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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Year Ended December 31, 1998 Commission File No. 001-14646
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Entertainment International Ltd.
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(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
New York 06-1113228
- ---------------------------------------- ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
7380 Sand Lake Road, Suite 350,
Orlando, Florida 32819
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(407) 351-0011
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Registrant's Telephone Number
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
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(Title of Class)
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 13, 1999 was $6,196,400 using the closing bid price of
$.14 on April 13, 1999.
The number of shares of Common Stock outstanding as of February 18, 1999 was
57,797,282.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
A list of Exhibits to this Annual Report on Form 10-K begins on page 12.
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ENTERTAINMENT INTERNATIONAL LTD.
1999 FORM 10-K REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
- ------ ----
<S> <C> <C>
Item 1 Business ....................................................... 1
Item 2. Properties ..................................................... 1
Item 3. Legal Proceedings .............................................. 1
Item 4. Submission Of Matters To A Vote Of Security Holders............. 2
PART II
- -------
Item 5. Market For Registrant's Common Equity And Related Stockholder
Matters......................................................... 3
Item 6. Selected Financial Data ........................................ 4
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations............................. 5
Item 8 Financial Statements And Schedules ............................. 9
Item 9. Changes In And Disagreements With Accountants On Return
Accounting And Financial Disclosure............................. 9
PART III
- --------
Item 10. Directors And Executive Officers Of The Registrant ............. 11
Item 11. Executive Compensation ......................................... 12
Item 12. Security Ownership Of Certain Beneficial Owners And Management.. 14
Item 13. Certain Relationships And Related Transactions ................. 14
Item 14. Exhibits, Financial Statements And Reports On Form 8-K.......... 15
</TABLE>
--------------------
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Annual Report contains certain forward-looking
statements and information that are based on the beliefs of management as well
as assumptions made by and information currently available to management. The
statements contained in this Annual Report relating to matters that are not
historical facts, are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, general economic conditions, government regulation,
competition and customer strategies, capital deployment, the impact of pricing
and reimbursement and other risks and uncertainties. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected.
<PAGE>
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PART I
Item 1. Business
General
Entertainment International Ltd. (the "Company") operated lighter-than-air
airships, also commonly known as blimps, from its inception in 1985 through 1995
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.
Since 1995, the Company generally has had no operations and no opportunity
to commence operations in the airship industry in which it had conducted its
business operations. As a result, the Company has experienced significant losses
and negative cash flow since 1995 and has been funded by affiliated entities.
The Company's strategy for the future is to acquire new business operations or
merge (through a direct, indirect, reverse or other form of merger) with an
entity that has ongoing business operations.
In connection with this strategy, the Company changed its name in
October 1998 to "Entertainment International, Ltd." to reflect the new
direction for the Company's operations, which the Company currently
believes will involve the entertainment industry or a media/Internet-based
business. Although the Company is involved in several preliminary discussions
with several companies in the entertainment industry, as of the date hereof, the
Company has no agreements with any third party to effect any such acquisition or
merger, and no assurances can be given that any such acquisition or merger will
in fact be effected in the future or that any such transaction will involve an
entity in either of these industries. As noted in the auditor's report, there
exists substantial doubt that the Company has the ability to continue as a going
concern.
The Company has 2 officers and several employees that manage its affairs.
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. The Company also maintains a small office in New York, New York.
Item 2. Properties
Since May 7, 1996, the Company has subleased approximately 500 square feet
of office space from Trans Continental Airlines, Inc. on a month-to-month basis
for monthly rental payments of approximately $770. See "Certain Relationships
and Related Transactions."
The Company stores various spare parts for its existing airships at a
warehouse located in Kissimmee, Florida which is leased by Airship Operations,
Inc., an unaffiliated company, and intends to do so for the foreseeable future.
The Company does not pay rent for such storage, but permits Airship Operations,
Inc. to use its airship parts (including one operational gondola) on a
lease-free basis.
Item 3. Legal Proceedings
From time to time, the Company is a party to various legal proceedings
arising in the ordinary course of business. As of April 13, 1999 the Company was
not a party to any legal proceeding which would have a material adverse effect
on its financial condition.
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Item 4. Submission Of Matters To A Vote Of Security Holders
The Company held a Special Meeting of Shareholders on October 6, 1998. The
number of shares of Common Stock with voting rights as of the record date
represented at the meeting either in person or by proxy was 50,068,488 shares or
90.96% of the eligible outstanding Common Stock of the Company.
At the meeting, the Shareholders voted upon one proposal to amend the
Company's Certificate of Incorporation to change the name of the Company from
"Airship International Ltd." to "Entertainment International Ltd." The number of
votes for, against and abstaining on this proposal by the holders of shares of
Common Stock was as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
49,802,684 179,399 86,405
</TABLE>
2
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock currently trades under the symbol "ENTI." Prior
to the Company changing its name to "Entertainment International Ltd," the
Company's Common Stock and Preferred Stock traded under the symbols "BLMP" and
"BLMPP," respectively.
Since July 5, 1995 (when the Company's securities were de-listed from the
Nasdaq SmallCap Market) the Company's Common Stock (and Preferred Stock, until
its conversion into Common Stock in June 1998 pursuant to the vote of the
Company's shareholders at the Company's Annual Meeting) have traded on the
over-the-counter market. The price ranges presented below represent the highest
and lowest quoted bid prices during each quarter for 1997 and 1998 reported by
the National Quotation Bureau, Inc. and Nasdaq. The quotes represent prices
between dealers and do not reflect mark-ups, markdowns or commissions and
therefore may not necessarily represent actual transactions.
Common Stock
<TABLE>
<CAPTION>
Year Period Bid Information
- ---- ------ ---------------
High Low
---- ---
<S> <C> <C> <C>
1997 1st Quarter $.175 $ .08
2nd Quarter $.175 $ .09
3rd Quarter $.115 $.075
4th Quarter $.078 $.035
1998 1st Quarter $.0475 $.02
2nd Quarter $.087 $.044
3rd Quarter $.08 $.06
4th Quarter $0.26 $.0
1999 1st Quarter (through
March 31, 1999) $.39 $.09
</TABLE>
Preferred Stock
<TABLE>
<CAPTION>
Year Period Bid Information
- ---- ------ ---------------
High Low
---- ---
<S> <C> <C> <C>
1997 1st Quarter $1.125 $ .51
2nd Quarter $1.094 $.531
3rd Quarter $ .594 $ .38
4th Quarter $ .406 $ .26
</TABLE>
<TABLE>
<CAPTION>
Year Period Bid Information
- ---- ------ ---------------
High Low
---- ---
<S> <C> <C> <C>
1998 1st Quarter $.375 $.21875
2nd Quarter (through $ .5 $ .25
June 10, 1998)
</TABLE>
3
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As reported by the Nasdaq OTC Bulletin Board, on April 13, 1999 the
closing bid price of the Common Stock was $.14 per share.
As of February 18, 1999, there were 1,736 holders of record of the
Company's Common Stock.
No dividends were declared or paid on the Common Stock during the
foregoing periods and the Company does not anticipate paying any dividends on
its Common Stock in the foreseeable future.
In June 1998, each share of the Company's Preferred Stock was converted
into three shares of the Company's Common Stock by vote of the shareholders at
the Company's Annual Shareholder's Meeting held on June 10, 1998. In connection
with the conversion, all accrued dividends on the Preferred Stock were waived
and the Preferred Stock was removed from the Company's Certificate of
Incorporation, as amended. Prior to the conversion, dividends on the Preferred
Stock had been payable quarterly on February 15, May 15, August 15 and November
15 of each year (each such date a "Dividend Payment Date") and accrued at the
annual rate of $.48 per share, to the extent payable in cash and $.60 per share,
to the extent payable in shares of Common Stock. The Company deferred and
accrued the cash dividend on the Preferred Stock from August 15, 1994 until
cancelled by Shareholder vote on June 10, 1998.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
the Company's financial statements and related notes and Management's Discussion
and Analysis of Financial Condition and Results of Operation appearing elsewhere
herein.
4
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Operating Statement Data:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues ........ $ -- $ -- $ -- $ 2,620,000 $ 3,980,000
Net loss .............. $(955,000) $(2,294,000) $(2,506,000) $(4,867,000) $(20,635,000)
Net earnings (loss) per
share ................. $.11 $(.09) $(0.10) $(0.18) $(0.74)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets ................... $ 3,945,000 $ 4,374,000 $ 4,496,000 $ 5,073,000 $ 9,819,000
Long-Term Obligations .......... $ 10,000 $ 4,080,000 $ 3,016,000 $ 3,348,000 $ 3,258,000
Obligations under capital lease $ 1,692,000 $ 2,477,000 $ 3,158,000 $ 3,689,000 $ (3,258,000)
Total Liabilities .............. $ 4,765,000 $ 22,057,000 $ 14,680,000 $ 14,680,000 $ 13,070,000
Stockholders' deficit .......... $ (820,000) $(17,683,000) $ (9,607,000) $ (9,607,000) $ (3,251,000)
</TABLE>
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operation
Overview
The Company commenced operations in August 1985 following the
completion of the Company's initial public offering in June 1985. Historically,
substantially all of the Company's revenues were derived from the operation of
the airships pursuant to aerial advertising contracts with its clients. Fees
were generally paid to the Company on a monthly basis and the respective
airships were flown according to a flight schedule provided by the client,
subject to weather conditions, government regulations and maintenance
requirements. In the absence of advertising contracts, the Company has suffered
a material adverse affect on its revenues. Although the Company has not had a
contract in effect since 1995 the Company will enter into new aerial contracts
if the opportunity arises.
Since 1995, the Company generally has had no operations and no opportunity
to commence operations in the airship industry in which it had conducted its
business operations. As a result, the Company has experienced significant losses
and negative cash flow since 1995 and has been funded by affiliated entities.
The Company's strategy for the future is to acquire new business operations or
merge (through a direct, indirect, reverse or other form of merger) with an
entity that has ongoing business operations.
In connection with this strategy, the Company changed its name in
October 1998 to "Entertainment International, Ltd." to reflect the new direction
for the Company's operations, which the Company currently believes will
involve the entertainment industry or a media/Internet-based business. Although
the Company is involved in several preliminary discussions with several
companies in the entertainment industry, as of the date
5
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hereof, the Company has no agreements with any third party to effect any such
acquisition or merger, and no assurances can be given that any such acquisition
or merger will in fact be effected in the future or that any such transaction
will involve an entity in either of these industries. As noted in the auditor's
report, there exists substantial doubt that the Company has the ability to
continue as a going concern.
In addition, during the past several years, the Company has been
approached by other entities, which have expressed an interest in effecting an
acquisition or merger of the Company primarily due to the fact that the Company
is a publicly-held corporation. In addition, the Company has incurred Net
Operating Losses ("NOLs") which, to a lessor degree, may make the Company
attractive to a prospective suitor.
Year Ended December 31, 1998, as compared to Year Ended December 31, 1997
Overall Financial Situation. The Company had a stockholder's deficit at
December 31, 1998 in the amount of $820,000, a decrease of $16,863,000 from the
stockholders' deficit at December 31, 1997 of $17,683,000. This decrease is
primarily due to the accrual of dividends on the outstanding shares of preferred
stock in the amount of $647,000 and a net loss for 1998 of $955,000, offset by
capital contributions of $11,886,000 received from stockholders in the form of
an extinguishment of debt and the abolishment of dividends accrued on preferred
stock in the amount of $6,508,000 (See Note B in Financial Statements). The
Company did not have revenues during 1998 or 1997. As was expected, operating
costs were substantially lower in 1998 than in 1997 by approximately $287,000 or
80%. In addition, selling general and administrative expenses decreased
significantly from 1997 by $244,000 or 33%, resulting in a loss from operations
of $563,000 for 1998. Interest expense decreased by more than $703,000 or 57%
for 1998 from 1997 due to the waiver of debt from related parties.
