U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission File No. 33-30608
DEFINITION, LTD.
(Name of Small Business Issuer in Its Charter)
Nevada 75-2293489
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1334 Killian Drive, Lake Park, Florida 33403
(Address of principal executive offices) (Zip Code)
(407) 844-7701
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange
Each Class on which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) or the Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes No X
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State registrant's revenues for its most recent fiscal year. $4,159,821
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing. (See definition of affiliate in Rule 12b-2 of the
Exchange Act).
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of the close of business on December 31, 1995 was approximately
$12,666,097 computed by reference to average bid and ask price of $3.125 as
reported on April 24, 1996.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
As of April 30, 1996, there were 4,891,842 shares of Common Stock, par value
$.001 per share, outstanding, held by approximately 1,164 stockholders of
record.
Transitional Small Business Disclosure Format: Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
BUSINESS
ITEM I BUSINESS
(a) General Development of Business
(1) Developments During the Fiscal Year Ended December 31, 1995.
The Registrant (the "Company") was incorporated on March 13, 1989 in the
State of Nevada. During the fiscal year ended December 31, 1995, the Registrant
made further progress in implementing its new business plan commenced during
1994, and in realizing sales and revenues from its 1994 asset acquisitions. See
(2) below.
In January 1995, the Registrant changed its Company name from "Stone Grill
International, Inc." to "Definition, Ltd." to better reflect its activities in
the television, computer and interactive electronic media industries. It was
considered desirable to select a name which was symbolic of the goals and
aspirations that the Board of Directors and management have for the Company, and
which would be distinctive but still easy to recognize and pronounce. The name
selected is "Definition, Ltd." since the interactive programming being developed
will be delivered via a "high definition" communication system through fiber
optic and satellite methods. The Company's goal is also to be a "defining
influence" in the emerging interactive communications industry and to achieve a
high level of customer service and product quality.
In February of 1995, the Company's wholly-owned subsidiary, Interactive
Systems, Inc. ("ISI") entered into a seven-year agreement with Academy Concepts,
Inc. ("ACI"), Baltimore, Maryland, for the purpose of forming, equipping and
maintaining an interactive, scholastic network system named the "Parent Academy
Network" (the "Network"). The purpose of the Network is to provide interactive
teaching materials to member schools, based upon a video and computer platform,
utilizing materials from ACI's "Parent Academy," and ISI's broadcast film and
media library. ISI serves as the exclusive technical provider and consultant to
the Network. As of December 31, 1995, the Network included six (6) participating
schools in the Baltimore, Maryland area. The Network is an outgrowth of ACI's
Parent Academy, which has been acclaimed as a benefit to schools in the
Baltimore, Maryland area, by bringing parents, teachers and students together in
an enhanced learning partnership -- the Parent Academy has been credited with
helping to increase student attendance and involvement while decreasing
delinquency and crime in schools where its program has been implemented.
Effective as of March 31, 1995, the Registrant enacted a 1-for-25 reverse
stock split of its Common Stock. The principal reason for the "reverse" split
was to increase the price per share at which the Company's Common Stock trades
in the public market, with a view to attracting additional investors and
brokerage houses to trade in the Company's stock. In March and April of 1995,
two former directors, Messrs. Cahill and Diamond, resigned, respectively, due to
other business obligations. In May, 1995, the Board selected Gerald Beeson as
the Company's new Chief Executive Officer.
Effective as of August 1, 1995, the Company's wholly-owned subsidiary, ISI,
entered into an Agreement with Digital Ad Media, Palm Beach Gardens, Florida
("DAM"), for the sale of fifteen (15) out of eighteen (18) daily hours of
broadcast air time (the "Air Time") owned by ISI, with availability beginning
September 1, 1995. The Air Time was originally acquired by ISI effective as of
December 1, 1994, from WAQ-TV 19, Inc. in West Palm Beach, Florida ("WAQ") for
$3.5 million. DAM agreed to pay the sum of $4.2 million for the Air Time,
payable as follows: $120,000 down payment (received by the Company on September
1, 1995), and a minimum of $204,000 payable quarterly thereafter until paid in
full. Any unused Air Time does not carry over and must all be utilized by DAM by
September 1, 2005. Additionally, effective as of December 31, 1995, the Company
acquired the six (6) remaining, available hours of broadcast airtime from WAQ in
a negotiated settlement.
<PAGE>
(2) Developments During the Fiscal Year Ended December 31, 1994.
