UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES AND EXCHANGE COMMISSION
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For transition period from _______________ to _______________
Commission File Number: 0-17953
DIAMOND ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2748019
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Tucker Lane, Walnut California, California 91789
(Address of principal executive offices)
(909) 839-1989
(Issuer's telephone number, including area code)
-------------------------
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 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 [ ]
As of June 30, 2000, there were 66,334,029 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2000 [Unaudited]. 1-2
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999 [Unaudited]..........................3
Condensed Consolidated Statements of Stockholders' Equity for the
three months ended June 30, 2000 [Unaudited].............................4
Condensed Consolidated Statements of Cash Flows for three months
ended June 30, 2000 and 1999 [Unaudited]...............................5-6
Notes to Condensed Consolidated Financial Statements [Unaudited] ......7-9
Item 2: Management's Discussion and Analysis or Plan of Operations.....10-15
Part II. Other Information
Item 1: Legal Proceedings.................................................15
Item 2: Changes in Securities..........................................15-16
Item 3: Defaults Upon Senior Securities...................................16
Item 4: Submission of Matters to a Vote of Security Holders...............16
Item 5: Other Information.................................................16
Item 6: Exhibits and Reports on Form 8-K..................................16
Signatures.................................................................17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000 [UNAUDITED]
ASSETS
CURRENT ASSETS
Accounts Receivable, net of allowance for
Doubtful accounts of $167,751 $ 348,759
Deferred consulting costs 387,639
Inventory 1,035,987
Prepaid expenses and other current assets 93,539
-----------
Total Current Assets 1,865,924
FURNITURE AND EQUIPMENT, net 283,636
FILM MASTERS AND ARTWORK, less
Accumulated amortization of $3,852,051 85,405
OTHER ASSETS
Investment in ATRE 50,000
Other assets 60,982
-----------
TOTAL ASSETS $ 2,345,947
===========
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000 [UNAUDITED]
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Book overdraft $ 9,892
Accounts Payable and accrued expenses 1,186,124
Financing payable 735,158
Notes payable - current portion 92,079
Notes payable related party - current portion 1,513,441
Convertible debentures - current portion 1,050,775
Capital lease obligations - current portion 28,742
Total Current Liabilities 4,616,211
LONG TERM LIABILITIES
Notes payable, less current portion 60,480
Notes payable related party, less current portion 100,000
Convertible debentures, less current portion 100,000
Capital lease obligations, less current portion 12,776
-----------
Total Liabilities 4,889,467
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIENCY
Convertible Preferred Stock - No Par Value,
5,000,000 Shares Authorized, 483,301 Issued
[of which 172,923 are held in Treasury] 809,593
Common Stock - No Par Value, 100,000,000 Shares
Authorized; 66,334,029 Shares Issued and Outstanding 13,426,717
Accumulated Deficit (16,755,277)
Treasury Stock ( 48,803)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY ( 2,567,770)
-----------
TOTAL LIABILITES AND STOCKHOLDERS' DEFICIENCY $ 2,321,697
===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS [UNAUDITED]
Three months ended
------------------------
June 30,
------------------------
2000 1999
---------- -----------
SALES - net $ 595,545 $ 699,085
COST OF GOODS SOLD 393,699 464,765
---------- -----------
GROSS PROFIT 201,846 234,320
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 450,406 846,213
---------- -----------
LOSS FROM OPERATIONS (248,560) (611,893)
---------- ------------
OTHER INCOME (EXPENSES)
Interest Expense ( 31,437) (164,426)
Other income 64 286
Valuation adjustment for ATRE -- --
---------- -----------
LOSS BEFORE INCOME TAXES (279,933) (776,033)
---------- ----------
INCOME TAXES -- --
---------- -----------
NET LOSS (279,933) (776,033)
PREFERRED DIVIDEND ( 3,750) --
---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES $ (283,683) $ (776,033)
========== ===========
LOSS PER SHARE, basic and diluted
NET LOSS $ -- $ ( .01)
PREFERRED DIVIDEND -- --
---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES $ -- $ ( .01)
========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 63,667,382 54,740,854
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY [UNAUDITED]
Convertible Total
Preferred Stock Common Stock Addit. Accumulated Treasury De- Stock-
Number of Number of Paid-in Deficit [Preferred] ferred holders'
Shares Amount Shares Amount Capital At Cost Costs Deficiency