Results of Operations. The Company did not have any revenues from
operations during 1998 or 1997.
Operating costs for 1998 were $70,000, a decrease of $287,000 or 81%
compared to operating costs of $357,000 for 1997. The primary reason that
operating expenses decreased from 1997 is a result of having no airships in
operation during any part of 1998. Operating costs primarily relate to usage of
the Company's one operational gondola and the utilization of the support
vehicles.
Selling, general and administrative costs for 1998 were $493,000, a
decrease of $244,000 or 34% compared to costs of $737,000 for 1997. The Company
incurred an increase of $263,000 in professional fees during 1997 with respect
to the Company's filing of its 1994, 1995 and 1996 annual reports with the
Securities Exchange Commission.
Interest expense. Interest expense for 1998 was $542,000, a decrease of
$703,000 or 57% from interest expense of $1,245,000 in 1997. This decrease was
due to the decrease in debt to Trans Continental Leasing, Inc. ("TC Leasing")
and advances from Trans Continental Airlines, Inc. ("Trans Continental").
Year Ended December 31, 1997, as compared to Year Ended December 31, 1996
Overall Financial Situation. The Company had a stockholder's deficit at
December 31, 1997 in the amount of $17,683,000, an increase of $3,845,000 from a
stockholders' deficit at December 31, 1996 of $13,838,000. This increase was
primarily due to the accrual of dividends on the outstanding shares of preferred
stock in the amount of $1,551,000 and a net loss for 1997 of $2,294,000. The
6
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Company did not have revenues during 1997 or 1996. As was expected, operating
costs were substantially lower in 1997 than in 1996 by approximately $793,000 or
9%, while selling general and administrative expenses increased slightly from
1996 by $48,000 or 7%, resulting in a loss from operations of $1,094,000 for
1997. Interest expense increased by more than $470,000 or 61% for 1997 from
1996.
Results of Operations. The Company did not have any revenues from
operations during 1997 or 1996.
Operating costs for 1997 were $357,000, a decrease of $793,000 or 69%
compared to operating costs of $1,150,000 for 1996. The primary reason that
operating expenses decreased from 1996 is a result of the substantial reduction
of the utilization of the Company's airship components. Operating costs
primarily relate to usage of the Company's one operational gondola and the
utilization of the support vehicles.
Selling, general and administrative costs for 1997 were $737,000, an
increase of $48,000 or 7% compared to costs of $689,000 for 1996. An increase of
$263,000 in professional fees during 1997 was incurred with the Company's filing
of its 1994, 1995 and 1996 annual reports with the Securities Exchange
Commission. The Company also experienced decreases in salaries and related
benefits in the amount of $243,000.
Interest expense. Interest expense for 1997 was $1,245,000, an increase of
$477,000 or 62% from interest expense of $768,000 in 1996. This increase was due
to the increase in debt to TC Leasing and advances from Trans Continental.
Liquidity And Capital Resources
As shown in the accompanying financial statements, the Company has
experienced significant operating losses and negative cash flow from operations
in recent years and has an accumulated deficit of $ 820,000 at December 31,
1998. During the years ended December 31, 1998, 1997 and 1996, the Company did
not generate any revenues from airship operations. The Company also reported net
losses of $955,000, $2,294,000 and $2,506,000 for the years ended December 31,
1998, 1997 and 1996, respectively and had working capital deficiencies of
$3,047,000 and $15,992,000 at 1998 and 1997, respectively. The Company's auditor
noted in its report in each year that these conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plan to improve the financial position and operation with the
goal of sustaining the Company's operations for the next twelve months and
beyond include:
Arranging with Trans Continental or other related parties to provide funds
on a monthly basis as a loan, and separately, acquiring assets and operations of
one or more entities, with which the Company has been in negotiation. At this
time, there are no agreements relating to any such acquisition or transaction,
and there can be no assurance that any such transactions will be consummated.
The expectation is that such a business combination, if completed, would
provide additional cash flow and net income to the Company.
Though management believes the Company will secure additional capital
and/or attain one or more of the above goals, there can be no assurance that any
acquisition, financing, or other plan will be effected. Any acquisition or
securities offering is subject to the Company's due diligence, the state of
7
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the general securities markets, and of the specific market for the Company's
securities, and any necessary regulatory review.
While the Company believes that its plans for additional funding or for
obtaining a possible business combination have a reasonable possibility of
improving the Company's financial situation and ensuring the continuation of its
business, there can be no assurance that the Company will be successful in
carrying out its plans and the failure to achieve them could have a material
adverse effect on the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997
---- ----
<S> <C> <C>
Net cash used in operating activities $(1,319,000) $(2,283,000)
Net cash provided by (used in) investing activities 261,000 (159,000)
Net cash provided by financing activities 1,056,000 2,442,000
Net increase (decrease) in cash and
cash equivalents $ (2,000) $ -0-
</TABLE>
During 1998, the Company's operations used $1,319,000 compared to using
approximately $2,283,000 during 1997. This decrease in cash used by operations
was primarily attributable to the reduction in accounts payable during 1998 from
1997 and an increase in accrued interest for 1998 over 1997.
Cash was provided by investing activities in the amount of $261,000 and
used by investing activities in the amount of $159,000 in 1998 and 1997,
respectively for working capital loans to certain related parties. See
"Certain Relationships and Related Transactions."
Cash was provided by financing activities in the amount of $1,056,000 and
$2,442,000 in 1998 and 1997, respectively. Cash provided by financing activities
in 1998 and 1997 was primarily from the working capital financing provided by
Trans Continental. Also in 1997, the Company obtained additional financing from
TC Leasing in the amount of $4,709,000. This financing was obtained by TC
Leasing from Norwest Equipment Finance, Inc. The Company used these funds to
repay debt owed to Senstar Capital Corporation in the amount of $3,003,000 and
for working capital.
Impact Of Recently Issued Accounting Standards
The Company adopted SFAS No. 128, "Earnings per Share," SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No.131, "Disclosures About Segments
of an Enterprise and Related Information" in Calendar 1998. The adoption of
these pronouncements required the Company to make certain additional
disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires recognition of the fair value of derivatives in the statement of
financial position, with changes in the fair value recognized either in earnings
or as a component of other comprehensive income dependent upon the nature of the
derivative. SFAS No. 133 will be adopted by the Company in 1999 and is not
expected to have a material effect on the consolidated financial statements.
8
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Forward-Looking Statements
Certain statements contained in this annual report, including those in the
section entitled "Management's Discussion and Analysis," contain forward-looking
information that involves risk and uncertainties. Actual future results and
trends may differ materially depending on a variety of factors discussed in the
"Risk Factors" section included in the Company's Form 10 Registration Statement
and various Form 8-K filings, including the nature and extent of future
competition, and political, economic and demographic developments in countries
where the Company does business or may do business in the future. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to revise
or update these forward-looking statements.
Year 2000
The Company has conducted a comprehensive review of its computer systems
to identify systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations if not appropriately addressed. The Company presently believes
that, with modifications to existing software and by converting to new software,
the Year 2000 problem will not pose significant operational problems for the
Company's computer systems as so modified and converted. 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 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.
Inflation
Since the formation of the Company in August 1985, the rate of inflation
has remained low and the cost of the Company's operations has not been
significantly affected by inflationary trends in the economy.
Item 8. Financial Statements and Schedules
The report of the Company's Independent Auditor, the Company's financial
statements and notes to financial statements appear herein commencing on Page
F-1.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Grant Thornton LLP ("Grant Thornton") had served as the Company's
independent accountants from 1993 through June 24, 1997, when Grant Thornton was
dismissed as a result of the Company's budgetary concerns. There had been no
reports issued by Grant Thornton for the year ended December 31, 1994 and any
subsequent interim period prior to the date of such dismissal. Prior to the
9
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date of dismissal, the Company did not have any disagreements with Grant
Thornton on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, nor had there been a
"reportable event" with Grant Thornton, as described in Items 304(a)(1)(iv) and
(v) of Regulation S-K. Grant Thornton's report on the financial statements for
the year ended December 31, 1993 included a modification paragraph as to
uncertainty, including matters giving rise to substantial doubt as to the
Company's ability to continue as a going concern. Upon recommendation of the
Audit Committee of the Board of Directors, the Board selected Meeks, Dorman &
Company, PA (formerly Charlie Meeks, C.P.A.), P.A. as its new independent
accountant with respect to the fiscal years ending December 31, 1994 and
thereafter.
10
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PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information, as of December 31, 1998,
concerning each director and executive officer of the Company.
<TABLE>
<CAPTION>
Positions with
Name Age the Company Position Held Since
- ---- --- ----------- -------------------
<S> <C> <C> <C>
Louis J. Pearlman 44 Chairman of the Board of June 1982
Directors, President and
Chief Executive and
Operating Officer and
Treasurer
Alan A. Siegel 35 Secretary and Director October 1989
James J. Ryan 50 Director July 1986
</TABLE>
The following sets forth the business experience of each director,
executive officer, including principal occupations, at present and for at least
the past five years.
Louis J. Pearlman has been Chairman of the Board, President, Chief
Executive and Operating Officer and Treasurer of the Company, and a Director of
the Company, since June 1982. Since November 1976, Mr. Pearlman has been
President and Chief Operating Officer, a director and a 21% shareholder of Trans
Continental Airlines, Inc. ("Trans Continental"). Mr. Pearlman currently devotes
approximately 75% of his time to the affairs of Trans Continental and the
remainder of his time to the affairs of the Company. See "Certain Relationships
and Related Transactions."
Alan A. Siegel has been Secretary of the Company since October 1989 and a
director of the Company since December 1991. From 1985 to 1989, Mr. Siegel was
Senior Account Manager of the Company and since 1989 has served as the Company's
General Manager. Mr. Siegel has also been Senior Account Manager for Trans
Continental since 1986. Mr. Siegel currently devotes approximately 75% of his
time to the affairs of Trans Continental and the remainder of his time to the
affairs of the Company. See "Certain Relationships and Related Transactions."
James J. Ryan has been a director of the Company since July 1986. Mr. Ryan
is currently Executive Director of Sedgwick Aviation of North America, an
international insurance brokerage firm. Until 1994, for more than 20 years, he
had been employed with Alexander and Alexander Inc., an international insurance
brokerage firm (and its predecessor firm), where he most recently held the title
of Senior Vice President of the Aviation and Aerospace Division.
The Company's directors are elected for a period of one year and until
their successors are duly elected and qualified. There are currently three
members of the Board of Directors who were elected at the Company's Annual
Meeting of Shareholders held on June 10, 1998. The Company and its principal
shareholders had agreed to use their best efforts to elect two designees of the
underwriters of the 1993 offering to the Company's Board of Directors which
right expired in April 1998.
