interest
Type of Loan Expense Amount Current Long-Term Rate Due Date
<S> <C> <C> <C> <C> <C> <C>
Installment Loan (B) $4,397 $122,117 $58,876 $63,241 10% November 14, 1999
Notes Payable (C) -- 379,860 379,860 -- 1997
Line of Credit (A) 108,339 1,382,742 1,382,742 -- Various Revolving Line of Credit
Convertible Debenture (D) 25,560 957,075 957,075 -- 10% May 1997
Acquired Debt -- 40,000 40,000 --
------ ------- ------- -------
Totals $138,296 $2,881,794 $2,818,553 $63,241
======== ========== ========== =======
</TABLE>
[A] 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.
[B] 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.
[C] 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 warrants as notes payable.
[D] 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. Subsequent to September 30, 1997, the Company negotiated a one year
extension agreement and has agreed to add 15% to the note as a financing cost.
12
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
- ------------------------------------------------------------------------------
[7] Notes Payable [Continued]
Following are maturities of debt for each of the next five years:
March 31,
Current $2,792,481
1999 53,475
2000 35,838
Thereafter --
----------
Total $2,881,794
==========
[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 the six months ended
September 30, 1997 and 1996.
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 $ 16,749
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.
13
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
- ------------------------------------------------------------------------------
[9] Income Taxes
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
==========
[10] Capital Stock
[A] 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.
[B] Authorized Shares - The Board of Directors agreed on April 23, 1996 to
increase its authorized shares to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock, which was approved at the August 23, 1996
annual shareholders meeting.
[C] 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 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 and options is included when
dilutive.
14
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #9
[UNAUDITED]
- ------------------------------------------------------------------------------
[12] Major Supplier
For the six months ended September 30, 1997, the Company had purchases from one
supplier that amounted to approximately $2,178,000 or 48% 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.
[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,
whose 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 17E].
[D] 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.
[E] In August 1997, the Company issued 2,050,000 common stock warrants at an
exercise price of $.10 per share as part of a consulting agreement entered into,
whose term ends August 1999. Deferred compensation resulting from this
transaction was recorded at the fair market value of the services rendered [See
Note 5H].
15
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[UNAUDITED]
- ------------------------------------------------------------------------------
[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 Company] 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.
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 six months ended September 30, 1997, the Company had net sales to two
customers that amounted to approximately $1,067,080 or 40%.
[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.
16
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #11
[UNAUDITED]
- ------------------------------------------------------------------------------
[17] New Authoritative Pronouncements [Continued]
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.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. SFAS No. 131 is not expected to have a
material impact on the Company.
[18] Acquisition
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
2,427,273 shares of the Company's common stock and the assumption of certain
outstanding obligations of BDC. The book value of the net assets acquired
approximates the fair value of the shares issued in connection with the
acquisition [See Note 7G]. This acquisition was deemed immaterial for accounting
purposes.
. . . . . . . . . . . . . .
17
<PAGE>
Item 2:
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended September 30, 1997 compared with the six months ended September
30, 1996
Results of Operations
The Company's operating income for the six months ended September 30, 1997 was
$141,562 as compared to an operating loss of $983,472 for the same period last
year. This decrease in the operating loss of approximately $1,125,000 was
primarily attributable to an increase in gross profit of approximately $340,000
and a reduction in expenses of approximately $785,000.
The Company's sales for the six months ended September 30, 1997 and 1996 were
$4,565,683 and $3,139,119, respectively. Management believes its sales are up as
a result of its acquisition of Beyond Design Corporation.
Cost of sales for the six months ended September 30, 1997 and 1996 were
$3,054,536 and $1,969,280 or 67% and 63% of sales, respectively.
Gross profit for the six months ended September 30, 1997 and 1996 were
$1,511,147 and $1,169,839, or 33% and 37% of sales, respectively. Gross profit,
as a percentage of sales, decreased to 24% for the three months ended September
30, 1997 compared to 38% for the three months ended September 30, 1997. The
decrease was primarily due to an increase in total sales of products which
produce a lower gross profit percentage.
Operating expenses for the six months ended September 30, 1997 and 1996 were
$1,369,585 and $2,153,311, respectively.
Interest expense for the six months ended September 30, 1997 and 1996 was
$139,927 and $86,089, respectively. As of September 30, 1997, the outstanding
debt of the Company was approximately $2,901,000 primarily all of which is
classified as current.
The Company's auditors issued a going concern report for the year ended March
31, 1997. There can be no assurance that management's plans to reduce operating
losses will continue or obtain additional financing will be successful.
Liquidity and Capital Resources
The Company's working capital [deficit] at September 30, 1997 was $(2,440,488)
as compared with a working capital [deficit] of $(2,722,958) at March 31, 1997.
This decrease in the working capital [deficit] of approximately $280,000 is
primarily the result of the Company's net income of approximately $200,100 and
non-cash adjustments to the net income.
Operating Activities
For the six months ended September 30, 1997, cash generated from operations was
$1,038,402 as compared to $1,058,556 of cash utilized for operations for the six
months ended September 30, 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.
18
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended September 30, 1997 compared with the six months ended September
30, 1996
Liquidity and Capital Resources [Continued]
Operating Activities [Continued]
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
2,427,273 shares of the Company's common stock and the assumption of certain
outstanding obligations of BDC. The Company is pursuing moving all locations to
one premises which will enable the Company to further reduce expenses.
Investing Activities
For the six months ended September 30, 1997 and 1996, investments in masters and
artwork were $101,993 and $175,604, respectively. Management continues to seek
to acquire new titles to enhance its product lines.
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.
As of September 30, 1997, ATRE is negotiating with two different non-affiliated
entities for the sale of three parcels of property. The Company believes that
contracts will be finalized for these properties and will close with net
proceeds of approximately $900,000 in 1998.
Financing Activities
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.
19
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended September 30, 1997 compared with the six months ended September
30, 1996
Liquidity and Capital Resources [Continued]
Financing Activities [Continued]
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. Subsequent to September 30, 1997, the
Company negotiated a one year extension agreement and has agreed to add 15% to
the note as a financing cost.
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.
20
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Six months ended September 30, 1997 compared with the six months ended September
30, 1996
New Authoritative Pronouncements [Continued]
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.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. SFAS No. 131 is not expected to have a
material impact on the Company.
Impact of Inflation
The Company does not believe that inflation had an impact on sales or income
during the past several years. Increases in supplies or other operating costs
could adversely affect the Company's operations; however, the Company believes
it could increase prices to offset increases in costs of goods sold or other
operating costs.
21
<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: Anaheim, California
December 10, 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
By: /s/ Thomas Sung
Thomas Sung
Principal Financial Officer and
Treasurer
22
<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> 3-mos
<FISCAL-YEAR-END> Mar-31-1998
<PERIOD-END> Sep-30-1997
<CASH> 468,189
<SECURITIES> 0
<RECEIVABLES> 2,286,716
<ALLOWANCES> 0
<INVENTORY> 2,819,168
<CURRENT-ASSETS> 5,684,949
<PP&E> 974,779
<DEPRECIATION> 604,643
<TOTAL-ASSETS> 8,439,119
<CURRENT-LIABILITIES> 8,125,437
<BONDS> 0
0
376,593
<COMMON> 10,204,614
<OTHER-SE> (10,343,241)
<TOTAL-LIABILITY-AND-EQUITY> 8,439,119
<SALES> 2,356,894
<TOTAL-REVENUES> 2,356,894
<CGS> 1,798,362
<TOTAL-COSTS> 641,043
<OTHER-EXPENSES> 167,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,122
<INCOME-PRETAX> 9,588
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,588
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