During the fiscal year ended December 31, 1994, the Registrant took steps
to implement its new business plan. In August 1994, the Registrant's
wholly-owned subsidiary, Interactive Systems, Inc. ("ISI") closed two
acquisitions intended to advance the implementation of its business plan:
First, effective as of August 18, 1994, ISI entered into an Agreement with
Lopere Productions, Inc., Port Jefferson, New York ("LPI"), for the acquisition
of 104 one-hour programs and 350 half-hour programs, consisting of certain
copyrighted programs, documentaries, music blocks, educational, and other
productions and film footage in exchange for a convertible promissory note in
the principal amount of $5,250,000, bearing interest at the rate of 8% annually,
with interest due and payable quarterly, which was converted at the election of
LPI into 6,562,500 shares (pre-split) of the Company's common stock, par value
$.001, and 165,789 shares of the Company's convertible preferred stock, par
value $.01.
Secondly, also effective as of August 18, 1994, ISI also entered into an
Agreement with Royal Lane Studios, Inc., Dallas, Texas ("RLS"), for the
acquisition of certain computer, cable TV and broadcast equipment in exchange
for a convertible promissory note in the principal amount of $750,000, bearing
interest at the rate of 8% annually, with interest due and payable quarterly,
which was converted at the election of RLS into 2,343,750 (pre-split) shares of
the Company's common stock, par value $.001, and 19,736 shares of the Company's
convertible preferred stock, par value $.01.
Late in 1994, ISI completed two additional acquisitions, completing its
goals for the year:
Effective as of December 1, 1994, ISI entered into an Agreement with Idea
House, Inc., Lake Park, Florida ("IHI"), for the acquisition of studio equipment
and leasehold improvements in exchange for a convertible promissory note in the
principal amount of $250,000, bearing interest at the rate of 8% annually, with
interest due and payable quarterly, which was converted at the election of IHI
into 312,500 (pre-split) shares of the Company's common stock, par value $.001,
and 7,018 shares of the Company's convertible preferred stock, par value $.01.
Finally, effective as of December 1, 1994, ISI entered into two Agreements
with WAQ-TV 19, Inc., West Palm Beach, Florida ("WAQ"), for the acquisition of:
(a) $3,500,000 in pre-paid air time; and (b) $650,000 in studio, broadcast,
office equipment and other television station equipment and furnishings,
respectively, in exchange for convertible promissory notes in the aggregate
principal amount of $4,150,000, bearing interest at the rate of 8% annually,
with interest due and payable quarterly, which were converted at the election of
WAQ into an aggregate of 6,906,250 (pre-split) shares of the Company's common
stock, par value $.001, and 98,071 shares of the Company's convertible preferred
stock, par value $.01.stock, par value $.01.
(b) Narrative Description of Business
During 1994 the Registrant embarked upon a new business plan. During 1994
the Registrant began to acquire assets and seek business opportunities related
to interactive media and communications. In furtherance of these plans, the
Registrant acquired programming, a broadcast film library, computers, video,
studio, broadcast and cable equipment, and pre-paid air time as described under
I(a)1. above. In early 1995, the Registrant's Wholly-owned subsidiary,
Interactive Systems, Inc. ("ISI") acquired an office and studio facility.
During 1995, the Company's business included the production of direct
response programming, and interactive programming for world wide application,
including educational software, infomercials, interactive computer media, video,
and the sale of television advertising media (utilizing broadcast air time
through WAQ- TV 19 (West Palm Beach, Florida)). During 1995, the Company also
utilized and sold, from time to time, primarily into foreign markets, copies of
video, film clips and programming from its broadcast film library, which
includes certain copyrighted programs, documentaries, newsreels, music blocks,
and educational footage. ISI is currently involved in an computer-based,
interactive educational network with Academy Concepts ("ACI") as previously
described. Additionally, ISI is involved with the production of television
programs for broadcast in the West Palm Beach, Florida and the Dallas/Fort
Worth, Texas metropolitan areas, respectively. ISI is also engaged in the
production of one-half hour infomercials for video and cable television
broadcast.
<PAGE>
ISI is also seeking to develop customers and sales utilizing the
"Internet." On April 10, 1996, the Registrant signed a letter of intent with
WorldWide Marketing, a European-based firm ("WWM"), whereby WWM committed to use
its best efforts to produce $20 million in product sales over a two-year period
under a marketing program known as "Messagio d'amore" (message of love), with
the use of broadcast and computer media on the Internet, owned or to be
developed by the Company. Such sales are anticipated to be generated from both
large and small specialty vendors and craftsmen located primarily in Verona,
Italy. While this is not a binding contract, the Company's management believes
that it represents a potentially significant source of future revenues for the
Company.
Ten percent (10%) or more of the Company's sales revenues during 1995 were
attributable to each of WorldWide Marketing, Trento, Italy and Trefilerias
Quijano, S.A., Porto, Portugal, respectively.