11
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To the knowledge of management of the Company, except as set forth above,
no director of the Company holds any directorship in any other company with a
class of securities registered pursuant to Section 12, or subject to the
requirements of Section 15(d), of the Securities Exchange Act of 1934 or in any
company registered as an investment company under the Investment Company Act of
1940.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who own more than ten
percent of a registered class of the Company's equity securities to file certain
reports regarding ownership of, and transactions in, the Company's securities
with the Securities and Exchange Commission (the "SEC"). These officers,
directors and stockholders are also required by SEC rules to furnish the Company
with copies of all Section 16(a) reports that are filed with the SEC. Based
solely on a review of copies of such forms received by the Company, and written
representations received by the Company from certain reporting persons, the
Company believes that for the year ended December 31, 1998 all Section 16(a)
reports required to be filed by the Company's executive officers, directors and
10% stockholders were filed on a timely basis, other than (i) Louis J. Pearlman
who failed to timely file a Form 4 with respect to 1,000,000 shares of Common
Stock issued in July 1998 to Trans Continental for consideration of Trans
Continental extending to the Company a line of credit of $150,000 (Mr. Pearlman
was required to file the form 4 since he is the Chairman, a director and 21%
shareholder of Trans Continental and not for stock issued by the Company to
him); and (ii) Mr. Alan Siegel, who failed to timely file a Form 4 with respect
to 1,000,000 shares of Common Stock issued to him in January 1999 in
consideration for services rendered and the waiver and deduction of salary
payable by the Company to Mr. Siegel during the period from 1995 through 1998.
Item 11. Executive Compensation
The following table summarizes all compensation earned by or paid to the
Company's Chief Executive Officer for services rendered in all capacities to the
Company for the three years ended December 31, 1998 and all officers who earned
over $100,000 (the "Named Executive Officers"). No other executive officer's or
employee's annual salary and bonus exceeded $100,000 during the Company's past
three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------------ ---------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options/SARs(#)
- --------------------------- ---- ---------- --------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Louis J. Pearlman 1998 -- -- -- --
Chairman, President, Chief Executive 1997 $4,423 -- -- --
and Operating Officer and Treasurer 1996 $118,921 -- -- --
</TABLE>
Director's Compensation
Directors who are not employees of the Company are compensated at a rate
of $500 for each meeting of the full Board of Directors which they attend in
person, up to a maximum of $2,000 in any one year, plus expenses for attending
such meetings. Officers are appointed annually by the Board of Directors and
serve at the discretion of the Board.
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OPTIONS/SAR GRANTS IN 1998
There were no option grants in 1998.
AGGREGATE OPTION EXERCISES IN 1998 AND
1998 FISCAL YEAR-END OPTION VALUES
There were no option exercises in 1998.
Compensation Committee Interlocks and Insider Participation
The Board of Directors of the Company does not have a compensation
committee. The Board of Directors determines executive compensation, based on
corporate performance and market conditions. Mr. Pearlman and Mr. Siegel are
members of the Board of Directors and together represent a majority of the
Board. See "Employment Agreements."
Employment Agreements
The Company had an employment agreement with Louis J. Pearlman which
expired in 1994. The Company and Mr. Pearlman have not entered into a new
employment agreement. Mr. Pearlman's compensation is determined by the Company's
Board of Directors, of which Mr. Pearlman is the Chairman, and together with Mr.
Siegel constitutes a majority of the Board.
The Company entered into an employment agreement as of December 31, 1992
with Alan A. Siegel. Mr. Siegel's agreement expired on January 1, 1998. Mr.
Siegel's agreement provided for an annual salary of $75,000 for the first year
of the agreement and for annual increases thereafter in an amount equal to the
greater of 5% of his previous year's salary or the increase, if any, in the
Consumer Price Index for All Urban Consumers, Central Florida 1967/100. The
agreement also provided for an annual bonus payable to Mr. Siegel in an amount
equal to 1 1/2% of the Company's net after-tax profits for such fiscal year plus
an amount determined in the discretion of the Board. The Company has not entered
into a new employment agreement with Mr. Siegel. The Board of Directors
determines Mr. Siegel's compensation. Mr. Siegel is a member of the Board of
Directors, and together with Mr. Pearlman constitutes a majority of the Board.
1994 Employee Share Purchase Plan
The Company has an employee share purchase plan (the "Plan") for employees
of the Company and any present or future "subsidiary corporations." The Company
intends for the Plan to be an "employee stock purchase plan" as defined in
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Plan, approved by the Company's shareholders on April 11, 1995, was effective
November 1, 1994. All employees are eligible to participate in the Plan, except
that the Company's appointed committee may exclude any or all of the following
groups of employees from any offering: (i) employees who have been employed for
less than 2 years; (ii) employees whose customary employment is 20 hours or less
per week; (iii) employees whose customary employment is not more than 5 months
in any calendar year; and (iv) highly compensated employees (within the meaning
of Code Section 414(q)). The shares issuable under the Plan shall be common
shares of the Company subject to certain restrictions up to a maximum of
1,000,000 shares. The committee shall determine the length of each offering but
no offering may exceed 27 months. The option price for options granted in each
offering may not be less than the lessor of (i) 85% of the fair value of the
shares on the day of the offering, or (ii) 85% of the fair market value of the
shares at the time the option is exercised.
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Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number and percentage of shares of
Common Stock beneficially owned, as of February 18, 1999, by (i) all persons
known by the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, (ii) each of the Company's directors, (iii) the
Company's Chief Executive Officer and the Named Executive Officers, and (iv) all
executive officers and directors of the Company as a group (3 persons).
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of Class
- ---------------- ---------------- ----------------
<S> <C> <C>
Louis J. Pearlman(1)(2)(5).................. 12,469,153 20.8%
Alan A. Siegel(1)(3)........................ 1,051,130 1.8%
James J. Ryan(4)............................ 30,000 *
Trans Continental Airlines, Inc.(5)......... 4,666,862 8.1%
All officers and directors as a group
(3 persons)............................... 13,550,283 22.6%
</TABLE>
- ----------
* Less than 1%.
(1) The business address of each person is c/o Entertainment International Ltd.,
7380 Sand Lake Road, Suite 350, Orlando, Florida 32819.
(2) Represents: (i) 5,802,291 shares of the Company's common stock; (ii)
warrants exercisable for 2,000,000 shares of the Company's Common Stock; and
(iii) 4,666,862 shares of the Company's common stock owned of record by Trans
Continental Airlines, Inc. ("Trans Continental"). Mr. Pearlman is the President
and Chief Operating Officer, a director and an approximately 21% owner of the
issued and outstanding shares of Trans Continental.
(3) Includes options to purchase 50,000 shares of the Company's common stock.
(4) Mr. Ryan's business address is c/o Sedgewick Aviation North America,
3 Becker Farm Road, Roseland, New Jersey.
(5) Represents: (i) 3,666,862 shares of common stock issued to Trans Continental
in consideration for its guaranty of certain loans to the Company; and (ii)
1,000,000 shares of common stock issued to Trans Continental for entering into a
line of credit of $150,000 with the Company in July 1998. The 3,666,862 shares
of common stock were granted to Trans Continental in consideration for its
guaranty of the Company's obligations under the loans with Allstate Financial
Corporation, Phoenixcor, Inc. Senstar Capital Corporation, the Argentina Lease
Agreement and the Argentina Operations Agreement with Mastellone Hnos, S.A., and
a corporate credit card issued for the Company's benefit. See "Certain
Relationships and Related Transactions."
Item 13. Certain Relationships and Related Transactions
Since May 7, 1996, the Company has subleased approximately 500 square feet
of office space from Trans Continental Airlines, Inc. on a month-to-month basis
for monthly rental payments of approximately $770.
14
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In January 1999, the Company issued to Alan Siegel 1,000,000 shares of the
Company's common stock in consideration for services rendered and the waiver and
deduction of salary payable by the Company to Mr. Siegel during the period from
1995 through 1998. In addition, the Company issued to Frank Sicoli, Scott
Bennett and Frank Vazquez, employees of the Company, 1,000,000, 500,000 and
250,000 shares of the Company's Common Stock, respectively, as compensation in
connection with their employment by the Company.
On July 29, 1998, the Company issued to Trans Continental 1,000,000 shares
of the Company's common stock in consideration of Trans Continental granting to
the Company a $150,000 line of credit. Mr. Louis J. Pearlman the Company's
Chairman and President, and a director of the Company owns 21 % of Trans
Continental and is Trans Continental's Chairman of the Board, President and
principal shareholder.
On June 10, 1998, a majority of the Company's shareholders voted to
approve the conversion of each outstanding share of preferred stock into three
shares of common stock. Shareholders also waived their rights to accrued but
undeclared dividends, and the authorized but unissued shares of preferred stock
were removed from authorization. In connection with the shareholders' approval
of such conversion, Louis Pearlman, Trans Continental and Trans Continental
Leasing, Inc. each agreed to waive approximately $2 million, $5.5 million and
$4.0 million, respectively, for advances to the Company, as well as accrued and
unpaid salaries in the case of Mr. Pearlman.
On December 24, 1996, Trans Continental Leasing, Inc. ("TC Leasing")
obtained a loan with Norwest Equipment Finance, Inc. in the amount of
$4,709,000. The proceeds of this refinancing were used to repay the Company's
debt to Senstar and to provide working capital to the Company. TC Leasing is a
wholly owned subsidiary of Trans Continental. The Company owed to TC Leasing the
aggregate amount of approximately $4,090,000, which amount was waived in
connection with the June 1998 shareholders' meeting. The Company sold airship
parts to TC Leasing in order to facilitate the loan.
Trans Continental serves as the Company's travel agent for substantially
all of its travel arrangements and the Company is its principal customer. In the
opinion of management, the terms and prices received from Trans Continental are
similar to those available from other travel agencies. During 1998, 1997 and
1996, the Company utilized the travel agency services for reservations, while
primarily paying certain costs directly to the provider.
The Company and certain of its affiliates employ common employees. A
portion of such employees' salaries and related benefits are allocated to the
Company and such affiliated entities based on the approximate amount of time
such employee devotes to each of the Company and its affiliates. As of
December 31, 1998, the Company's allocated portion of such costs amounted to
$173,000.
The Company has purchased hull insurance for the Company's airships
through Sedgwick Aviation of North America, an international insurance brokerage
firm of which Mr. James J. Ryan is the Executive Director.
Item 14. Exhibits, Financial Statements And Reports On Form 8-K
<TABLE>
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Page
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(a)(1) The following financial statements of the Company
are filed herewith:
A. Report of Independent Certified
Accountant ................................ F-1
B. Balance Sheets for the years ended
December 31, 1998 and 1997 ................ F-2
C. Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 .......... F-3
D. Statements of Changes in Stockholders'
Deficit for the years ended December 31,
1998, 1997 and 1996 ....................... F-4
E. Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 .......... F-5
F. Notes to Financial Statements ............. F-6 to F-23
</TABLE>
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<TABLE>
<S> <C>
(2) The following exhibits of the Company are filed herewith, unless
otherwise indicated:
</TABLE>
<TABLE>
<CAPTION>
Exhibit Incorporated by
Number Description Reference to
- ------ ----------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company filed
June 9, 1992 ...................................... Exhibit2(12)
3.2 Amendment to Certificate of Incorporation filed
September 18, 1984 ................................ Exhibit3(2)
3.3 Amendment to Certificate of Incorporation filed
April 8, 1985 ..................................... Exhibit 4(12)
3.4 Amendment to Certificate of Incorporation filed
August 1, 1986 .................................... Exhibit 5(12)
3.5 Amendment to Certificate of Incorporation filed
January 27, 1989 .................................. Exhibit 6(12)
3.6 Amendment to Certificate of Incorporation filed
August 5, 1992 .................................... Exhibit7(12)
3.7 Certificate of Correction to Amendment of
Certificate of Incorporation filed on February 26,
1993 .............................................. Exhibit 8(12)
3.8 Amendment to Certificate of Incorporation filed
February 26, 1993 ................................. Exhibit 9(12)
3.9 Certificate of Amendment to Certificate of
Incorporation filed on June 18, 1998 .............. Exhibit 3.1(20)
3.10 Certificate of Amendment to Certificate of
Incorporation filed on October 16, 1998 ........... *
3.11 By-laws of the Company ............................ Exhibit 3.9(19)
4.1 Warrant Agreement dated February 14, 1991 between
the Company and American Securities Transfer, Inc.
including form of Class A Warrant and Form of Class
B Warrant ......................................... Exhibit 4.1(4)
4.2 Warrant dated February 7, 1991 issued to Stephen M.
Bathgate .......................................... Exhibit 4.2(4)
4.3 Two warrants dated respectively December 31, 1991
and February 25, 1992 issued to Julian M.