--------- --------- ---------- ----------- ------- ------------ --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 2000 483,251 $ 376,593 62,334,029 $13,077,717 $ - $(16,471,594) $ (48,803) $ -- $(3,066,087)
Sale of Convertible
Preferred A Stock
Net cash proceeds 50 433,000 -- -- -- -- 433,000
Issuance of stock for
options
Cash 3,000,000 105,000 105,000
Conversion of debt 285,714 10,000 10,000
Conversion of A/P 714,286 25,000 25,000
Options issued for services
- Consultants 209,000 209,000
Net [Loss] for three months
ended June 30, 1999 -- -- -- -- -- ( 283,683) -- -- ( 283,683)
------- --------- ---------- ----------- ------- ------------ --------- ----- -----------
Balance - June 30, 2000 483,301 $ 809,593 66,334,029 $13,426,717 $ -- $(16,755,277) $ (48,803) $ -- $(2,567,770)
======= ========= ========== =========== ======= ============ ========= ===== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS [UNAUDITED]
Three months ended
June 30,
2000 1999
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (283,683) (776,033)
Adjustments to reconcile net loss to net cash
(used in) operating activities
Depreciation and amortization 52,487 90,514
Bad debt expense 30,000 35,816
Non-cash consulting and compensation expense 128,491 226,700
Non-cash interest expense - 58,125
Increase in accounts receivable 96,629 205,621
Increase inventory 58,891 43,414
Increase (decrease) in prepaid expense 22,917 (46,336)
Increase in Other Assets - 47,999
Decrease in deferred Cost (108,376) (128,000)
Increase in accounts payable (265,019) ( 35,380)
Decrease in obligation Payable - ( 5,670)
Decrease in accrued expenses - ( 67,752)
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (267,663) (350,982)
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments by ATRE 30,000 9,100
Purchase of property and equipment ( 37,066) ( 10,662)
Purchases of masters and artwork ( 10,543) (9,432)
Loans receivable - -
---------- -----------
Net cash provided by (used in) investing activities $ ( 17,609) $ ( 10,994)
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS [UNAUDITED](continued)
Three months ended
June 30,
2000 1999
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in book overdraft ( 9,536) (123,183)
Net repayments of financing agreement (173,973) ( 92,751)
Proceeds from notes payable - -
Payment of notes payable ( 33,683) ( 60,000)
Proceeds from notes payable related parties - 190,000
Payments of notes payable related party ( 30,400) ( 37,200)
Proceeds from convertible debentures - 150,000
Payments of convertible debentures - ( 13,544)
Payments on capital leases ( 5,136) ( 5,670)
Proceeds from sale of preferred convertible stocks 433,000
Proceeds the exercise of options 105,000 306,250
---------- -----------
Net cash provided by financing activities 285,272 313,902
---------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 0 ( 48,074)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 0 48,074
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 0 $ 0
=========== ============
SUPPLEMENTAL INFORMATION Interest paid $ 31,437 $ 106,301
========== ===========
Income taxes paid $ - $ -
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been
prepared by Diamond Entertainment Corporation (the "Company"), pursuant to
the rules and regulations of the Securities and Exchange Commission. The
information furnished herein reflects all adjustments (consisting of
normal recurring accruals and adjustments) which are, in the opinion of
management, necessary to fairly present the operating results for the
respective periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant
to such rules and regulations. The results of the three months ended June
30, 2000 are not necessarily indicative of the results to be expected for
the full year ending March 31, 2001.
NOTE 2 - STOCK OPTION PLAN
On June 9, 2000, the Board of Directors of the Company approved the
Company's 2000 Stock Compensation Plan ("Plan") for the purpose of
providing the Company with a means of compensating selected key employees
(including officers), directors and consultants to the Company and its
subsidiaries for their services rendered in connection with the
development of Diamond Entertainment Corporation with shares of Common
Stock of the Company. The plan authorizes the Board of Directors of the
Company to sell or award up to 13,000,000 shares and/or options of the
Company's Common Stock, no par value.
NOTE 3 - CONSULTING AGREEMENTS
On June 1, 2000, the Company entered into three consulting agreements that
will terminate on May 31, 2001, whereby the consultants will provide
consulting service for the Company concerning management, marketing,
consulting, strategic planning, corporate organization and financial
matters in connection with the operation of the businesses of the Company,
expansion of services, acquisitions and business opportunities. The
consultants received options to purchase a total of 7,300,000 of the
Company's common stock exercisable at $.035 per share in exchange for
services to be rendered and the options shall expire on May 31, 2001.
