<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
Securities Exchange Act of 1934
for Quarterly Period Ended September 30, 1998
-OR-
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities And Exchange Act of 1934
for the transaction period from _________ to________
Commission File Number 0-14646
------------
Entertainment International Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 06-1113228
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7380 Sand Lake Road, Suite 350, Orlando, FL 32819
- --------------------------------------------------------------------------------
(Address of principal executive offices, Zip Code)
(407) 351-0011
- --------------------------------------------------------------------------------
(Registrant'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 ____
The number of outstanding shares of the registrant's common stock,
par value $.01, as of September 30, 1998 is 55,047,000.
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
ENTERTAINMENT INTERNATIONAL LTD.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(NOTE 1) (NOTE 1)
-------- -------
<S> <C> <C>
ASSETS
Airships and related equipment, net $ 3,780,000 $ 3,910,000
Cash and cash equivalents 1,000 2,000
Due from related parties 287,000 434,000
Prepaid insurance -- 22,000
Other assets 7,000 6,000
------------ ------------
$ 4,075,000 $ 4,374,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Accounts payable $ 1,407,000 $ 1,525,000
Customer payments on future services 514,000 514,000
Insurance financing 18,000 45,000
Accrued expenses and other liabilities 119,000 5,983,000
Notes payable 12,000 4,080,000
Obligations under capital lease 1,894,000 2,477,000
Deferred gain on sale of airship 733,000 766,000
Due to stockholders 380,000 6,667,000
------------ ------------
Total Liabilities 5,077,000 22,057,000
------------ ------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value:
Authorized -- 10,000,000 shares,
Issued and outstanding -- 0
and 2,459,000 shares -- 24,000
Common stock, $.01 par value:
Authorized -- 110,000,000 and 80,000,000
shares; issued and outstanding --
55,047,000 and 42,523,000 shares 550,000 425,000
Capital in excess of par value-Preferred Stock -- 14,447,000
Capital in excess of par value -- Common Stock 48,318,000 22,066,000
Accumulated deficit (49,870,000) (54,645,000)
------------ ------------
Total Stockholders' Deficit (1,002,000) (17,683,000)
------------ ------------
$ 4,075,000 $ 4,374,000
============ ============
</TABLE>
Unaudited -- See accompanying notes to condensed financial statements.
2
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ENTERTAINMENT INTERNATIONAL LTD.
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
AIRSHIP REVENUES: $ 0 $ 0 $ 0 $ 0
------------ ------------ ------------ -----------
COSTS AND EXPENSES:
Selling, general & administrative 232,000 213,000 646,000 817,000
------------ ------------ ------------ -----------
232,000 213,000 646,000 817,000
------------ ------------ ------------ -----------
OPERATING LOSS (232,000) (213,000) (646,000) (817,000)
------------ ------------ ------------ -----------
OTHER INCOME (EXPENSE):
Interest expense 175,000 (290,000) (452,000) (824,000)
Gain (loss) on sale of fixed assets -- -- (22,000) 39,000
Other income 11,000 11,000 33,000 37,000
------------ ------------ ------------ -----------
186,000 (279,000) (441,000) (748,000)
------------ ------------ ------------ -----------
NET LOSS $ (46,000) $ (492,000) $ (1,087,000) $(1,565,000)
============ ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 54,743,000 42,516,000 47,770,000 42,069,000
============ ============ ============ ===========
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK:
NET LOSS $ (46,000) $ (492,000) $ (1,087,000) $(1,565,000)
ABOLISHMENT OF ACCRUED
PREFERRED DIVIDENDS -- -- 6,508,000 --
PREFERRED STOCK DIVIDEND -- (431,000) (646,000) (1,294,000)
------------ ------------ ------------ -----------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ (46,000) $ (923,000) $ 4,775,000 $(2,859,000)
============ ============ ============ ===========
NET INCOME (LOSS) PER SHARE $ (0.01) $ (0.02) $ 0.10 $ (0.07)
============ ============ ============ ===========
</TABLE>
Unaudited -- See accompanying notes to condensed financial statements.
