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 September 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 September 30, 2000, there were 69,634,029 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2000
[Unaudited]........................................................ 2-3
Condensed Consolidated Statements of Operations for the three
and six months ended September 30, 2000 and 1999 [Unaudited]......... 4
Condensed Consolidated Statements of Cash Flows for Six months
ended September 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..... ...................................... 16
Item 2: Changes in Securities........................................ 16-17
Item 3: Defaults Upon Senior Securities.............................. 17
Item 4: Submission of Matters to a Vote of Security Holders.......... 17
Item 5: Other Information............................................ 17
Item 6: Exhibits and Reports on Form 8-K............................ 17
Signatures........................................................... 18
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000
[UNAUDITED]
ASSETS
CURRENT ASSETS
Accounts Receivable, net of allowance for
Doubtful accounts of $138,914 $ 556,871
Deferred consulting costs 139,333
Inventory 1,083,075
Prepaid expenses and other current assets 95,739
-----------
Total Current Assets 1,875,018
FURNITURE AND EQUIPMENT, net 301,465
FILM MASTERS AND ARTWORK, less
Accumulated amortization of $3,890,506 81,250
OTHER ASSETS
Investment in ATRE 50,000
Other assets 60,982
-----------
TOTAL ASSETS $ 2,368,715
===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000
[UNAUDITED]
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Book overdraft $ 7,711
Accounts Payable and accrued expenses 1,515,492
Financing payable 853,663
Notes payable - current portion 82,079
Notes payable related party - current portion 1,530,241
Convertible debentures - current portion 1,049,275
Capital lease obligations - current portion 28,742
-----------
Total Current Liabilities 5,067,203
LONG TERM LIABILITIES
Notes payable, less current portion 52,112
Notes payable related party, less current portion 100,000
Convertible debentures, less current portion 100,000
Capital lease obligations, less current portion 5,788
-----------
Total Liabilities 5,325,103
-----------
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, 600,000,000 Shares
Authorized; 69,634,029 Shares Issued and Outstanding 14,466,035
Accumulated Deficit (18,183,213)
Treasury Stock ( 48,803)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY ( 2,956,388)
-----------
TOTAL LIABILITES AND STOCKHOLDERS' DEFICIENCY $ 2,368,715)
===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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<TABLE>
<CAPTION>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS [UNAUDITED]
Three months ended Six months ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
SALES - net $ 878,022 $ 974,026 $1,473,567 $ 1,673,111
COST OF GOODS SOLD 527,093 695,649 920,792 1,160,414
---------- ----------- ---------- -----------
GROSS PROFIT 350,929 278,377 552,775 512,697
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 546,654 715,824 913,853 1,562,037
---------- ----------- ---------- -----------
LOSS FROM OPERATIONS (195,725) (437,447) (361,078) (1,049,340)
---------- ----------- ---------- -----------
OTHER INCOME (EXPENSES)
Interest Expense (129,207) (142,583) (160,644) ( 306,899)
Other income 124 7,416 183 7,592
---------- ----------- ---------- -----------
LOSS BEFORE INCOME TAXES (324,808) (572,614) (521,539) (1,348,647)
---------- ---------- ---------- -----------
INCOME TAXES - - - -
---------- ---------- ---------- -----------
NET LOSS (324,808) (572,614) (521,539) (1,348,647)
---------- ---------- ---------- -----------
PREFERRED DIVIDEND ( 7,500) - ( 11,250) -
---------- ---------- ---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES $( 332,308) $ (572,614) $ (532,789) $(1,348,647)
========== =========== ========== ===========
LOSS PER SHARE, basic and diluted
NET LOSS $ - $ ( .01) $ ( .01) $ ( .02)
PREFERRED DIVIDEND - - - -
---------- ----------- ---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES $ - $ ( .01) $ ( .01) $ ( .02)
========== =========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 68,967,362 57,461,529 66,650,696 55,061,112
========== ========== ========== ===========
</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]
Six months ended
September 30,
2000 1999
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (532,789) $(1,348,647)
Adjustments to reconcile net loss to net cash
(used in) operating activities
Depreciation and amortization 116,695 171,041
Bad debt expense 91,001 65,816
Non-cash consulting and compensation expense 69,667 285,591
Non-cash interest expense - 116,250
Increase (decrease)in accounts receivable (171,675) (154,646)
Increase (decrease)in inventory 11,803 240,155
Increase (decrease)in prepaid expense 20,717 (47,836)
Increase (decrease)in Other Assets - 80,035
Decrease (decrease)in deferred Cost (139,333) ( 18,346)
Increase (decrease)in accounts payable and
accrued expenses 29,350 274,994
Decrease (decrease)in obligation Payable 64,932 14,734
Decrease in accrued expenses -
---------- -----------
Net cash used in operating activities (439,632) (320,859)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments by ATRE 59,900 97,900
Purchase of property and equipment ( 73,573) ( 16,189)
Purchases of masters and artwork ( 44,843) ( 24,480)
Loans receivable - -
---------- -----------
Net cash provided by (used in) investing activities $ ( 58,516) $ 57,231
---------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS [UNAUDITED](continued)
Six months ended
September 30,
2000 1999
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in book overdraft ( 11,717) (120,639)
Net repayments of financing agreement ( 55,468) ( 74,903)
Proceeds from notes payable - -
Payment of notes payable ( 55,443) (120,000)
Proceeds from notes payable related parties - 190,000
Payments of notes payable related party ( 13,600) (211,500)
Proceeds from convertible debentures - 150,000
Payments of convertible debentures ( 1,500) ( 13,544)
Payments on capital leases ( 12,124) ( 14,186)
Proceeds from sale of preferred convertible stocks 433,000
Proceeds from the exercise of options 215,000 478,400
---------- -----------
Net cash provided by financing activities 498,148 263,628
---------- -----------
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 $ 64,725 $ 190,760
========== ===========
Income taxes paid $ - $ -
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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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 six months ended September
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 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.