The per unit weighted-average fair value of unit options granted on June
1, 2000 was $0.029 at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
weighted-average risk-free interest rates of 5.86; dividend yields of 0%;
weighted-average volatility factors of the expected market price of the
Company's common stock of 178%; and a weighted average expected life of
the option was 2 months. In June of 2000, the Company received $105,000 in
cash for the issuance of the 3,000,000 shares upon the exercise of these
options and options of 1,000,000 were exercised for consulting services
incurred and owed by the Company to one of the consultants totaling
$25,000 and from the cancellation of a obligation of $10,000 in principal
and interest owed to the same consultant. The options had an aggregate
fair value at date of grant of approximately $209,000.
7
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - SERIES A CONVERTIBLE PREFERRED STOCK
On May 11, 2000, the Company entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with eight investors. Pursuant to the
Securities Purchase Agreement, the Company issued and sold 50 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") for
total consideration of $500,000, or $10,000 per share. The May Davis
Group, Inc. ("May Davis"), acted as placement agent for the offering. May
Davis received a placement fee of $40,000 and the Company issued warrants
to purchase 1,500,000 shares of Common Stock to May Davis and certain
designees of May Davis and
warrants to purchase 25,000 shares of Common Stock to Butler Gonzalez,
LLP, counsel to May Davis. Such warrants are exercisable at a price of
$.08 per share.
Commencing August 9, 2000, the Series A Preferred Stock is convertible, at
the investors' option, into shares of the Company's common Stock and
automatically converts into Common Stock on April 12, 2002. The conversion
price of the Series A Preferred Stock is the lower of $.08 per share or
80% of the average of the closing bid prices of the Company's Common Stock
on any five trading days in the ten trading day period preceding the date
of conversion. The conversion price of the Series A Preferred Stock is
also adjusted in the event of stock dividends, stock splits,
recapitalizations, reorganizations, consolidations, mergers or sales of
assets. The Series A Preferred stock also provides for a dividend upon
conversion of the Series A Preferred Stock at the rate of 6% per annum
payable in additional shares of the Company's Common Stock. An accrual was
recorded as a dividend expense for approximately $30,000 during the
quarter ended June 30, 2000. In no event can the Series A Preferred Stock
be converted into more than 11,575,000 shares of Common Stock.
Additional features of the Series A Preferred Stock include, among other
things, i) a redemption feature at the option of the Company commencing
September 8, 2000, of shares of Series A Preferred Stock having a stated
value of up to $100,000, ii) a mandatory redemption feature upon the
occurrence of certain events such as a merger, reorganization,
restructuring, consolidation or similar event, and a liquidation
preference over the Common Stock in the event of a liquidation, winding up
or dissolution of the Company. The Series A Preferred Stock does not
provide any voting rights, except as may be required by law.
Under Registration Rights Agreements the Company entered into with the
purchasers of the Series A Preferred Stock, the Company is required to
file a registration statement to register the Common Stock issuable upon
conversion of the Series A Preferred Stock under the Securities Act to
provide for the resale of such Common Stock. The Company is required to
keep such registration statement effective until all of such shares have
been resold.
8
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - SUBSEQUENT EVENTS
Authorized Shares
-----------------
In July 2000, the Company amended its Articles of Incorporation to
increase the number of authorized common stock from 100,000,000 shares to
600,000,000 shares.
Common Stock Options
--------------------
In July 2000, the remaining options of 3,300,000 shares of the Company's
common stock issued to the three consultants in June 2000 were exercised.
The Company received $110,500 in cash for the issuance 3,157,143 shares
upon the exercise of these options and options of 142,857 were exercised
for consulting services incurred and owed by the Company to one of the
consultants totaling $5,000.
9
<PAGE>
Item 2: Management's Discussion and Analysis or Plan of Operations
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes for the year
ended March 31, 2000 included in its Annual Report on Form 10KSB. The discussion
of results, causes and trends should not be construed to imply any conclusion
that such results or trends will necessarily continue in the future.