Benscher .......................................... Exhibit 4.3(4)
4.4 Two warrants dated respectively February 7, 1991 and
March 23, 1991 issued to Kenneth S. Bernstein ..... Exhibit 4.4(4)
4.5 Two warrants dated respectively February 7, 1991 and
May 23, 1991 issued to Chatfield Dean & Co., Inc .. Exhibit 4.5(4)
4.6 Warrant dated September 26, 1991 issued to Dr.
Joseph C. F. Chow and Cynthia B. Chow ............. Exhibit 4.6(4)
4.7 Warrant dated September 26, 1991 issued to Cohig &
Associates, Inc ................................... Exhibit 4.7(4)
4.8 Warrant dated May 1, 1991 issued to Daliz
Associates ........................................ Exhibit 4.8(4)
4.9 Two warrants dated respectively February 8, 1990,
and February 21, 1991 issued to Emanuel and
Company ........................................... Exhibit 4.9(4)
4.10 Warrant dated December 10, 1991 issued to After
Falkowitz ......................................... Exhibit 4.10(4)
4.11 Four warrants dated respectively June 5, 1990,
December 5, 1990, December 17,1990, and February 21,
1991 issued to Alfonso Figlioia ................... Exhibit 4.11(4)
4.12 Two warrants dated respectively, May 23, 1991 and
February 7, 1992 issued to Sanford D. Greenberg ... Exhibit 4.12(4)
</TABLE>
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<TABLE>
<S> <C> <C>
4.13 Warrant dated December 7, 1991 issued to Edward C.
Larkin ............................................ Exhibit 4.13(4)
4.14 Warrant dated December 4, 1991 issued to David
Mathis ............................................ Exhibit 4.14(4)
4.15 Warrant dated February 7, 1991 issued to Eugene
McColley .......................................... Exhibit 4.15(4)
4.16 Warrant dated February, 1992 issued to Nour
Collection, Inc ................................... Exhibit 4.16(4)
4.17 Warrant dated November 3, 1989 issued to ORIX
Commercial Credit Corporation ("ORIX") ............ Exhibit 10.29(5)
4.18 Warrant date February, 1992 issued to Chahram
Pahlavi ........................................... Exhibit 4.18(4)
4.19 Warrant dated April 7, 1992 issued to Jim Ryan .... Exhibit 4.19(4)
4.20 Warrant dated May 1, 1992 issued to Sterling
Capital Group, Inc. ............................... Exhibit 4.20(4)
4.21 Warrant dated May 1, 1991 issued to Jonathan Turk . Exhibit 4.21(4)
4.22 Warrant dated February 7, 1991 issued to Steven R.
Hinkle ............................................ Exhibit 4.22(4)
4.23 Warrant dated April 1, 1992 issued to Simon Zamet . Exhibit 4.23(4)
4.24 Warrant dated May 8, 1992 issued to Louis J.
Pearlman .......................................... Exhibit 4.24(6)
4.25 Two Warrants dated April 17, 1992 issued to Emanuel
and Company ....................................... Exhibit 4.25(6)
4.26 Representatives' Preferred Stock Warrant issued to
Emanuel and Company and Chatfield Dean & Co. Inc. . Exhibit 4.26(6)
4.27 Action by Written Consent of the Board of Directors
dated April 15, 1997 extending warrant granted to
Louis J. Pearlman ................................. Exhibit 4.27
10.1 Amended and Restated Loan Agreement dated as May 8,
1992 between the Company and Louis J. Pearlman .... Exhibit 10.1(6)
10.2 Form of Subscription Agreement between the Company
and certain investors relating to the 1992 Private
Placement ......................................... Exhibit 10.2(6)
10.3 Letter Agreement dated April 17, 1992. between the
Company and Emanuel and Company in connection with
the 1992 Private Placement ........................ Exhibit 10.3(6)
10.4 Incentive Stock Option Plan as amended, of the
Company ........................................... Exhibit 10.2(1)
10.5 Amendment to Incentive Stock Option Plan dated
December 9, 1991 .................................. Exhibit 10.2(4)
10.6 Aerial Airship Agreement dated October 26, 1987 by
and between the Company and the Metropolitan Life
Insurance Company ("MetLife") ..................... Exhibit 10.29(7)
10.7 Amendment dated as of March 15, 1988 to the
Advertising Agreement between the Company and
MetLife ........................................... Exhibit B.1(3)
10.8 Amendment dated as of March 15, 1988 to the Aerial
Advertising Agreement between the Company and
MetLife ........................................... Exhibit 10.14(5)
10.9 Amendment dated as of March 15, 1988 to the Aerial
Advertising Agreement between the Company and
MetLife ........................................... Exhibit 10.15(5)
10.10 Amendment dated as of March 15, 1988 to the Aerial
Advertising Agreement between the Company and
MetLife ........................................... Exhibit 19.4(8)
10.11 Airship Advertising Agreement dated as to April 27,
1990 between the Company, Airship Industries (USA),
Inc. ("AIUSA") and Anheuser Busch Companies, Inc.
("Anheuser") ...................................... Exhibit 10.8(4)
10.12 Termination Agreement dated as of January 1, 1991
between the Company, Anheuser, and AIUSA .......... Exhibit 19.2(8)
10.13 Airship Advertising Agreement dated as of January 1,
1951 between the Company and Anheuser ............. Exhibit 19.3(8)
10.14 Amendment to Airship Advertising Agreement dated May
31, 1991 between the Company and Anheuser ......... Exhibit 10.11(4)
</TABLE>
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<TABLE>
<S> <C> <C>
10.15 Passenger Airship Agreement dated May 31, 1991
between the Company and Anheuser .................. Exhibit 19.12(4)
10.16 Airship Advertising Agreement dated March 12, 1992
between the Company and Anheuser .................. Exhibit 10.13(4)
10.17 Term Loan Agreement dated as of February 27, 1990
between State Bank of South Australia and the
Company in the principal amount of $250,000 ....... Exhibit 10.3(9)
10.18 Airship Lease dated February 27, 1990 between the
Company and the State Bank of South Australia
together with Lease Supplement No. 1 thereto ...... Exhibit 10.23(5)
10.19 Subordination Agreement dated February 27, 1990,
between the Company, State Bank of South Australia
and Louis J. Pearlman ............................. Exhibit 10.16(4)
10.20 Line of Credit Agreement dated December 31, 1991
between Julian Benscher and the Company in the
amount of $1,000,000, as amended on February 20,
1992 and Secured and Credit Note dated December 31,
1991 from the Company to Julian Benscher in the
principal amount of $1,000,000 .................... Exhibit 10.17(4)
10.21 Loan Agreement dated December 8, 1988 between the
Company and Louis J. Pearlman relating to a loan of
$500,000 .......................................... Exhibit C.1(3)
10.22 Promissory note dated December 8, 1988 of the
Company ........................................... Exhibit D.1(3)
10.23 Demand Note dated as of December 31, 1988 of the
Company to Louis J. Pearlman, in the principal
amount of $324,929.76 ............................. Exhibit H.1(3)
10.24 Term Note for the principal amount of $850,000 dated
January 31, 1990 from the Company to Louis J.
Pearlman .......................................... Exhibit 10.21(4)
10.25 Stock Option Agreement dated January 1, 1989 between
the Company and Louis J. Pearlman to purchase
1,000,000 shares .................................. Exhibit E.1(3)
10.26 Amendment to Stock Option Agreement between the
Company and Louis J. Pearlman dated as of February
7, 1991 ........................................... Exhibit 10.24(4)
10.27 Exchange Agreement dated January 29, 1992 between
Slingsby Aviation Limited and the Company ......... Exhibit 10.28(4)
10.28 Purchase Agreement Assignment dated November 2, 1989
between the Company and ORIX and Consent by Airship
UK ................................................ Exhibit 10.26(5)
10.29 Letter of Credit dated November 2, 1989 between the
Company and ORIX .................................. Exhibit 10.309(5)
10.30 Assignment of (MetLife) Aerial Advertising Agreement
and Consent dated as of November 2, 1989 between the
Company and Airship (UK) .......................... Exhibit 10.27(5)
10.31 Guaranty of Louis J. Pearlman in favor of ORIX dated
as of November 2, 1989 ............................ Exhibit 10.28(5)
10.32 Note and Warrant Purchase Agreement dated as of
November 2, 1989 between the Company and ORIX ..... Exhibit 109.33(5)
10.33 Agreement dated November 12, 1990 among the Company,
the Receiver for Airship UK, AIUSA and others ..... Exhibit 10.30(10)
10.34 Corporate Financial Consulting Agreement dated
February 14, 1991 between the Company and Cohig &
Associates ........................................ Exhibit 10.38(4)
10.35 Engagement Letter dated September 22, 1988 between
Emanuel and Company and the Company ............... Exhibit K.1(3)
</TABLE>
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<TABLE>
<S> <C> <C>
10.36 Agreement dated August 28, 1992 between Seoul
Olympic Sports Promotion Foundation and the
Company ............................................ Exhibit 10.45(11)
10.37 Fifth Amendment to Aerial Advertising Agreement
effective as of September 1, 1992 between
Metropolitan Life and the Company ................. Exhibit 10.46(11)
10.38 Loan Agreement dated October 14, 1992 between
Sequel Capital Corporation and the Company ........ Exhibit 10.47(11)
10.39 Agreement dated December 17, 1992 between J&B
Enterprises Limited (UK) Corp., Julian Benscher
and the Company ................................... Exhibit 10.48(11)
10.40 Airship Mortgage dated December 17, 1992 between the
Company and J&B Enterprises Limited (UK) Corp. .... Exhibit 10.49(11)
10.41 Employment Agreement dated as of December 31, 1992
between the Company and Seth Bobet ................ Exhibit 10.50(11)
10.42 Employment Agreement dated as of December 31, 1992
between the Company and Alan Siegel ............... Exhibit 10.51(11)
10.43 Employment Agreement dated as of December 31, 1992
between the Company and Frank Sicoli .............. Exhibit 10.52(11)
10.44 Amended Employment Agreement dated as of February
15, 1993 between the Company and Louis J.