7
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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 24, 2000, the Company engaged a consulting firm for a period of one
year to provide advice to undertake for and consult with the company
concerning management, marketing, consulting, strategic planning, corporate
organization and structure, financial matters in connection with the
operation of the businesses of the Company, expansion of services,
acquisitions and business opportunities, and shall review and advise the
Company regarding its overall progress, needs and conditions. The
consulting firm was granted options to purchase 600,000 shares of the
Company's Common Stock with an exercise price at $0.05 per share and option
shall expire on July 24, 2003. These options were not exercised as of
September 30, 2000.
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 $11,250 during six month period ended September
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.
8
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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - SERIES A CONVERTIBLE PREFERRED STOCK (continued)
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.
NOTE 5 - 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.
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 six months ended September 30, 2000, we continued to implement our
operational changes to meet our primary goals in generating profits in fiscal
2001, and to position the Company as a going concern to generate positive cash
flow starting the forth quarter of fiscal year 2001. We have made strong gains
towards converting 50% of our video products sales to higher margin DVD format
sales during fiscal year 2001. During the quarter ended June 30, 2000 and
September 30, 2000, DVD product sales accounted for approximately 8% and 30% of
total sales, respectively. We have also reduced operating expenses by
approximately $648,000 during the six month period ended September 30, 2000 when
compared to the same period a year earlier.
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.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE SIX MONTHS ENDED SEPTEMBER
30, 1999:
Results of Operations
---------------------
The Company's net loss before preferred dividend for the six months ended
September 30, 2000 was approximately $522,000 as compared to a net loss of
approximately $1,349,000 for the same period last year. The primary reason for
the net loss was the Company's operating loss of approximately $361,000.
The Company's operating loss for the six months ended September 30, 2000 was
$361,000 as compared to an operating loss of approximately $1,049,000 for the
same period last year. The decrease in the Company's operating loss arose
primarily from decreased operating expenses of approximately $648,000, and an
increase in gross profit of approximately $40,000.
10
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The Company's sales for the six months ended September 30, 2000 and 1999, were
approximately $1,473,000 and $1,673,000 respectively. The Company's sales
decreased by approximately $200,000 from the same period a year earlier with
decreased video product sales and toy products of approximately $37,000 and
$163,000, 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.
Cost of sales for the six months ended September 30, 2000 and 1999 were $921,000
and $1,160,000 or 63% and 69% of sales, respectively. The decrease in cost of
goods of approximately $239,000 was due to lower sales volume offset by higher
DVD product margins.
Gross profit for the six months ended September 30, 2000 and 1999 was
approximately $553,000 and $513,000, or 37% and 31% of sales, respectively. The
higher gross margin of approximately $40,000 was primarily the result of product
mix moving towards the higher margin DVD product line offset by lower sales
volume.
Operating expenses for the six months ended September 30, 2000 and 1999 were
approximately $914,000 and $1,562,000, respectively. This decrease in operating
expenses of approximately $648,000 was the result of the Company's lower expense
levels in general administrative, selling, bad debt, and non-cash consulting and
compensation. General Administrative expenses for the six months ended September
30, 2000 and 1999 were approximately $593,000 and $768,000, respectively. The
decrease in general administrative expenses of approximately $175,000 was
primarily the result of lower expense levels of office rent, salaries, and
payroll related costs. Selling expenses for the six months ended September 30,
2000 and 1999 were approximately $215,000 and $508,000, respectively. The
decrease in selling expenses of approximately $293,000 was attributable mainly
to lower expense levels in salaries, royalty expense, freight, advertising and
sales promotion related expenses. Non-cash consulting and compensation expenses
for the six months ended September 30, 2000 and 1999 were approximately $70,000
and $286,000, respectively. The decreased of approximately $216,000 resulted
primarily from the lower costs associated with the issuance of stock options to
consultants and employees. Bad debt expense for the six months ended September
30, 2000 and 1999 were approximately $91,000 and $66,000, respectively.