Overview
-----------
During the three months ended June 30, 2000, we continued to implement our new
plan which has as its primary goals to include 1) generating an operating profit
in fiscal 2001, with the turn around complete in the second quarter and 2)
positioning the Company as a going concern which can generate positive cash flow
starting the fourth quarter and allowing the Company to operate as a significant
company in the distribution of home video cassettes, DVD's and general
merchandise business. In order to achieve these objectives, the Company is
undertaking operating changes in fiscal 2001. These include:
o The Company is seeking to obtain additional debt or equity financing. In the
event that the Company secures such financing, the first $500,000 to $600,000
will be used to expand the Company's product line and increase sales. Any
amounts over this will be used to pay down notes payable related party. There
is not an agreement nor assurance to secure any such financing.
o Convert approximately $1,051,000 of convertible debentures and approximately
$810,000 of related party notes payable convertible debentures in order to
reduce the Company's cash requirements.
o Convert approximately 50% of the Company's video products to DVD format in
order to keep current with existing demand and technology. The new products
are estimated to increase overall sales by approximately 18%, which will add
to the overall gross profit margin by approximately 13%.
o Reduce operating expense to the lowest level possible. The Company relocated
its office and warehouse facilities in January 2000, in order to reduce
annual rent expense by approximately $250,000.
o Evaluate the lowest level of employee requirements to operate the Company
effectively. The Company reduced its payroll and payroll related expenses
that can result in annual savings of approximately $350,000.
Although the Company believes that the outlook is favorable, there can be no
assurance that market conditions will continue in a direction favorable to the
Company.
10
<PAGE>
Results of Operations
-------------------------
The Company's net loss before preferred dividend for the three months ended June
30, 2000 was approximately $280,000 as compared to a net loss of approximately
$776,000 for the same period last year. The primary reason for the net loss was
the Company's operating loss of approximately $249,000.
The Company's operating loss for the three months ended June 30, 2000 was
$249,000 as compared to an operating loss of approximately $612,000 for the same
period last year. The Company's operating loss arose primarily from decreased
operating expenses of approximately $396,000 and a decrease in gross profit of
approximately $33,000.
The Company's sales for the three months ended June 30, 2000 and 1999, were
$595,545 and $699,085, respectively. The Company's sales decreased by
approximately $103,000 from the same period a year earlier with decreased video
product sales and toy products of approximately $66,000 and $37,000,
respectively. The lower video and toy product sales when compared to the same
period a year earlier was attributable to lower demand from our major customers
resulting from primarily, the lack of new products. The Company plans to acquire
new titles for videocassette and DVD products over the remainder of fiscal year
2001. Sales of the Company's products are generally seasonal resulting in
increased sales starting in the third quarter of the fiscal year. The Company
expects the sales to increase in fiscal year ending March 31, 2001.
Cost of sales for the three months ended June 30, 2000 and 1999 were $393,699
and $464,765 or 66% and 66% of sales, respectively. The decrease in cost of
goods of approximately $71,000 was due to lower sales volume.
Gross profit for the three months ended June 30, 2000 and 1999 were
approximately $202,000 and $234,000, or 34% and 34% of sales, respectively. The
lower gross margin of approximately $32,000 was the result of lower sales
volume.
Operating expenses for the three months ended June 30, 2000 and 1999 were
approximately $450,000 and $846,000, respectively. This decrease in operating
expenses of approximately $396,000 was the result of the Company's lower expense
levels in selling, general administrative, bad debt, and non-cash consulting and
compensation. The decrease general administrative expenses of approximately
$120,000 were primarily the result of lower expense levels of office rent and
salaries. The decrease in selling expenses of approximately $172,000 were
attributable primarily to lower expenses in salaries and commissions, royalty
expense, freight and sales promotional expenses. Non-cash consulting and
compensation associated with the issuance of stock options decreased by
approximately $98,000. Bad debt expense was reduced by approximately $6,000.
Bad debt expense for the three months ended June 30, 2000 and 1999 were
approximately $30,000 and $36,000, respectively.
11
<PAGE>
Interest expense for the three months ended June 30, 2000 and 1999 were $31,437
and $164,426 respectively. The decrease in interest expense of approximately
$133,000 was the result of lower levels of borrowings together with lower
non-cash interest expenses associated with issuance of stock options. As of June
30, 2000, the outstanding debt of the Company was approximately $3,693,000 of
which approximately $3,420,000 is classified as current.
The Company's auditors issued a going concern report for the year ended March
31, 2000. There can be no assurance that management's plans to reduce operating
losses will continue or the Company's efforts to obtain additional financing
will be successful.