3
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<PAGE>
ENTERTAINMENT INTERNATIONAL LTD.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN EXCESS
PREFERRED STOCK COMMON STOCK OF PAR VALUE
--------------- ------------ ------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PREFERRED COMMON DEFICIT
------ ------ ------ ------ --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1997 2,459,000 $24,000 42,523,000 $425,000 $ 14,447,000 $ 22,066,000 $(54,645,000)
NINE MONTHS
ENDED SEPTEMBER 30,
1998:
Dividends accrued
on preferred
stock -- -- -- -- -- -- (646,000)
Abolishment of dividends
accrued on preferred
stock (see Note 3) -- -- -- -- -- -- 6,508,000
Common stock
issued in
connection with
conversion
of
preferred
stock (2,459,000) (24,000) 11,524,000 115,000 (14,447,000) 14,356,000 --
Common stock
issued for obtaining
line of credit -- -- 1,000,000 10,000 -- 32,000 --
Reimbursement of 1993
Stock subscriptions -- -- -- -- -- (22,000) --
Capital contributions from
stockholders due to
extinguishment of debt -- -- -- -- -- 11,886,000 --
Net Loss -- -- -- -- -- -- (1,087,000)
------------------------------------------------------------------------------------------------
BALANCES AT
SEPTEMBER 30,
1998 -- $ -- 55,047,000 $550,000 $ -- $48,318,000 $(49,870,000)
================================================================================================
</TABLE>
Unaudited--See accompanying notes to condensed financial statements.
4
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<PAGE>
ENTERTAINMENT INTERNATIONAL LTD.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,087,000) $(1,565,000)
Adjustments to reconcile net loss to net cash flows used in operating
activities:
Depreciation and Amortization 108,000 --
Realized gain on sale leaseback (33,000) (33,000)
Loss (gain) on sale of equipment 22,000 (39,000)
Changes in operating assets and liabilities (126,000) (161,000)
---------- -----------
Net cash flows used in operating activities (1,116,000) (1,798,000)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of airship components and vehicles -- 79,000
Net change in amounts due from related parties 147,000 (80,000)
---------- -----------
Net cash flows provided by (used by) investing activities 147,000 (1,000)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable -- 4,709,000
Principal payments on capital leases and
loans payable (898,000) (3,865,000)
Issuance of common stock 42,000 --
Reimbursement of 1993 stock subscriptions (22,000) --
Change in loans from stockholders 1,846,000 955,000
---------- -----------
Net cash flows provided by financing activities 968,000 1,799,000
---------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,000) --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,000 2,000
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,000 $ 2,000
========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 309,000 $ 474,000
=========== ===========
Non-cash accrual of common stock dividend on preferred stock $ 646,000 $ 1,294,000
=========== ===========
Non-cash abolishment of accrued preferred dividends $ 5,608,000 --
===========
Non-cash extinguishment of debt due to stockholders $11,886,000 --
===========
</TABLE>
Unaudited-See accompanying notes to condensed financial statements.
5
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ENTERTAINMENT INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1-BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete statements. Management believes that all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
financial statements, have been included. 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 as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimated. If such differences prove significant and material, the Company will
file an amendment to this report on Form 10-Q.
NOTE 2-TRANSACTIONS WITH RELATED PARTIES:
On July 29, 1998, the Company issued 1,000,000 shares of common stock to Trans
Continental Airlines, Inc. ("Trans Continental"), a shareholder of the Company,
in exchange for extending the Company a $150,000 line of credit. Since June 10,
1998, Trans Continental has advanced the Company a total of $380,000 through
September 30, 1998. There can be no assurance that Trans Continental will make
additional loans, cash advances, and guarantees on an ongoing basis.