Competition
The computer media and interactive communications industries are highly
competitive and are substantially controlled by a few number of large companies,
such as computer software and telephone companies. The Registrant will
necessarily be in competition with these and others who are well recognized in
their industries, better capitalized and better staffed than the Registrant. The
ultimate success of the Registrant will depend upon its ability to favorably
compete in smaller, niche markets for its products and services, including
targeted foreign markets.
Governmental Regulation
The Registrant is subject to various federal, state and local laws
generally affecting its business. The Registrant is currently not subject to any
material governmental regulations particular to its business. However, the
interactive communications industry is currently in a state of rapid development
and will potentially be affected by a broad range of federal and state
regulations.
Employees
During the fiscal year ended December 31, 1995, the Registrant employed
eleven (11) full-time and four (4) part-time persons. As of December 31, 1995,
the Company's Chief Executive Officer and Secretary were employed full-time by
the Company, but its President and other directors only devoted such time to the
affairs of the Registrant as was necessary to assist in acquisitions and
operations as needed and to attend Board of Director and Shareholder meetings.
ITEM 2 DESCRIPTION OF PROPERTY.
On January 29, 1995 the Registrant's wholly-owned subsidiary, Interactive
Systems, Inc. ("ISI"), purchased an office condominium located in Lake Park,
Florida for $105,000 ($21,000 down and $84,000 bank mortgage). The facility
contains approximately 4,000 square feet and is being utilized as the
Registrant's principal office and production studios for ISI. The Registrant
believes that such facility will be adequate for its immediate needs and
short-term growth.
ITEM 3 LEGAL PROCEEDINGS
The Registrant is not currently the subject of any material litigation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's annual meeting of shareholders was held on October 20,
1995.
(b) The following individuals were elected as directors, each of whose term
continued after such meeting: Gerald Beeson, Gary A. Cooper, Anne Marie Villano
and Michael DeLuise. David Holt, who had not previously served, was elected as a
new director to fill a vacancy on the board.
(1) Directors For Against Withhold
--------- --------- ------- --------
Gerald Beeson 2,686,903 -0- 40
Gary A. Cooper 2,686,903 -0- 40
Anne Marie Villano 2,686,903 -0- 40
Michael DeLuise 2,686,903 -0- 40
David L. Holt 2,686,903 -0- 40
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information. As of the date of this Report, the Registrant has
only one class of equity securities outstanding, 4,891,842 shares of Common
Stock, $.001 par value (the "Common Stock") are issued and outstanding.
The principal market for the Registrant's Common Stock, its only class of
publicly traded equity securities, is the over-the-counter market, specifically
the Electronic Bulletin Board quotation system published by the National
Quotation Bureau where the Registrant's Common Stock trades under the symbol
"DFNL".
The following table indicates the quarterly high and low bid price ranges
of the Registrant's Common Stock as quoted by NASDAQ OTC Bulletin Board for the
periods indicated. The outstanding Common Stock was "reverse" split 25-for-1
effective as of March 31, 1995. These quotations reflect market prices between
dealers, do not include retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
Fiscal Year Ended December 31, 1994: High Low
------ ------
First Quarter .020 .005
Second Quarter .015 .005
Third Quarter .045 .005
Fourth Quarter .060 .005
Fiscal Year Ended December 31, 1995:
First Quarter 0.045 0.010
Second Quarter 1.8125 0.020
Third Quarter 5.625 1.6875
Fourth Quarter 5.00 2.25
Fiscal Year Ended December 31, 1996:
First Quarter 5.125 3.125
As of April 24, 1996, the closing bid price was quoted at $3.25 by market
makers.
The company has never paid cash dividends on its Common Stock. The
Registrant presently intends to retain future earnings, if any to finance the
expansion of its business and does not anticipate that any cash dividends will
be paid in the foreseeable future on its Common Stock. Future dividend policy
will depend on the Registrant's earnings, capital requirements, financial
conditions and other relevant factors.
(b) Holders. As of December 31, 1995, the number of holders of record of
each class of the Registrant's equity securities issued and outstanding was as
follows:
Number of
Title of Class Record Holders
-------------- --------------
Common Stock, $.001 1,164
par value per share
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Year Ended December 31, 1995 Compared to Year Ended
December 31, 1993
For the year ended December 31, 1995, Revenues were $4,159,821 compared to
$1,337,461 for the year ended December 31, 1994. This increase of over 300%
represents increased activity in the sale of air time, production of
infomercials, educational and other TV programming by use of the Broadcast
resource library in these productions and sales made in the foreign marketplace.