Liquidity and Capital Resources
-------------------------------
The Company's working capital deficit at June 30, 2000 was $2,774,537 as
compared with a working capital deficit of $2,247,704 at June 30, 1999. This
increase in the working capital deficit of approximately $526,833 is primarily
the result primarily lower levels of account receivable and inventory partially
offset by higher deferred consulting costs and decreased borrowing.
Operations
-------------
For the three months ended June 30, 2000, cash utilized for operations was
approximately $298,063 as compared to $350,982 three months ended June 30, 1999.
Net cash provided by financing activities during the three months ended June 30,
2000, and 1999 were approximately $285,272 and $313,902, respectively.
The Company has also been experiencing difficulties in paying its vendors on a
timely basis. These factors create uncertainty whether the Company can continue
as a going concern.
The Company believes it has adequate cash resources to sustain its operations
through the second quarter of fiscal 2001. In the third quarter of fiscal 2001
the Company will require additional financing. A back-up plan is being
considered in case this planned financing is not in place when required. The
Company will have an alternative cash flow plan to react to this situation. The
principal objective of the Company is to have the above items implemented in
fiscal 2001, which will lead to a profitable operation if the items are
successfully implemented, and will be subject to market and other conditions.
Although the Company believes that the outlook is favorable, there can be no
assurance that market conditions will continue in a direction favorable to the
Company.
12
<PAGE>
Investing
----------
For the three months ended June 30, 2000 and 1999, investments in masters and
artwork were $10,543 and $9,432, respectively. Management continues to seek to
acquire new titles to enhance its product lines.
American Top Real Estate, Inc. ("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. The Company
paid $50,000 for a 50% interest in ATRE. The Company's arrangement with its
partners in ATRE requires that all parties contribute capital or loans pro rata
according to their interests whenever required by ATRE for land acquisition,
principal or interest payments, property taxes or other expenses.
On June 2, 1999, ATRE entered into a sale agreement for approximately $600,000
and in September 1999, entered into a sales agreement for remaining acres of the
larger parcel for approximately $550,000. During June 2000, the sales agreement
for $600,000 entered into on June 2, 1999 was canceled by the buyer who
forfeited the $25,000 purchase deposit to ATRE. The ability of the remaining
agreement to close or for the Company to realize as of June 30, 2000, its share
of the net proceeds to the Company, however, are uncertain and is subject to
certain contingencies. Therefore, ATRE has not recorded a receivable for these
contracts.
Financing
-----------
On May 11, 2000, the Company entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with eight investors. Pursuant to the
Securities Purchase Agreement, the Company issued and sold 50 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") for total consideration
of $500,000, or $10,000 per share. The May Davis Group, Inc. ("May Davis"),
acted as placement agent for the offering. May Davis received a placement fee of
$40,000 and the Company issued warrants to purchase 1,500,000 shares of Common
Stock to May Davis and certain designees of May Davis and warrants to purchase
25,000 shares of Common Stock to Butler Gonzalez, LLP, counsel to May Davis.
Such warrants are exercisable at a price of $.08 per share.
Commencing August 9, 2000, the Series A Preferred Stock is convertible, at the
investors' option, into shares of the Company's common Stock and automatically
converts into Common Stock on April 12, 2002. The conversion price of the Series
A Preferred Stock is the lower of $.08 per share or 80% of the average of the
closing bid prices of the Company's Common Stock on any five trading days in the
ten trading day period preceding the date of conversion.
13
<PAGE>
The conversion price of the Series A Preferred Stock is also adjusted in the
event of stock dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. The Series A Preferred stock also
provides for a dividend upon conversion of the Series A Preferred Stock at the
rate of 6% per annum payable in additional shares of the Company's Common Stock.
An accrual was recorded as a dividend expense for approximately $3,750 during
the quarter ended June 30, 2000. In no event can the Series A Preferred Stock be
converted into more than 11,575,000 shares of Common Stock.
Additional features of the Series A Preferred Stock include, among other things,
i) a redemption feature at the option of the Company commencing September 8,
2000, of shares of Series A Preferred Stock having a stated value of up to
$100,000, ii) a mandatory redemption feature upon the occurrence of certain
events such as a merger, reorganization, restructuring, consolidation or similar
event, and a liquidation preference over the Common Stock in the event of a
liquidation, winding up or dissolution of the Company. The Series A Preferred
Stock does not provide any voting rights, except as may be required by law.
