e2brutay75:
To me it looks like it wold be fun to PLAY
with!!Form 10QSB for DIAMOND ENTERTAINMENT CORP
26-Mar-2004
Quarterly Report
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, 2003 included in its Annual Report on Form 10KSB and its Form 10QSB for period ended June 30, 2003 and September 30, 2003. 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.
NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH THE NINE MONTHS ENDED DECEMBER
31, 2002:
Results of Operations -
The Company's net income for the nine months ended December 31, 2003 was approximately $10,000 as compared to a net loss of approximately $122,000 for the same period last year. The primary reason for the net income at December 31, 2003, was the Company's operating income of approximately $179,000 offset by interest expense of approximately $169,000.
The Company's operating income for the nine months ended December 31, 2003 was approximately $179,000 as compared to an operating loss of approximately $44,000 for the same period last year. The increase in the Company's operating income of approximately $223,000 when compared to an operating loss of approximately $45,000 for the same period a year earlier arose primarily from increased operating expenses of approximately $181,000 offset by a increase in gross profit of approximately $404,000.
The Company's sales for the nine months ended December 31, 2003 and 2002, were approximately $3,700,000 and $2,897,000 respectively. The Company's sales increased, by approximately $803,000 from the same period a year earlier with increases in DVD product sales of approximately $1,685,000 offset by decreases in videocassette and general merchandise product sales of approximately $882,000. The lower Videocassette product sales when compared to the same period a year earlier was primarily attributable to a product mix shift from videocassettes to DVD product. We expect our sales to improve in fiscal year ending March 31, 2004 resulting from increased sales of new DVD products. 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 nine months ended December, 2003 and 2002 were approximately $2,210,000 and $1,813,000 or 60% and 63% of sales, respectively. The increase in cost of goods of approximately $397,000 was primarily the result of higher sales volume realized from our DVD product. The decrease in the cost of sales as a percentage to sales of approximately 3% when compared to the same period a year earlier, was primarily the result of increased DVD product having average lower costs.
Gross profit for the nine months ended December 31, 2003 and 2002 was approximately $1,489,000 and $1,085,000, or 40% and 37% of sales, respectively. The higher gross margin of approximately $404,000 was primarily the result of increased sales volume. The increase in the gross profit percentage when compared to sales of 3% was primarily the result of the product mix shift from our videocassette product sales to DVD product.
Selling, general and administrative expenses for the nine months ended December 31, 2003 and 2002 were approximately $1,310,000 and $1,129,000, respectively. The, increase of approximately $181,000 was the result of increases in general administrative and selling expenses of approximately $79,000 and $102,000, respectively.
General administrative expenses for the nine months ended December 31, 2003 and 2002 were approximately $773,000 and $694,000, respectively. The increase in general administrative expenses of approximately $79,000 was primarily the result of higher salaries and professional fees, and partially offset by lower consulting expense, accounting and settlement fees.
Selling expenses for the nine months ended December 31, 2003 and 2002 were approximately $537,000 and $435,000, respectively. The increase in selling expenses of approximately $102,000 was attributable mainly to higher expense levels in salaries, outgoing freight costs and sales promotion expense, partially offset by lower royalty expense.
Interest expense for the nine months ended December 31, 2003 and 2002 was approximately $169,000 and $134,000 respectively. The decrease in interest expense of approximately $35,000 was the result of lower levels of borrowings. As of December 31, 2003, the outstanding debt of the Company was approximately $605,000 all of which is classified as current.
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 2002:
Results of Operations -
The Company's net income for the three months ended December 31, 2003 was approximately $341,000 as compared to a net income of approximately $139,000 for the same period last year. The primary reason for the net profit at December 31, 2003, was the Company's operating income of approximately $417,000 and partially offset by other income and expense of approximately $76,000.
The Company's operating income for the three months ended December 31, 2003 was approximately $417,000 as compared to an operating income of approximately $128,000 for the same period last year. The increase in the Company's operating income of approximately $289,000 when compared to an operating loss for the same period a year earlier of $128,000 arose from the increase in gross profit of approximately $328,000, partially offset by an increase in operating expenses of approximately $39,000.
The Company's sales for the three months ended December 31, 2003 and 2002, were approximately $1,880,000 and $1,200,000 respectively. The Company's sales increased by approximately $680,000 from the same period a year earlier with increased DVD product and general merchandise sales of approximately $925,000, and partially offset by decreases in videocassette product sales of approximately $245,000. The lower videocassette product sales when compared to the same period a year earlier was primarily attributable to a product mix shift of sales to our DVD product. The Company did not have significant sales for general merchandise products for the three months ended December 31, 2003.
Cost of sales for the three months ended December 31, 2003 and 2002 were approximately $994,000 and $643,000 or 53% and 54% of sales, respectively. The increase in cost of goods of approximately $351,000 was mainly the result of higher sales volume realized from our DVD products having lower unit costs. The decrease in the cost of sales as a percentage to sales of approximately 1% when compared to the same period a year earlier, was primarily the result of selling DVD product having lower unit costs.
Gross profit for the three months ended December 31, 2003 and 2002 was approximately $886,000 and $558,000, or 47% and 46% of sales, respectively. The higher gross margin of approximately $328,000 was primarily the result of increase sales of higher margin DVD product resulting in an increase of 1% as a percentage of sales.
Selling, general and administrative expenses for the three months ended December 31, 2003 and 2002 were approximately $469,000 and $430,00, respectively. Increases in selling expenses of approximately $67,000 were partially offset by decreases in general administrative expenses of approximately $28,000.