Pearlman .......................................... Exhibit 10.53(11)
10.45 Second Amendment to Stock Option Agreement between
the Company and Louis J. Pearlman dated as of
February 15, 1993 ................................. Exhibit 10.54(11)
10.46 Mast Sale Agreement dated December 30, 1992 between
J&B Enterprises Limited (UK) Corp., Julian Benscher
and the Company ................................... Exhibit 10.55(11)
10.47 Mortgage dated December 30, 1992 between the Company
and J&B Enterprises Limited (UK) Corp. ............ Exhibit 10.56(11)
10.48 Subscription Agreements between the Company and
certain investors relating to the 1992 Private
Placement ......................................... Exhibit 10.57(11)
10.49 Sublease Agreement between Westinghouse Airships,
Inc. and the Company dated November 9, 1992 ....... Exhibit 10.58(13)
10.50 Amendment to Sublease Agreement between Westinghouse
Airships, Inc. and the Company dated November 9,
1992 .............................................. Exhibit 10.59(13)
10.51 Lease Agreement between Sand Lake IV-A Limited
Partnership and the Company dated February 25,
1991 .............................................. Exhibit 10.60(13)
10.52 Lease Agreement between T&L Leasing and the Company
dated January 13, 1992 ............................ Exhibit 10.61(13)
10.53 Lease Agreement between Westdeutsche Luftwerbung
Theodor Wullenkemper GMBH and the Company dated May
16, 1993 .......................................... Exhibit 10.52(15)
10.54 Manufacturers Agreement between WDL
Luftschiffgesellschaft MBH and the Company dated
May 16, 1993 ...................................... Exhibit 10.53(15)
10.55 Escrow Agreement between and among Westdeutsche
Lufterbung Theodor Wullenkemper GMBH & Co., WDL
Luftschiffgesellschaft MBH, Trans Continental Exhibit 10.54(15)
Airlines Inc., and the Company dated May 15, 1993.. Exhibit 10.55(15)
10.56 Aerial Advertising Agreement between the Company and
Catamount Petroleum Limited Partnership dated May
28, 1993 .......................................... Exhibit 10.56(15)
10.57 Amendment to Aerial Advertising Agreement between
the Company and Catamount Petroleum Limited
Partnership dated July 27, 1993 ................... Exhibit 10.57(15)
</TABLE>
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10.58 Second Amendment to Aerial Advertising Agreement
between the Company and Catamount Petroleum Limited
Partnership dated August 9, 1993 .................. Exhibit 10.58(15)
10.59 Third Amendment to Aerial Advertising Agreement
between the Company and Catamount Petroleum Limited
Partnership dated October 13, 1993 ................ Exhibit 10.59(15)
10.60 Fourth Amendment to Aerial Advertising Agreement
between the Company and Catamount Petroleum Limited
Partnership dated November 9, 1993 ................ Exhibit 10.60(15)
10.61 Aerial Advertising Agreement between Kingstreet
Tours Limited and the Company dated as of January
18, 1994 .......................................... Exhibit 10.61(15)
10.62 Passenger Airship Agreement between Anheuser-Busch
Companies. Inc. and the Company dated as of January
2, 1994 ........................................... Exhibit 10.62(15)
10.63 Amendment to Airship Advertising Agreement dated
March 12, 1992, between the Company and
Anheuser-Busch Companies, Inc. dated March 4, 1994
and related letter agreement dated February
11, 1994 .......................................... Exhibit 10.63(15)
10.64 Amendment to note agreement dated as of November 2,
1989 between the Company and ORIX dated January 11,
1994 .............................................. Exhibit 10.64(15)
10.65 Loan Agreement between Don Golden and the Company
dated June 30, 1993 ............................... Exhibit 10.65(15)
10.66 Guarantee of Louis J. Pearlman in favor of the
Company dated as of June 30, 1993 ................. Exhibit 10.66(15)
10.67 Loan Agreement between Superboard Limited and the
Company dated December 7, 1997 .................... Exhibit 10.67(15)
10.68 Guarantee of James Stuart Tucker in favor of the
Company dated as of December 7, 1993 .............. Exhibit10.68(19)
10.69 Kingstreet Tours Limited Aerial Advertising
Agreement dated January 18, 1994, by and between
the Company and Kingstreet Tours Limited .......... Exhibit 10.69(19)
10.70 Amended and Restated Airship Advertising Agreement,
dated July 8, 1994, by and between the Company and
Anheuser-Busch Companies. Inc, .................... Exhibit 10.70(19)
10.71 Aircraft Lease Agreement, dated December 15, 1994,
by and between the Company and Mastellone Hnos.,
S.A. .............................................. Exhibit 10.71(19)
10.72 Airship Operations Agreement, dated December 15,
1994, by and between Airship Operations (USA), Inc.
and Mastellone Hnos, S.A. ......................... Exhibit 10.72(19)
10.73 Passenger Airship Agreement. Dated as of January 2,
1994, by and between the Company and Anheuser-Busch
Companies, Inc. ................................... Exhibit 10.73(19)
10.74 Letter Agreement Modification, dated January 11,
1994, by and between the Company and ORIX USA
Corporation ....................................... Exhibit 10.74(19)
10.75 Amendment to Lease, dated May 12, 1994, by and
between the Company and ORIX USA Corporation ...... Exhibit 10.75(19)
10.76 Collateral and Security Agreement, dated as of May
10, 1994, by and between the Company and ORIX USA
Corporation ....................................... Exhibit 10.76(19)
</TABLE>
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10.77 Aircraft Collateral Funding Repayment Agreement,
dated as of November 16, 1994, by and between the
Company and Allstate Financial Corporation ........ Exhibit 10.77(19)
10.78 Guaranty, dated December 6, 1994, of Louis J.
Pearlman .......................................... Exhibit 10.78(19)
10.79 Guaranty, dated December 6, 1994, of
Trans-Continental Airlines. Inc. .................. Exhibit 10.79(19)
10.80 Aircraft Lease Agreement, dated as of May 31, 1995,
by and between Trans Continental Leasing, Inc. as
Lessor and the Company, as Lessee ................. Exhibit10.80(19)
10.81 Full Warranty Bill of Sale, dated as of May 31,
1994, by the Company to Trans Continental Leasing,
Inc. .............................................. Exhibit 10.81(19)
10.82 Credit Agreement, dated November 30, 1995, by and
between the Company and Senstar Capital
Corporation ....................................... Exhibit 10.82(19)
10.83 Term Note, dated November 30, 1995, of the Company
to Senstar Capital Corporation .................... Exhibit 10.83(19)
10.84 Aircraft Mortgage and Security Agreement, dated
November 30, 1995, by and between the Company and
Senstar Capital Corporation ....................... Exhibit 10.84(19)
10.85 Assignment of Contract Rights, dated November 30,
1995, by and between the Company and Senstar
Capital Corporation ............................... Exhibit 10.85(19)
10.86 Agreement of Guaranty and Suretyship, dated November
30, 1995, by and between Trans Continental Airlines
and Senstar Capital Corporation ................... Exhibit 10.86(19)
10.87 Release and Settlement Agreement, dated September
20, 1993, by and between the Company and Sequel
Capital Corporation and Louis J. Pearlman ......... Exhibit 10.87(19)
10.88 Promissory Note, dated October 1994, of Louis J.
Pearlman to Airship Airways, Inc. ................. Exhibit 10.88(19)
10.89 Promissory Note, dated October 26, 1994, of Louis J.
Pearlman to Airship Airways, Inc. ................. Exhibit 10.89(19)
10.90 Form of Share Subscription Agreement, dated August
11, 1994, between the Company and _____________ ... Exhibit 10.90(19)
10.91 List of Purchasers in the 1994 Private Placement .. Exhibit 10.91(19)
10.92 Secured Promissory Note, dated October 26, 1994, of
Airship Airways, Inc. to the Company .............. Exhibit 10.92(19)
10.93 Option Agreement, dated as of August 11, 1994,
between the Company and Louis J. Pearlman ......... Exhibit 10.93(19)
10.94 Airship International Ltd. Employee Share Purchase
Plan .............................................. Exhibit 1(18)
10.95 Amended and Restated Lease Agreement, dated June 2,
1995, between Orix USA Corporation. and
The Company ....................................... Exhibit 10.95(21)
11.1 Statement re: Computation of Per Share Earnings ... *
16.1 Letter of Wiss & Co. dated June 22, 1993 .......... Exhibit 16.1(14)
16.2 Letter of Grant Thornton dated July 7, 1997 ....... Exhibit 16(16)
16.3 Letter of Grant Thornton dated July 22, 1997 ...... Exhibit 16(17)
21.1 List of Subsidiaries .............................. Exhibit 21.1(19)
27.1 Financial Data Schedule ........................... *
</TABLE>
21
<PAGE>
<PAGE>
- --------
* Previously filed.
(1) The Company's Registration Statement on Form S-18 Registration No. 2.96334
NY as filed with the Securities and Exchange Commission (the "SEC") on
March 9, 1985.
(2) The Company's Registration Statement on Form S-1 Registration No. 33-7830,
as filed with the SEC on August 7, 1986.
(3) The Company's Annual Report on Form 10-K for fiscal year ended December 31,
1988. (4) The Company's Annual Report on Form 10-K for fiscal year ended
December 31, 1991.
(5) The Company's Registration Statement on Form S-2, Registration No.
33-32619, as filed with the SEC on December 18, 1989.
(6) The Company's Post-effective Amendment No. 1 on Form S-3 to Form S-2,
Registration No. 33-38076, as filed with the SEC on May 14, 1992.
(7) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1987.
(8) The Company's Report on Form 8 dated August 14, 1991.
(9) The Company's Report on Form 8-K dated February 27, 1990.
(10) The Company's Registration Statement on Form S-2, Registration No.
33038076, as filed with the SEC on December 5, 1990.
(11) The Company's Registration Statement on Form S-1, Registration No.
33-56382, as filed with the SEC on February 16, 1993.
(12) The Company's Registration Statement on Form 8-A. as filed with SEC on
March 16, 1993.
(13) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
(14) The Company's Report on Form 8-K dated July 9, 1993.
(15) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1993.
(16) The Company's Report on Form 8-K, as filed with the SEC on July 11, 1997.
(17) The Company's Report on Form 8-K/A, as filed with the SEC on July 22, 1997.
(18) The Company's Proxy Statement, as filed with the SEC on March 20, 1995.
(19) The Company's Annual Report on Form 10-K for the year ended December 31,
1994.
(20) The Company's Quarterly Report on Form 10-Q, as amended, for the quarter
ended June 30, 1998.
(21) The Company's Annual Report on Form 10-K for the year ended December 31,
1998.
(b) The following Current Reports on Form 8-K were filed by the Company
during the last quarter of 1998:
On November 12, 1998, the Company filed a report on Form 8-K disclosing
that its name had been changed to "Entertainment International, Ltd."
22
<PAGE>
<PAGE>
SIGNATURES
In accordance with 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, on May 6, 1999.
ENTERTAINMENT INTERNATIONAL LTD.
By: /s/ Louis J. Pearlman
-------------------------------
Louis J. Pearlman,
Chairman, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Louis J. Pearlman Chairman of the Board and May 6, 1999
- ------------------------ Chief Executive Officer
Louis J. Pearlman (Principal Executive and
Financial Officer) and Director
/s/ Alan A. Siegal
- ------------------------
Alan A. Siegel Secretary and Director May 6, 1999
/s/ James J. Ryan Director May 6, 1999
- ------------------------
James J. Ryan
</TABLE>
23
<PAGE>
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
A. Report of Independent Certified Public Accountant
F-1
B. Balance Sheets as of December 31, 1998 and 1997 F-2
C. Statements of Operations for the years ended December 31,
1998, 1997, and 1996 F-3
D. Statements of Changes in Stockholders' Deficit for the
Years ended December 31, 1998, 1997, and 1996 F-4
E. Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996 F-5
F. Notes to Financial Statements F-6 to F-23
</TABLE>
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Entertainment International Ltd.