Interest expense for the six months ended September 30, 2000 and 1999 were
$161,000 and $308,000 respectively. The decrease in interest expense of
approximately $147,000 was the result of lower levels of borrowings together
with lower non-cash interest expenses associated with issuance of stock options.
As of September 30, 2000, the outstanding debt of the Company was approximately
$3,802,000 of which approximately $3,544,000 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.
11
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999:
Results of Operations
---------------------
The Company's net loss before preferred dividend for the three months ended
September 30, 2000 was approximately $325,000 as compared to a net loss of
approximately $573,000 for the same period last year. The primary reason for the
net loss was the Company's operating loss of approximately $196,000.
The Company's operating loss for the three months ended September 30, 2000 was
$196,000 as compared to an operating loss of approximately $437,000 for the same
period last year. The decrease in the Company's operating loss arose primarily
from reduced operating expenses of approximately $168,000 and an increase in
gross profit of approximately $73,000.
The Company's sales for the three months ended September 30, 2000 and 1999, were
approximately $878,000 and $974,000 respectively. The Company's sales decreased
by approximately $96,000 from the same period a year earlier with higher video
product sales of approximately $30,000 offset by lower toy products sales of
approximately $126,000. The lower 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.
Cost of sales for the three months ended September 30, 2000 and 1999 was
$527,000 and $696,000 or 60% and 72% of sales, respectively. The decrease in
cost of goods of approximately $169,000 was attributable primarily to lower
sales volume.
Gross profit for the three months ended September 30, 2000 and 1999 were
approximately $351,000 and $278,000, or 40% and 28% of sales, respectively. The
higher gross margin of approximately $73,000 was the caused mainly by the shift
towards higher margin video and DVD products.
Operating expenses for the three months ended September 30, 2000 and 1999 were
approximately $547,000 and $715,000, respectively. This decrease in operating
expenses of approximately $168,000 was the result of the Company's lower expense
levels in general administrative, selling, and non-cash consulting and
compensation. General Administrative expenses for the three months ended
September 30, 2000 and 1999 were approximately $319,000 and $395,000,
respectively. The decrease in general administrative expenses of approximately
$76,000 was primarily the result of lower expense levels of office rent,
12
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accounting expense, and expenses related to public corporation compliance
services. Selling expenses for the three months ended September 30, 2000 and
1999 were approximately $140,000 and $262,000, respectively. The decrease in
selling expenses of approximately $122,000 were attributable primarily to lower
expense levels in royalty expense, advertising and sales promotional related
expenses. Non-cash consulting and compensation expenses for the three months
ended September 30, 2000 and 1999 were approximately $52,000 and $58,000,
respectively. The decreased of approximately $6,000 resulted from the lower
costs associated with the issuance of stock options to consultants and
employees. Bad debt expense for the three months ended September 30, 2000 and
1999 were approximately $61,000 and $30,000, respectively.
Interest expense for the three months ended September 30, 2000 and 1999 was
$129,000 and $142,000 respectively. The decrease in interest expense of
approximately $13,000 was the result of lower levels of borrowings together with
lower non-cash interest expenses associated with issuance of stock options.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit at September 30, 2000 was $3,192,185 as
compared with a working capital deficit of $2,473,275 at September 30, 1999.
This increase in the working capital deficit of approximately $719,000 is
primarily the result of lower levels of account receivable, inventory and
deferred consulting costs, offset by decreased borrowing.
Operations
-------------
For the six months ended September, 2000, cash utilized for operations was
approximately $440,000 as compared to $321,000 the six months ended September
30, 1999. Net cash provided by financing activities during the six months ended
September 30, 2000, and 1999 were approximately $498,000 and $264,000,
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.
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 its back-up plan and required financing implemented in fiscal 2001,
which will lead to a profitable operation if they 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.
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Investing
----------
For the six months ended September 30, 2000 and 1999, investments in masters and
artwork were $34,300 and $26,692, 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 real estate sale agreement for
approximately $600,000 and in September 1999, entered into a sales agreement for
another parcel of the remaining acres 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. On September
19, 2000, ATRE closed the sale for one parcel of the remaining acres for
$550,000. The net proceeds of this sale was applied against ATRE'S outstanding
mortgage loan which was collateralized by the property sold. ATRE had previously
repaid the Company all past loans it borrowed from the Company including all
applicable interest and at September 30, 2000, the Company owed ATRE $568,800 in
accumulated loans it received, consisting of proceeds from ATRE's mortgage loans
and partial proceeds from parcels previously sold. ATRE believes the remaining
parcels will be sold and continues to list the properties with its real estate
agent. Future sales are contingent on market conditions and there can be no
assurance that ATRE will sell the remaining parcels within the next one to three
years.
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.
14
<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 $11,250 during the six month
period ended September 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.
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.
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.
15
<PAGE>
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.
16
<PAGE>
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 $11,250 during
the six month period ended September 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
17
<PAGE>
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: November 20, 2000 By: /s/ Fred U. Odaka
---------------------------------------
Fred U. Odaka
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
18