On September 30, 1998, the Company signed agreements with Trans Continental,
Transcontinental Leasing, Inc. (a wholly owned subsidiary of Trans Continental)
and Louis J. Pearlman, the Chairman of the Company and a shareholder, to waive
certain amounts owed to them by the Company as of June 10, 1998. These
agreements were conditional upon the shareholders passing certain proposals set
forth in the Proxy Statement for the Annual Meeting of Shareholders held on June
10, 1998, which were passed.
In these agreements, Transcontinental Leasing, Inc. waived amounts owed to it by
the Company of $3,753,000, consisting of $3,717,000 in principal and $36,000 in
interest, for a capitalized lease. Louis J. Pearlman agreed to waive $1,265,000,
consisting of $989,000 advanced to the Company for working capital and deferred
salary, bonus and other compensation plus $1,065,000 in interest. The principal
amount was offset by $789,000 for the repayment by Pearlman to the Company of a
loan made by the Company to an unaffiliated third party guaranteed by Pearlman.
Trans Continental waived the aggregate amount of $6,868,000 advanced to the
Company for making lease payments and working capital, consisting of $6,181,000
in principal and $687,000 in interest. The extinguishment of debt by Pearlman,
Trans Continental and Trans Continental Leasing, Inc. was recorded as an
addition to capital in excess of par value because they are all shareholders,
directly or indirectly.
NOTE 3-STOCKHOLDERS' EQUITY:
The Company accrued quarterly dividend payments with respect to its Class A
Cumulative Convertible Preferred Voting Stock (the "Preferred Stock") since
August 15, 1994. Dividends on the Preferred Stock accrued at the annual rate of
$.60 per share payable in Common Stock. The Company accrued $646,000 in
dividends from January 1, 1998 through June 10, 1998.
On June 10, 1998 holders of more than a majority of the Company's common and
preferred stock, voting together, and holders of more than 51% of the preferred
stock, voting separately as a class, approved the conversion of each share of
outstanding preferred stock, par value $.01 per share, into three shares of the
Company's Common Stock, par value $.01 per share. All shares were converted as
of June 10, 1998.
In connection with such vote, the stockholders waived their rights to the
accrued but undeclared preferred dividends and the authorized but unissued
shares of preferred stock were removed as authorized stock. In addition, the
stockholders voted to increase the number of authorized shares of common stock
to 110,000,000.
6
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ENTERTAINMENT INTERNATIONAL LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Cont'd)
NOTE 4 - SUBSEQUENT EVENT
On October 6, 1998, at a Special Meeting of Shareholders, holders of more than a
majority of the shareholders approved an amendment to the Company's Certificate
of Incorporation to change the name of the Company from "Airship International
Ltd." to "Entertainment International Ltd." The amendment was filed with the
Secretary of State of New York on October 16, 1998.
NOTE 5 - UNCERTAINTIES
Year 2000
The Year 2000 presents potential concerns for business and consumer computing.
The consequences of this issue may include systems failures and business process
interruption. It may also include additional business and competitive
differentiation. Aside from the well-known calculation problems with the use of
2-digit date formats as the year changes from 1999 to 2000, the Year 2000 is a
special case leap year which may cause similar problems in many systems unless
remediated. The problem exists for many kinds of software and hardware,
including mainframes, mini computers, PCs, and embedded systems.
Because the Company has had no significant operations, management believes that
the impact of the Year 2000 issue on the Company would not be material.
Accordingly, management has elected not to evaluate its state of readiness or
the costs to address the Year 2000 issue at this time. In addition, management
has decided not to create a contingency plan to deal with the Year 2000 problem.
7
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<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Historically, Entertainment International Ltd., formerly Airship International
Ltd. (the "Company") operated lighter-than-air airships, also commonly known
as blimps, which were used to advertise and promote the products and services
of the Company's clients. The Company's clients utilized its airships at major
sporting and special events and over urban and beach locations as an informative
advertising and promotional vehicle. The Company did not operate any airships
during 1996, 1997 or the first nine months of 1998.
Since 1995, the Company generally has had no operations and no opportunity to
commence operations in the airship industry in which it historically
conducted its business operations. As a result, the Company has experienced
significant operating losses and negative cash flow from its operations.