Orlando, Florida
We have audited the accompanying balance sheets of Entertainment International
Ltd. as of December 31, 1998 and 1997, and the related statement of operations,
stockholders' deficit, and cash flows for the years ended December 31, 1998,
1997, and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entertainment International
Ltd. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for the three years then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note B to the
financial statements, the Company has experienced significant operating losses,
an accumulated deficit and negative working capital at December 31, 1998 and
1997. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty, with the
exception of the effects of applying Statement of Financial Accounting Standards
No. 121, "Impairment of Long-Lived Assets to be Disposed Of", as described in
Note A.
Meeks, Dorman & Company, P.A.
Longwood, Florida
March 31, 1999
F-1
<PAGE>
<PAGE>
Entertainment International Ltd.
Balance Sheets
December 31,
<TABLE>
<CAPTION>
1998 1997
=====================================================================================
<S> <C> <C>
ASSETS
Airships and Related Equipment:
Airships $ 2,294,000 $ 2,294,000
Vehicles 645,000 645,000
Parts and equipment 828,000 850,000
Airship components 1,606,000 1,606,000
- -------------------------------------------------------------------------------------
5,373,000 5,395,000
Less: Accumulated depreciation and amortization 1,628,000 1,485,000
- -------------------------------------------------------------------------------------
3,745,000 3,910,000
Cash and cash equivalents -- 2,000
Prepaid insurance 21,000 22,000
Due from related parties 173,000 434,000
Other assets 6,000 6,000
- -------------------------------------------------------------------------------------
$ 3,945,000 $ 4,374,000
=====================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Accounts payable $ 993,000 $ 1,525,000
Customer payment on future services 514,000 514,000
Insurance financing 31,000 45,000
Accrued expense and other liabilities 90,000 5,983,000
Obligations under capital leases 1,692,000 2,477,000
Notes payable 10,000 4,080,000
Deferred gain on sale of airship, net 722,000 766,000
Due to stockholders 713,000 6,667,000
- -------------------------------------------------------------------------------------
Total liabilities 4,765,000 22,057,000
Contingencies and commitments
- -------------------------------------------------------------------------------------
Stockholders' Deficit:
Preferred stock, $.01 par value: Authorized -
-0- and 10,000,000 shares at 1998 and 1997,
respectively, issued and outstanding -
-0- shares in 1998 and 2,459,000 in 1997 -- 24,000
Common stock, $.01 par value: Authorized -
110,000,000 and 80,000,000 shares at 1998 and 1997,
respectively, issued and outstanding - 55,047,000
shares in 1998 and 42,523,000 in 1997 550,000 425,000
Capital in excess of par value - Preferred Stock -- 14,447,000
Capital in excess of par value - Common Stock 48,369,000 22,066,000
Accumulated deficit (49,739,000) (54,645,000)
- -------------------------------------------------------------------------------------
Total stockholders' deficit (820,000) (17,683,000)
- -------------------------------------------------------------------------------------
$ 3,945,000 $ 4,374,000
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
<PAGE>
Entertainment International Ltd.
Statements of Operations
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
================================================================================================
<S> <C> <C> <C>
Airship Revenue $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------
Costs and expenses:
Operating costs 70,000 357,000 1,150,000
Selling, general and administrative expenses 493,000 737,000 689,000
- ------------------------------------------------------------------------------------------------
563,000 1,094,000 1,839,000
Loss from operations (563,000) (1,094,000) (1,839,000)
- ------------------------------------------------------------------------------------------------
Other income (expense):
Gain (loss) on sale of airship components to
Stockholder (22,000) -- 13,000
Forgiveness of debt by stockholder 88,000 -- --
Realized gain on sale leaseback 44,000 45,000 44,000
Loss on insurance settlement -- -- --
Interest expense (542,000) (1,245,000) (768,000)
Interest, royalties and other income 40,000 -- 44,000
- ------------------------------------------------------------------------------------------------
(392,000) (1,200,000) (667,000)
- ------------------------------------------------------------------------------------------------
Net loss $ (955,000) $ (2,294,000) $ (2,506,000)
================================================================================================
Weighted average number of common shares 46,736,000 42,181,000 40,879,000
- ------------------------------------------------------------------------------------------------
Net loss applicable to common shares:
Net loss $ (955,000) $ (2,294,000) $ (2,506,000)
Abolishment of accrued preferred dividends 6,508,000 -- --
Preferred stock dividend (647,000) (1,551,000) (1,725,000)
- ------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shares $ 4,906,000 $ (3,845,000) $ (4,231,000)
================================================================================================
Net income (loss) per common share $ .11 $ (.09) $ (.10)
================================================================================================
SIGNIFICANT AMOUNTS APPLICABLE TO
RELATED PARTIES:
Selling, general and administrative:
Interest expense $ 334,000 $ 437,000 $ 293,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<PAGE>
Entertainment International Ltd.
Statements of Stockholders' Deficit
For the Years Ended December 31,
<TABLE>
<CAPTION>
Capital in Excess of
Par Value
Preferred Stock Common Stock -------------------------
--------------- ------------ Preferred Common Accumulated
Shares Par Value Shares Par Value Stock Stock Deficit
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,797,000 $ 28,000 40,490,000 $405,000 $14,443,000 $22,086,000 $(46,569,000)
Conversion of preferred stock
into Common stock (85,000) (1,000) 512,000 5,000 1,000 (5,000) --
Dividends accrued on preferred
stock -- -- -- -- -- -- (1,725,000)
Net loss -- -- -- -- -- -- (2,506,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 2,712,000 27,000 41,002,000 410,000 14,444,000 22,081,000 (50,800,000)
Conversion of preferred stock
into Common stock (253,000) (3,000) 1,521,000 15,000 3,000 (15,000) --
Dividends accrued on preferred
stock -- -- -- -- -- -- (1,551,000)
Net loss -- -- -- -- -- -- (2,294,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,459,000 24,000 42,523,000 425,000 14,447,000 22,066,000 (54,645,000)
Conversion of preferred stock
into Common stock (2,459,000) (24,000) 11,524,000 115,000 (14,447,000) 14,356,000 --
Reimbursement of 1993 stock
Subscriptions -- -- -- -- -- (22,000) --
Common stock issued to Trans
Continental for obtaining
line of Credit -- -- 1,000,000 10,000 -- 32,000 --
Write-off of underwriter
compensation -- -- -- -- -- 51,000 --
Capital contributions from
Stockholders due to
Extinguishment of debt -- -- -- -- -- 11,886,000 --
Dividends accrued on preferred
stock -- -- -- -- -- -- (647,000)
Abolishment of dividends accrued
on Preferred stock -- -- -- -- -- -- 6,508,000
Net loss -- -- -- -- -- -- (955,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- $ -- 55,047,000 $550,000 $ -- $48,369,000 $(49,739,000)
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<PAGE>
Entertainment International Ltd.
Statements of Cash Flows
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (955,000) $ (2,294,000) $ (2,506,000)
Adjustments to reconcile net loss to net
Cash flows used in operating activities:
Depreciation and amortization 143,000 219,000 462,000
Realized gain on sale leaseback (44,000) (45,000) (44,000)
Proceeds from issuance of common stock 92,000 -- --
Loss (gain) on disposition of airships and
related equipment 22,000 79,000 (34,000)
Changes in operating assets and liabilities:
Prepaid insurance 1,000 (22,000) 81,000
Other assets -- 6,000 74,000
Accounts payable - trade (532,000) (90,000) (75,000)
Customer payments on future services -- (39,000) --
Insurance financing (14,000) 7,000 (66,000)
Accrued expenses and other liabilities (32,000) (104,000) (27,000)
--------------------------------------------
Net cash flows used in operating activities (1,319,000) (2,283,000) (2,135,000)
Cash flows from investing activities:
Proceeds from sale of airships and related equipment -- -- 88,000
Acquisition of airships and related equipment -- -- (19,000)
Net change in due from related parties 261,000 (159,000) (99,000)
--------------------------------------------
Net cash flows provided by (used in) investing
activities 261,000 (159,000) (30,000)
Cash flows from financing activities:
Proceeds from issuance of notes payable -- 4,787,000 --
Principal payments on capital leases and loans (1,101,000) (4,404,000) (863,000)
Reimbursement of 1993 stock subscriptions (22,000) -- --
Changes in loans from stockholders 2,179,000 2,059,000 3,004,000
--------------------------------------------
Net cash flows provided by financing activities 1,056,000 2,442,000 2,141,000
--------------------------------------------
Net changes in cash and equivalents (2,000) -- (24,000)
Cash and cash equivalents, beginning of year 2,000 2,000 26,000
--------------------------------------------
Cash and equivalents, end of year $ -- $ 2,000 $ 2,000
============================================
Supplemental information:
Interest paid $ 542,000 $ 679,000 $ 475,000
============ ============ ============
Non-cash accrual of dividend on preferred stock $ 647,000 $ 1,551,000 $ 1,725,000
============ ============ ============
Non-cash abolishment of accrued preferred dividends $ 6,508,000 $ -- $ --
============ ============ ============
Non-cash extinguishment of debt due to stockholders $ 11,886,000 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<PAGE>
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - 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 has not operated any airships
since 1995.
Cash and Equivalents - The Company considers unrestricted short-term, highly
liquid investments with maturities of three months or less at the time of
purchase to be cash equivalents.
Revenue Recognition - Airship revenues, when available, are recognized during
the period in which services are provided. Whenever significant flight time is
owed to a customer, the incremental cost of providing services is accrued. No
amounts are accrued at December 31, 1998, 1997 or 1996.
Flight Crew Training Costs - Significant flight crew training costs for new
blimps are amortized over twelve months from the date related revenues commence.
Airships and Related Equipment - Property and Equipment are stated at cost.
Depreciation is provided by the straight line method over the estimated useful
lives of the assets - 10 to 20 years (airships), 4 to 8 years (vehicles), 3 to 5
years (parts and equipment) and 2 to 3 years (improvements). Airship components
are not depreciated until placed in service.
Deferred Financing and Offering Costs - Costs incurred to obtain debt financing
are capitalized and amortized over the terms of the related loans. Such costs
include incremental payments to consultants, lenders and other out of pocket
expenses, as well as the fair value of options and warrants issued to persons
other than lenders. The fair value of options and warrants issued to lenders are
reported as debt discount and amortized over the term of the related loan. In
determining the fair value of warrants issued, substantial discounts have been
provided for the effects of restrictions on sale, the volume of shares involved
and other factors.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A. Income Taxes - The Company follows the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting For Income Taxes", which requires the
recognition of deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect when these
differences are expected to
F-6
<PAGE>
<PAGE>
reverse. Valuation allowances are established when appropriate, to reduce
deferred tax assets to the amount expected to be realized.
Concentration of Risk - The Company maintains its cash in bank deposit accounts
which, rarely, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. Management believes the Company is not
exposed to any significant credit risk related to cash.
Fair Market Value of Financial Instruments - Unless otherwise noted, the fair
value of financial instruments approximates book value.
F-7
<PAGE>
<PAGE>
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Impairment of Long-Lived Assets - The Company follows the provisions of
Statement of Financial Accounting Standards 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 121
requires that long-lived assets held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
standard in the fourth quarter of the fiscal year ended December 31, 1994
resulted in an adjustment of $9,634,000 or $0.32 per share to the Company's
financial statements. The Company obtained an independent appraisal on its
airship components in August 1997, which reflects a range of values from
$2,174,000 (on a liquidation sale value) to $5,096,000 (on a market value
basis). Based on the fact that the Company had two airships in operation at
December 31, 1994, the Company adjusted the carrying value to $3,635,000 or the
midpoint of the above range. At December 31, 1995, the Company decided to write
down the balance of the airship components to liquidation sale value, which
resulted in an additional adjustment of $1,462,000 or $0.04 per share. The
Company reviews all of its long-lived assets for impairment in accordance with
SFAS 121.