General administrative expenses for the three months ended December 31, 2003 and 2002 were approximately $226,000 and $254,000, respectively. The decrease in general administrative expenses of approximately $28,000 was primarily the result of lower levels of consulting expense, accounting fees, partially offset by higher salaries.
Selling expenses for the three months ended December 31, 2003 and 2002 were approximately $243,000 and $176,000, respectively. The increase in selling expenses of approximately $67,000 was attributable mainly to higher expense levels in salaries, commission expense, and outgoing freight costs.
Interest expense for the three months ended December 31, 2003 and 2002 was approximately $76,000 and $46,000 respectively. The increase in interest expense of approximately $30,000 was primarily the result of higher levels of borrowings.
Other income was lower by $57,000 when compared to the same period a year earlier. During the three months ended June 30, 2002, the Company recorded as income, forgiveness of debt of approximately $57,000.
The Company's auditors issued a going concern report for the year ended March 31, 2003. 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
On December 31, 2003 the Company had assets of $2,337,000 compared to $1,720,000 on March 31, 2003. The Company had a total stockholder's deficiency of $918,000 on December 31, 2003, compared to a deficiency of $928,000 on March 31, 2003, an increase of $46,585. The decrease in stockholder's deficiency was the result of recording the net loss of approximately $10,000 for the nine months ended December 31, 2003.
As of December 31, 2003 the Company's working capital deficit decreased by approximately $24,000 from a working capital deficit of approximately $1,445,000 at March 31, 2003, to a working capital deficit of approximately, $1,421,000 at December 31, 2003. The decrease in the working capital deficit was the attributable primarily to increases in accounts payable, accrued expenses and amount due factor of approximately $835,000 and decreases in bank overdraft, notes payable and customer deposit totaling approximately $200,000, which were offset by increases in cash, accounts receivable, inventory due related party and prepaid expense totaling approximately $659,000.
As of the filing of this Form 10-QSB, we had not yet obtained the effectiveness of a registration statement covering the resale of common stock upon conversion of the Series "B" Convertible Preferred Shares as required under the Certificate of Designations, the Securities Purchase Agreement pursuant to which such securities were sold, and related registration rights agreements ("Agreements") and are in default under certain provisions of the Agreements entitling holders of our Series B Preferred Shares, under certain circumstances, to be paid liquidated damages equal to 1% per month of the liquidated value of such shares (currently $8,250 per month); such liquidated damages have not been paid, and as of December 31, 2003, aggregated approximately $167,000. This is in addition to a daily late payment which by the terms of the Agreements becomes payable if the Company fails to convert Series B Preferred Shares into Common Stock within seven business days after receipt of a conversion notice and the certificate(s) for the Series B Preferred Shares to be converted.) Also at the option of at least two-thirds of the holders of our outstanding Series B Preferred Shares, such holders may have the right to require us to redeem such shares which as of December 31, 2003, would require us to pay an aggregate of approximately $1,280,000 upon such redemption, or the holders who deliver a conversion notice may be entitled to the redemption of their shares at a redemption price equal to 120% of the liquidation value of such shares. As of the date of the filing of this Form 10- QSB, we do not have sufficient cash to redeem all of such shares or pay the penalties that have accrued. Also, we have insufficient authorized shares of common stock available for issuance upon conversion of the Series B Preferred Shares. Also, certain holders of such shares of preferred stock may be able to sell the shares of common stock issuable upon conversion pursuant to Rule 144 without registration under the Securities Act. The sale of the shares upon conversion of the Series B Preferred Shares and outstanding warrants may adversely affect the market price of our common stock. The issuance of shares upon conversion of the Series "B" Convertible Preferred Shares and exercise of outstanding warrants will also cause immediate and substantial dilution to our existing stockholders and may make it difficult for us to obtain additional capital.
The Company may be unable to effect any equity financing until it has increased its authorized shares of common stock and/or effected a restructuring of its equity capital, such as by means of a stock split, combination or similar restructuring and a buy back of all the outstanding preferred stock. The Company is currently contemplating a restructuring of the terms and conditions underlying the Agreements and plans to negotiate with its Series B Preferred shareholders to mitigate any existing defaults of our obligations to the Series B Preferred shareholders and to minimize the amount of dilution by negotiating the terms of the Series B Preferred Shares. There is no assurance that the Company will be successful in such negotiations.
Operations Cash flows provided by operating activities was approximately $570,000 during the nine months period ended December 31, 2003 compared to cash flows provided by operating activities of approximately $241,000 during the nine months period ended December 31, 2002. Cash provided by operating activities was primarily attributable to increases in accounts payable and accrued expenses and the Company's net income loss offset by increases in accounts receivable and inventory. deposits.
The Company has also been experiencing difficulties in paying its vendors on a timely basis. These factors create uncertainty as to whether the Company can continue as a going concern.
Investing For the nine months ended December 31, 2003 and 2002, investments in masters and artwork were approximately $214,000 and $123,000, respectively. Management continues to seek to acquire new titles to enhance its product lines.
Financing - Cash flows used for financing activities was approximately $206,000 during the nine months period ended December 31, 2003 compared to cash flows used in financing activities of approximately $88,000 during the nine months period ended December 31, 2002.
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 are 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.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts receivables, accruals for other costs, and the classification of net operating loss and tax credit carry forwards between current and long-term assets. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2002.
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