Management's strategy for the future is to arrange for funding from affiliated
entities, of which there can be no assurance, and to separately consider
acquiring new business operations or merging (whether through direct, indirect,
reverse, or other form of merger) with an entity that has ongoing business
operations. As of the date hereof, the Company has no agreements with any third
party to effect any acquisition or merger, and no assurances can be given that
any such acquisition or merger will be effected in the future. As noted in the
auditor's report in the Company's 10-K Report for the year ended December 31,
1997, there exists the substantial doubt that the Company may have the ability
to continue as a going concern.
The Company was incorporated in New York on June 9, 1982 and commenced
operations in August 1985 following the completion of the Company's initial
public offering in June 1985. The Company's principal executive offices are
located at 7380 Sand Lake Road, Suite 350, Orlando, Florida 32819 and its
telephone number is (407) 351-0011.
OVERALL FINANCIAL CONDITION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. For the nine months ended September 30, 1998, the
Company incurred a loss of $1,087,000 and had negative cash flows of $1,116,000
from operations. The $1,087,000 loss was less than the prior period loss of
$1,565,000 due to lower interest expense and lower selling, general and
administrative costs due to commissions paid on refinancing the Company's debt
in 1997. Interest expense is lower in 1998 due to the waiving of the debt by
certain shareholders as discussed in Note 2 to the financial statements. The
accompanying financial statements do not include any adjustments that might
result from the Company's current liquidity shortage.
The Company experienced a net loss of $46,000 for the three month period ended
September 30, 1998, compared to a net loss of $492,000 for the same period
during the prior year. The change was due primarily to a decrease in interest
expense. Interest expense reflects a reversal of interest accrued in the second
quarter on the debt that was retroactively waived back to June 10, 1998.
The Company had a stockholders' deficit of $1,002,000 at September 30, 1998, as
compared to the stockholders' deficit of $17,683,000 at December 31, 1997
representing a decrease of $16,681,000. The decrease was due to the
extinguishment of debt to the Company by certain related parties and
shareholders in the amount of $11,886,000 which was recorded as a capital
transaction, increasing Capital in Excess of Par Value and to the abolishment of
accrued preferred stock dividends in the amount of $6,508,000 after the accrual
of $646,000 of additional amounts for dividends from January 1,1998 through June
10, 1998.
RESULTS OF OPERATIONS
The Company had no revenue from operation of its airships during the first nine
months of 1998 and 1997.
Selling, general, and administrative costs for the nine months ended September
30, 1998, were $646,000 compared to $817,000 for the comparable period in 1997.
The difference of $171,000 resulted primarily from the net effect of commissions
paid on refinancing the Company's debt in 1997. For the three months ended
September 30, 1998, selling, general and administrative expenses of $232,000
were comparable to the $213,000 for the same period in 1997.
8
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LIQUIDITY AND CAPITAL RESOURCES
The Company continues to experience negative cash flows from operating
activities. Due to the continued negative cash flow and existing encumbrances on
its assets, the Company has relied on loans, cash advances, and guarantees from
Louis Pearlman, the Company's president and principal stockholder, and Trans
Continental. There can be no assurance that Mr. Pearlman or Trans Continental
will make additional loans, cash advances, and guarantees on an ongoing basis.
At September 30, 1998, Mr. Pearlman and Trans Continental waived balances owed
to them as of June 10, 1998. However, Trans Continental has advanced the Company
an additional $380,000 since June 10, 1998. (see Note 2 to the financial
statements).
On June 10, 1998 holders of more than a majority of the Company's common and
preferred stock, voting together, and holders of more than 51% of the Company's
preferred stock, voting separately as a class, approved the conversion of each
share of outstanding preferred stock, par value $.01 per share, into three
shares of the Company's Common Stock, par value $.01 per share. All shares were
converted as of June 10, 1998.