Stock Based Compensation - Effective January 1, 1996, the Company adopted SFAS
123, "Accounting for Stock Based Compensation." ("SFAS 123") As it relates
to stock options granted to employees, SFAS 123 permits companies who have not
done so already, to either adopt the accounting method promulgated by Accounting
Principles Board Opinion 25 (APB 25), "Accounting for Stock Issued to
Employees", to measure compensation, or to adopt the fair value base method
prescribed by SFAS 123. If APB 25's method is followed, pro forma disclosures
are required as if SFAS 123 accounting recognition method was adopted. SFAS 123
pertains to stock options granted after December 31, 1995. Management has
determined not to adopt SFAS 123's accounting recognition provisions related to
stock options granted to employees and, accordingly, will continue following APB
25's accounting provisions. All other provisions of SFAS 123 have been
implemented effective January 1, 1996. The implementation of SFAS 123 did not
have an effect on the Company's financial statements.
Net Loss Per Common Share - In February 1997, the FASB issued SFAS 128,
"Earnings per Share," ("SFAS 128") which is effective for financial statements
issued for periods ending after December 15, 1997. This pronouncement
establishes standards for computing and presenting earnings per share (EPS)
for entities with publicly-held common stock or potential common stock. SFAS
128 simplifies the standards for computing EPS and makes them comparable to
international EPS standards. Early application of this statement is not
permitted. The Company adopted SFAS 128 in the fourth quarter of 1997, as
required. Implementation of this FASB did not require any changes to the
earnings per share information presented by the Company. The pronouncement
requires the presentation of net loss per common share based on the weighted
average number of shares outstanding during the periods. SFAS 128 also requires
presentation of diluted EPS. When losses have been incurred, warrants and
options are not included since the effect would dilute loss per share, however,
preferred stock dividends are included in the loss per share calculation.
Therefore diluted EPS is not
F-8
<PAGE>
<PAGE>
presented for the Company for the years ended December 31, 1997 and 1996 because
there were net losses in both years. When net income applicable to common stock
is reported, warrants and options are included using the treasury stock method,
provided exercise prices are less than the average market price; warrants
convertible into common stock are included when such inclusion results in
further dilution. The options and warrants outstanding at December 31, 1998 all
provided for exercise prices higher than the average market price.
F-9
<PAGE>
<PAGE>
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
New Accounting Standards - In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") which requires recognition of the fair value of
derivatives in the statement of financial position, with changes in the fair
value recognized either in earnings or as a component of other comprehensive
income dependent upon the nature of the derivative. SFAS 133 will be adopted by
the Company in 1999 and is not expected to have a material effect on the
consolidated financial statements.
NOTE B - SIGNIFICANT UNCERTAINTIES AND MANAGEMENT'S PLANS TO OVERCOME OPERATING
DIFFICULTIES AND MEET CASH REQUIREMENTS
As shown in the accompanying financial statements, the Company has experienced
significant operating losses and negative cash flow from operations in recent
years and has an accumulated deficit of $49,739,000 at December 31, 1998. During
the years ended December 31, 1998, 1997 and 1996, the Company did not generate
any revenues from airship operations and it reported net operating losses and
negative cash flows from operating activities per each of the three years. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
During 1998, the Company consummated several transactions and initiatives to
reduce its stockholders deficit from $17,683,000 at December 31, 1997 to
$820,000 at December 31, 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 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 totaling $6,508,000 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
Airlines, Inc. ("Trans Continental"), Trans Continental 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, Trans Continental 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
F-10
<PAGE>
<PAGE>
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.
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE B - SIGNIFICANT UNCERTAINTIES AND MANAGEMENT'S PLANS TO OVERCOME OPERATING
DIFFICULTIES AND MEET CASH REQUIREMENTS (Continued)
While the Company believes that its plans for additional funding or a possible
business combination along with the above transactions have the reasonable
capability of improving the Company's financial situation and ensuring the
continuation of its business, there can be no assurance that the Company will be
successful in carrying out its plans and the failure to achieve them could have
a material adverse effect on the Company.
Though management believes the Company will secure additional capital and/or
attain one or more of the above goals, there can be no assurance that any
acquisition, financing or other plan will be effected. Any acquisition or
securities offering is subject to the Company's due diligence, the state of the
general securities markets and of the specific market for the Company's
securities, and any necessary regulatory review.
NOTE C - TRANSACTIONS WITH STOCKHOLDERS, RELATED PARTIES AND OTHERS
Loans from Principal Stockholders - In May 1992, all amounts due to Mr.
Pearlman, consisting of 10% notes payable, accrued salaries, bonuses and
interest were consolidated into one single loan of $1,845,000. The loan was
payable in equal quarterly installments of $135,000 per year including interest
at 8 1/2% per annum, and commenced in July 1992. This payment schedule continued
until a loan payable to a bank for the SeaWorld airship was paid with the
preferred stock proceeds - see Note G, at which time the loan became payable at
the discretion of the Company.
On June 30, 1993, the Company made a $789,000 loan (the "Loan") to an individual
who had previously facilitated financing for the Company. Mr. Pearlman had
guaranteed repayment of the Loan. The Loan was being repaid by Mr. Pearlman in
equal monthly installments of $6,209 per month, including interest at the rate
of 8.75%. The remaining unpaid principal balance of the Loan was due on June 30,
1995. It was agreed that the Company's obligation to repay principal and
interest on the loan to Mr. Pearlman be reduced to reflect the outstanding
balance on this Loan for so long as it was to remain outstanding. Amounts due to
F-11
<PAGE>
<PAGE>
Mr. Pearlman at December 31, 1997 and 1996 totaled $1,238,000 and $1,137,000,
respectively, net of unamortized discount.
During the period from December 31, 1995 through 1997, Trans Continental
advanced the Company funds that were used for operations in the amount of
$4,872,000. The balance owed to Trans Continental accrued interest at the rate
of 10% per annum and was due on demand.
On September 30, 1998, the Company signed agreements with 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.
F-12
<PAGE>
<PAGE>
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE C - TRANSACTIONS WITH STOCKHOLDERS, RELATED PARTIES and OTHERS -
(Continued)
In these agreements, 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 and
Trans Continental was recorded as an addition to capital in excess of par value
because they are all shareholders.
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 $695,000 through
December 31, 1998. There can be no assurance that Trans Continental will make
additional loans, cash advances, and guarantees on an ongoing basis.
Personal Guarantees - Mr. Pearlman and Trans Continental have guaranteed all
capital leases and loans of the Company (see Note E).
Transactions with Stockholder and His Affiliate - Mr. Julian Benscher ("Mr.
Benscher") beneficially owns less than 5.0% of the common stock of the Company
at December 31, 1998. The Company and Mr. Benscher continue to engage in
business transactions in which the Company provides Mr. Benscher with the use of
an airship, along with certain related components and equipment, and Mr.
Benscher pays the costs relating to the operation of the airship.
Rental Arrangement and Travel Agency Service - Trans Continental serves as the
Company's travel agent for substantially all of its travel arrangements and the
Company is its principal customer. In the opinion of management, the terms and
prices received from the corporation are similar to those available from other
travel agencies. During 1998, 1997 and 1996, the Company utilized the travel
agency services for reservations, while primarily paying certain costs directly
to the provider.
Warrants - Reference should be made to Note H for warrants issued in connection
with certain of the above transactions.
NOTE D - INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards for
income tax purposes of approximately $44,060,000 available as offsets against
future taxable income. During 1991, the Company experienced changes in the
Company's ownership as defined in Section 382 of the Internal Revenue Code
("IRC"). The effect of these changes in ownership
F-13
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<PAGE>
is to limit the utilization of certain existing net operating loss carryforwards
for income tax purposes. Operating losses incurred after the ownership change
are not limited. As a result, approximately $29,649,000 of the operating losses,
which occurred after the ownership change are not limited. The operating losses
incurred prior to the ownership change are limited to a specified dollar amount
each year. The net operating loss carryforwards expire during the years 2000 to
2014. The Company also has unused investment tax credits of $140,000 which
expire principally in the year 2000.
F-14
<PAGE>
<PAGE>
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE D - INCOME TAXES (Continued)
The tax effect of temporary differences that give rise to significant positions
of the deferred tax assets and deferred tax liabilities, consists of the
following at December 31:
1998 1997
===============================================================================
Deferred tax assets
Net operating loss $ 14,980,000 $ 14,677,000
Investment tax credits 140,000 140,000
Airships and related equipment -- --
Accrued interest on stockholder loans -- 542,000
- -------------------------------------------------------------------------------
15,120,000 15,359,000
Less: Valuation allowance 14,723,000 14,962,000
- -------------------------------------------------------------------------------
397,000 397,000
Deferred tax liabilities:
Airships and related equipment (397,000) (397,000)
- -------------------------------------------------------------------------------
(397,000) (397,000)
- -------------------------------------------------------------------------------
Net deferred tax asset $ -- $ --
===============================================================================
The net change in the valuation allowance was approximately $239,000 relating to
net operating losses from 1998.
NOTE E - CAPITAL LEASES AND LOANS PAYABLE
Capital Leases - In October 1989, the Company purchased a new Skyship 600 Series
airship (the "MetLife airship") from Airship UK. The MetLife airship and related
equipment were financed primarily by net proceeds of $6,200,000 from a capital
lease obtained through ORIX Commercial Credit Corp. ("ORIX"). The capital lease
initially required monthly payments of $135,000 through November 1992. In
December 1992, the lease was renewed for an additional three-year term at
monthly payments of $121,000. At the end of the additional three year term the
Company had the option to purchase this airship for $1,000,000 or renew the
lease for another three year term at monthly payments of $35,000. At the
completion of the third lease term, title is to be transferred to the Company
upon payment of $1. On January 11, 1994 the Company renegotiated the lease to
reduce the $121,000 payments. Even after the payment modifications the Company
was unable to make the payments and went into default. Effective June 2, 1995,
the lease was renegotiated calling for payments of principle only of $20,000 for
twelve months. At the end of the initial twelve-month period, the Company began
to make principle and interest payments at the rate of prime plus 1% of $40,000
for the next six months, followed by payments of $60,000 for the next six months
and finally payments equaling the higher of $80,000 or 50% of the annual cash
flows for the fiscal year immediately prior to the commencement of each
applicable twelve-month period for the remaining term of the lease until the
lease is fully amortized or a larger payment is made based upon the annual cash
flow of the year. Based upon the revised payment schedule, the payments are not
sufficient to cover the interest expense. The balance under this capital lease
amounted to $1,692,000 and $2,477,000 at December 31, 1998 and 1997,
respectively.
F-15
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<PAGE>
The airship and related equipment financed by the capital leases had a cost of
$6,687,000 and accumulated depreciation of $1,077,000 at December 31, 1993.
During 1994 the leased airship was damaged and taken out of service. A cost of
$2,699,000 and accumulated depreciation of $1,232,000 were written off due to
the damage. The remaining cost basis of approximately $3,500,000 was transferred
to spare parts and airship components. The resulting net book value was later
analyzed as part of the SFAS 121 writedown as described in Note A.