Under Registration Rights Agreements the Company entered into with the
purchasers of the Series A Preferred Stock, the Company is required to file a
registration statement to register the Common Stock issuable upon conversion of
the Series A Preferred Stock under the Securities Act to provide for the resale
of such Common Stock. The Company is required to keep such registration
statement effective until all of such shares have been resold.
Year 2000 Issue
---------------
During the year ended March 31, 2000, the Company conducted an assessment of
issues related to the Year 2000 and determined that it was necessary to modify
or replace portions of its software in order to ensure that its computer systems
will properly utilize dates beyond December 31, 1999. The Company completed Year
2000 systems modifications and conversions during the year ended March 31, 2000.
Costs associated with becoming Year 2000 were not material. At this time, the
Company cannot determine the impact that Year 2000 issue will have on its key
customers or suppliers. If the Company's customers or suppliers don't convert
their systems to become Year 2000 compliant, the Company may be adversely
impacted. The Company is addressing these risks in order to reduce the impact on
the Company. As of the date of this report, the Company did not experience any
disruption to operations or any other problems relating to the Year 2000 issue.
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.
14
<PAGE>
Forward Looking Statements
--------------------------
Forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Stockholders are cautioned that all forward-looking statements
involve risks and uncertainty, including without limitation, the ability of us
to implement our new plan to attain our primary goals as discussed above under
"Operations." Although we believe the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements contained in the report will prove to be accurate.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
On June 1, 2000, the Company entered into three consulting agreements that
will terminate on May 31, 2001, whereby the consultants will provide
consulting service for the Company concerning management, marketing,
consulting, strategic planning, corporate organization and financial
matters in connection with the operation of the businesses of the Company,
expansion of services, acquisitions and business opportunities. The
consultants received options to purchase a total of 7,300,000 of the
Company's common stock exercisable at $.035 per share in exchange for
services to be rendered and the options shall expire on May 31, 2001.
The per unit weighted-average fair value of unit options granted on June 1,
2000 was $0.029 at the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions: weighted-average
risk-free interest rates of 5.86; dividend yields of 0%; weighted-average
volatility factors of the expected market price of the Company's common
stock of 178%; and a weighted average expected life of the option was 2
months. In June and July of 2000, the Company received $215,500 in cash for
the issuance of the 6,157,143 shares upon the exercise of these options and
the remaining options of 1,142,857 were exercised for consulting services
incurred and owed by the Company to one of the consultants totaling $30,000
and from the cancellation of a obligation of $10,000 in principal and
interest owed to the same consultant. The options had an aggregate fair
value at date of grant of approximately $209,000.
On May 11, 2000, the Company entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with eight investors. Pursuant to the
Securities Purchase Agreement, the Company issued and sold 50 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") for total
consideration of $500,000, or $10,000 per share. The May Davis Group, Inc.
("May Davis"), acted as placement agent for the offering. May Davis
received a placement fee of $40,000 and the Company issued warrants to
purchase 1,500,000 shares of Common Stock to May Davis and certain
designees of May Davis and warrants to purchase 25,000 shares of Common
Stock to Butler Gonzalez, LLP, counsel to May Davis. Such warrants are
exercisable at a price of $.08 per share.
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Commencing August 9, 2000, the Series A Preferred Stock is convertible, at
the investors' option, into shares of the Company's common Stock and
automatically converts into Common Stock on April 12, 2002. The conversion
price of the Series A Preferred Stock is the lower of $.08 per share or 80%
of the average of the closing bid prices of the Company's Common Stock on
any five trading days in the ten trading day period preceding the date of
conversion. The conversion price of the Series A Preferred Stock is also
adjusted in the event of stock dividends, stock splits, recapitalizations,
reorganizations, consolidations, mergers or sales of assets. The Series A
Preferred stock also provides for a dividend upon conversion of the Series
A Preferred Stock at the rate of 6% per annum payable in additional shares
of the Company's Common Stock. An accrual was recorded as a dividend
expense for approximately $30,000 during the quarter ended June 30, 2000.
In no event can the Series A Preferred Stock be converted into more than
11,575,000 shares of Common Stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with Section 13 of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
DIAMOND ENTERTAINMENT CORPORATION
Dated: August 28, 2000 By: /s/ Fred U. Odaka
---------------------------------------
Fred U. Odaka
Chief Financial Officer, Principal Financial
Officer and Principal Accounting Officer
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