In connection with such vote, the stockholders waived their rights to the
accrued but undeclared preferred dividends and the authorized but unissued
shares of preferred stock were removed as authorized stock. In addition, the
stockholders voted to increase the number of authorized shares of common stock
to 110,000,000.
On September 30, 1998, the Company signed agreements with Trans Continental,
Transcontinental Leasing, Inc. (a wholly owned subsidiary of Trans Continental)
and Louis J. Pearlman, the Chairman of the Company and a shareholder, to waive
certain amounts owed to them by the Company as of June 10, 1998. These
agreements were conditional upon the shareholders passing certain proposals set
forth in the Proxy Statement for the Annual Meeting of Shareholders held on June
10, 1998, which were passed.
In these agreements, Transcontinental Leasing, Inc. waived amounts owed to it by
the Company of $3,753,000, consisting of $3,717,000 in principal and $36,000 in
interest, for a capitalized lease. Louis J. Pearlman agreed to waive $1,265,000,
consisting of $989,000 advanced to the Company for working capital and deferred
salary, bonus and other compensation plus $1,065,000 in interest. The principal
amount was offset by $789,000 for the repayment by Pearlman to the Company of a
loan made by the Company to an unaffiliated third party guaranteed by Pearlman.
Trans Continental waived the aggregate amount of $6,868,000 advanced to the
Company for making lease payments and working capital, consisting of $6,181,000
in principal and $687,000 in interest. The extinguishment of debt by Pearlman,
Trans Continental and Trans Continental Leasing, Inc. was recorded as an
addition to capital in excess of par value because they are all shareholders,
directly or indirectly.
Issues and Uncertainties
Year 2000
The Year 2000 presents potential concerns for business and consumer computing.
The consequences of this issue may include systems failures and business process
interruption. It may also include additional business and competitive
differentiation. Aside from the well-known calculation problems with the use of
2-digit date formats as the year changes from 1999 to 2000, the Year 2000 is a
special case leap year which may cause similar problems in many systems unless
remediated. The problem exists for many kinds of software and hardware,
including mainframes, mini computers, PCs, and embedded systems.
Because the Company has had no significant operations, management believes that
the impact of the Year 2000 issue on the Company would not be material.
Accordingly, management has elected not to evaluate its state of readiness or
the costs to address the Year 2000 issue at this time. In addition, management
has decided not to create a contingency plan to deal with the Year 2000 problem.
9
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ITEM 3 - Not applicable.
Part II
ITEMS 1 and 2 - Not applicable.
ITEMS 3 and 4 - Not applicable.
ITEM 5 - Not applicable.
ITEM 6 - Exhibits and Reports on Form 8-K.
(a.) Exhibits
27. Financial data schedule.
(b.) The Company filed a Report on Form 8-K on August 22, 1998
reporting the issuance of 1,000,000 shares of common stock to
Trans Continental Airlines, Inc. in exchange for a $150,000 line
of credit on July 29, 1998. The press release also disclosed the
results of the June 10, 1998 shareholder vote.
10
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<PAGE>
SIGNATURES
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.
ENTERTAINMENT INTERNATIONAL LTD.
Dated: November 13, 1998 By: /s/ Louis J. Pearlman
-----------------------
Louis J. Pearlman
Chairman of the Board of
Directors, President and
Treasurer (Principal Executive
and Financial Officer)
Dated: November 13, 1998 By: /s/ Alan A. Siegel
--------------------
Alan A. Siegel
Secretary & Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: November 13, 1998 By: /s/ James J. Ryan
-------------------
James J. Ryan
Director
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 287,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 295,000
<PP&E> 5,373,000
<DEPRECIATION> 1,593,000
<TOTAL-ASSETS> 4,075,000
<CURRENT-LIABILITIES> 2,938,000
<BONDS> 0
<COMMON> 550,000
0
0
<OTHER-SE> (1,552,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,075,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 646,000
<OTHER-EXPENSES> 646,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 452,000
<INCOME-PRETAX> (1,087,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,087,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,087,000)
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