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE E - CAPITAL LEASES AND LOANS PAYABLE (Continued)
The following is a schedule by year of future minimum lease payments pursuant to
the capital leases together with the present value of the net minimum lease
payments as of December 31, 1998:
1999 $ 960,000
2000 960,000
Thereafter 28,000
----------
Total minimum lease payments 1,948,000
Less amount representing interest 256,000
----------
Present value of net minimum lease payments $1,692,000
==========
WDL Lease - Pursuant to an agreement effective May 16, 1993 (the "WDL Lease"),
the Company leased from Westdeutsche Luftwerbung Theodor Wullenkemper GMBH
("Westdeutsche") a used type WDL airship equipped with a NightSign (TM) system.
The Company entered into the WDL Lease to procure an airship to fulfill its
obligations under the Gulf Oil Contract when it became apparent that the
proposed acquisition of the assets of Slingsby could not be completed in time to
fulfill the Company's obligations. The Company began operating this airship as
the Gulf Oil Airship on June 25, 1993. On September 11, 1994, the Gulf Oil
Airship was damaged in an accident and its operations ended. As a result of the
damage to the Gulf Oil Airship, the Company sustained a loss of $1,978,000,
representing the cost of the airship less insurance proceeds and credits
allowed, including salvage value, when the airship was returned to WDL in
September 1994. At December 31, 1994, the Company owed WDL a total of $2,866,000
under the WDL Lease, including the $1,978,000 described above plus lease and
other operating costs through September 11, 1994. Pursuant to the WDL Lease, the
Company maintained a security deposit in a cash account (the "Cash Escrow
Account") with Trans Continental. As of December 31, 1994, the Company had on
deposit in the Cash Escrow Account $1,800,000. During March 1995, the Company
paid the full balance of the Cash Escrow Account to WDL to reduce its liability
to WDL to $1,000,000. Pursuant to the WDL Lease, Trans Continental
collateralized the advances with a certificate of deposit in the amount of
$2,500,000. The Company is currently indebted to WDL in the approximate amount
of $801,000.
Loan Payable - The Company entered into an accounts receivable factoring
security agreement on September 19, 1994 which was modified on November 16, 1994
and November 23, 1994. The maximum borrowing amount under the November 23rd
agreement was $1,500,000. The loan balance was to be reduced by $75,000 per
month beginning
F-16
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<PAGE>
December 1, 1994. A fee of 0.125% per month is payable each month on the higher
of funds outstanding or $1,500,000. The loan was used to payoff certain
liabilities and provide a source of working capital. The balance due to Allstate
Financial Corp. ("Allstate") as of December 31, 1994 amounted to $1,250,000. The
loan was secured by accounts receivable, inventory, certain airships and
equipment.
On June 22, 1995, the Allstate loan was repaid when Transcontinental Leasing,
Inc. ("TC Leasing"), a wholly-owned subsidiary of Trans Continental, entered
into a sale-leaseback agreement with the Company. TC Leasing obtained financing
for this transaction from Phoenixcor, Inc. Pursuant to the Allstate transaction,
the Bud One Airship was sold by the Company to TC Leasing for the purchase price
of $2,060,000, which in turn was leased back to the Company. In accordance with
SFAS No. 98 "Accounting for Leases," any gain on the sale is deferred and
amortized in proportion to the amortization of the leased asset. The resulting
gain of $873,000 was capitalized as part of the airship cost and is being
amortized over 20 years equal to the corresponding increased depreciation.
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE E - CAPITAL LEASES AND LOANS PAYABLE (Continued)
On November 30, 1995, the Company entered into an arrangement with Senstar
Capital Corporation ("Senstar") pursuant to which the sale-leaseback arrangement
with TC Leasing was reversed. The Company borrowed a total of $3,500,000 from
Senstar, part of which was used to repay the loan from Phoenixcor, Inc., the
lender for TC Leasing's transaction. The loan from Senstar was repayable over 5
years in sixty monthly payments of approximately $63,000 each, with a balance
due at the end of the five year term of approximately $700,000, and secured by a
lien on the Airship and is guaranteed by Trans Continental. The balance due
under this loan amounted to $3,004,000 at December 31, 1996.
TC Leasing entered into a loan agreement, dated December 30, 1996, with Norwest
Equipment Finance, Inc. ("Norwest") on behalf of the Company. The proceeds of
the loan were used to repay the Senstar loan which had a balance due of
approximately $3,003,000 at the time of repayment, and to provide working
capital to the Company. The Company has made the payments required under the
Norwest loan directly to Norwest. Such payments amounted to approximately
$648,000 during 1997. TC Leasing is the obligor under the Norwest loan and the
Company owes to TC Leasing with respect to the Norwest loan the aggregate amount
of approximately $4,090,000, consisting of $4,060,000 of principal and
approximately $30,000 of interest.
On September 30, 1998, the Company signed an agreement with Transcontinental
Leasing, Inc. (a wholly owned subsidiary of Trans Continental) to waive this
loan balance payable to them as of June 10, 1998. This agreement was 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.
Trans Continental Leasing, Inc. waived $3,753,000, consisting of $3,717,000 in
principle and $36,000 in interest. This
F-17
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<PAGE>
extinguishment of debt was recorded as an addition to capital in areas of par
value because they are indirect shareholders.
Other Long-Term Debt - The Company has other long-term debt in the amount of
$10,000 and $12,000 at December 31, 1998 and 1997, respectively. These loans
mature through December 31, 2001 at various annual interest rates.
F-18
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<PAGE>
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE F - LEGAL PROCEEDINGS
Capital Funding Group Ltd. - In February 1992, Capital Funding Group Ltd.
("CFG") commenced an action against the Company and others seeking in excess of
$1,000,000 in damages based on the alleged failure by the Company to provide
adequate collateral and security in connection with certain alleged financial
agreements with CFG. The Company retained CFG in July 1991, paid a commitment
fee (which was written off in 1991) and received a commitment from CFG which
then failed to provide the funding. The Company and the other defendants
answered the complaint in February 1992 by denying all of the substantive
allegations and asserting several affirmative defenses. In addition, the Company
asserted certain counterclaims against CFG and its two principals for breach of
a commitment letter pursuant to which CFG was to arrange for a $9 million loan
to the Company, breach of a compromise agreement accepted by CFG in January
1992, pursuant to which CFG was to provide funding to the Company in the amount
of $7 million, breach of an escrow agreement, pursuant to which CFG was to
return $200,000 of the commitment fee paid by the Company and various other
counterclaims. In March 1993, the Company was awarded a default judgment of
$8,000,000 against CFG. No balances have been returned to the Company as of
December 31, 1988.
Tenerten and Drake, Inc. - On September 15, 1994, Tenerten and Drake, Inc.
("TDI") filed a complaint against the Company. The complaint alleges that the
Company failed to pay certain sums of money due to TDI under an agreement to
perform advertising and related services for the Company. The Company filed its
answer and raised its affirmative defenses to said complaint alleging that the
services allegedly performed by TDI were defective in numerous respects. A final
judgment was entered against the Company on July 20, 1995 in the amount of
$24,000, which has been subsequently paid. The Company has since settled all
remaining claims instituted by TDI by agreeing to the release of the cash bond
to TDI and by paying to TDI the additional sum of $4,100 for legal fees.
Other Proceedings - The Company is a defendant in a number of other legal
proceedings, which occurred in the normal the course of business. Those cases in
which the ultimate settlement is known or estimable have been accrued in the
financial statements. It is not possible at this time to predict the outcome of
the unsettled legal actions; however, in the opinion of management and informal
advice of counsel, the disposition of these other lawsuits will not have a
material effect on the financial statements.
NOTE G - STOCKHOLDERS' EQUITY
Preferred Stock - In February 1993, the Company completed a public offering
("the Offering") of 2,875,000 shares of its Class A 8% Cumulative Convertible
Voting Preferred Stock ("Preferred Stock") at $6.00 per share.
Each share of Preferred Stock was convertible, at any time after the earlier of
February 16, 1994 or a date determined by the underwriters at their sole
discretion (which date was not to be prior to April 19, 1993), into 6 shares of
common stock, subject to future adjustment. Dividends on the Preferred Stock
were payable quarterly and the first four dividends were paid, on an annualized
basis, 50% in cash and 50% in shares of the Company's common
F-19
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<PAGE>
stock. The Preferred Stock accrued dividends at the annual rate of $.60 per
share for dividends paid in shares of common stock, and $.48 per share for
dividends paid in cash. If available cash was not sufficient to pay any or all
of the subsequent dividend payments, the balance of the dividend would have been
paid in shares of the common stock. The Company had total accrued dividends on
Preferred Stock in the amount of $5,864,000 at December 31, 1997.
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE G - STOCKHOLDERS' EQUITY (Continued)
The Preferred Stock became redeemable at the option of the Company, in whole or
in part, at $6.60, together with all accrued and unpaid dividends, at any time
after February 16, 1996. The liquidation preference of the Preferred Stock was
$6.00 per share.
In connection with the offering, the Company issued to the two representatives
of the several underwriters, warrants to purchase an additional 10% of the
Preferred Stock sold in the Offering. The Preferred Stock warrants were
exercisable for four years commencing February 1994 at an exercise price equal
to 165% of the initial offering price of the Preferred Stock, subject to certain
anti-dilution provisions.
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.
The Company accrued $646,000 in dividends from January 1, 1998 through June 10,
1998 which brought the total dividends waived to $5,608,000.
Warrants and Options - Outstanding warrants and options at December 31, 1998,
all of which are currently exercisable, after giving effect to adjustments
through such date for anti-dilution provisions and exercisable price reductions
are as follows:
F-20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Exercise
Shares Price Expiration
Issuable Per Share Date
=====================================================================================
<S> <C> <C> <C>
Warrants:
Issued to Company President in May
1992 in consideration of restructuring
terms of loans due, extended from
May 1997 2,000,000 $0.10 May 1999
Options:
Issued to officers and others in
1989 and 1991 through the Company's Through
Employee Share Purchase Plan 165,000 $0.01 to $1.28 October 2001
=====================================================================================
</TABLE>
F-21
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<PAGE>
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE G - STOCKHOLDERS' EQUITY (Continued)
Employee Share Purchase Plan - The Company has an employee purchase option plan
(the "Plan") for employees of the Company and any present or future "subsidiary
corporations." The Company intends the Plan to be an "employee stock purchase
plan" as defined in Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Plan was effective November 1, 1994. All employees are
eligible to participate in the Plan, except that the Company's appointed
committee may exclude any or all of the following groups of employees from any
offering: (i) employees who have been employed for less than 2 years; (ii)
employees whose customary employment is 20 hours or less per week; (iii)
employees whose customary employment is not more that 5 months in any calendar
year; and (iv) highly compensated employees within the meaning of Code Section
414(q). The shares issuable under the Plan shall be common shares of the Company
subject to certain restrictions up to a maximum of 1,000,000 shares. The
committee shall determine the length of each offering but no offering may exceed
27 months. The option price for options granted in each offering may not be less
than the less of (i) 85% of the fair value of the shares on the day of the
offering, or (ii) 85% of the fair market value of the shares at the time the
option is exercised.
F-22
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Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE H - EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan (the "Savings Plan") that qualifies as
a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit of
15% of the employee's salary. The Company matches 25% of each employee's
contributions for 1993, depending on length of service, up to a maximum of 6%
of the employee's earnings.
Entertainment International Ltd.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
NOTE I - 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 and in many organizations using older technology, dates
were used for special programmatic functions.
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.
NOTE J - SUBSEQUENT EVENT
In January 1999, an officer of the company was issued 1,000,000 shares of the
company's common stock. This stock was issued in consideration for services
rendered and the waiver of $75,000 salary payable, during the period from 1994
through 1998.
F-23