General and administrative expenses for the year ended December 31, 1995
increased $136,685 over that of the previous year due to the increased activity
by the corporation in acquisitions and expenses related to increased
administrative and sales activity. The increase in consulting and professional
fees of $97,776 was related to a contract entered into with an investment
banking firm, formation and operation of the Parent Academy Television Network
joint venture and the various contracts entered into during the year.
Depreciation and amortization increased $731,104 from the fiscal year ended
December 31, 1994 to December 31, 1995 as a direct result of the placement in
use of the Broadcast and Resource Library acquired at the end of 1994.
Total other expenses decreased from the year ended December 31, 1994 to the
year ended December 31, 1995 by $20,864. The major items that attributed to this
change were a valuation impairment of marketable securities in the amount of
$413,758 in 1994 and a loss on write down of airtime credits from an affiliate
in the year ended December 31, 1995 in the amount of $405,211. In 1995 there was
also a loss from the joint venture in the amount of $48,705 and a loss on the
sale of assets of $22,966. Interest expense decreased from 1994 to 1995 in the
amount of $82,766 due to the conversion of certain promissory notes to equity.
Net income from operations for the year ended December 31, 1995 increased
by $670,002, a 74% increase, over the net income from operations for the year
ended December 31, 1994. The increase was principally due to the increased sales
effort in the foreign marketplace.
Recognition of income from discontinued operations also had a positive
effect on the net income of the company in the amount of $137,596 in 1995 and
$509,028 in 1994. The increase in income from discontinued operations in 1994
reflected the recision of a contract that reflected a loss in the December 31,
1993 fiscal year. The income of $137,596 recognition was due to a gain from the
disposition of a subsidiary corporation.
During fiscal 1995 the company utilized the balance of its net operating
loss carryover and for the first time in its history has accrued a provision for
federal income taxes in the amount of $176,292.
Net income for the year ended December 31, 1995 amounted to $1,050,108 or
approximately $ 0.22 per share compared to $906,966, or $0.31 per share for the
year ended December 31, 1994. However, income from operations amounted to
$1,569,754 or approximately $0.32 per share in 1995 compared to $899,752, or
approximately $0.31 per share. The net income from all sources for 1995 was
$1,050,108 ($0.22 per share) compared to $906,966 ($0.31 per share) in the year
ended December 31, 1994. The main reasons for the drop in the per share earnings
are that for the first time the company accrued an expense for federal income
tax, after utilization of all of the net operating losses, and a large increase
in the number of shares outstanding due to issuance of stock for fees,
conversion of notes payable and the conversion of preferred stock to common
stock.
<PAGE>
Results of Operations - Year Ended December 31, 1994 Compared to Year Ended
December 31, 1993
For the year ended December 31, 1994, Revenues were $1,337,461 compared to
$-0- for the year ended December 31, 1993. This increase in revenues represents
increase activity in the production and the use of the Broadcast resource
library in these productions. There was also a one time recognition of deferred
revenue of $811,085 included in the revenues for the year ended December 31,
1994.
General and administrative expenses for the year ended December 31, 1994
increased $43,758 over that of the previous year due to the increased activity
by the corporation in acquisitions and the productions completed for sale in the
broadcast segment of the company's business. The increase in consulting and
professional fees of $78,670 and the increase in Depreciation and amortization
of $51,843 from December 31, 1993 to 1994 were the result of the fees and
expenses incurred in the acquisitions of the assets and related depreciation for
the year ended December 31, 1994.
Total other expenses increased from the year ended December 31, 1993 to the
year ended December 31, 1994 by $365,540. This increase was due in large part by
a valuation impairment of marketable securities in the amount of $413,758 and an
increase in interest expense in the amount of $87,672.
Net income from continuing operations increased by $593,864 in the fiscal
year ended December 31, 1994 over the year ended December 31, 1993. This
increase was principally due to increased operations and the recognition of
deferred revenue in the year ended December 31, 1994.
The recognition of income from discontinued operations also had a positive
effect on the income of the company in the amount of $509,028 for the year ended
December 31, 1994. The year ended December 31, 1993 showed a loss from
discontinued operations in the amount of $754,845. The increase in income in
1994 from discontinued operations was largely due to the recision of a contract
that reflected a loss in the December 31, 1993 fiscal year.
Net income for the year ended December 31, 1994 was $906,966 or $0.31 per
share, compared to a loss in the amount of $950,771, or a loss of $0.45 per
share, reflected in the financial statements for the year ended December 31,
1993.
Liquidity and Capital Resources
Fiscal Year Ended December 31, 1994
During the fiscal year ended December 31, 1995, the Company incurred a
positive working capital ratio. The working capital ration of approximately 4:1
is the direct result of the sales that have resulted in a large increase in
accounts receivable. Also, the current liabilities of the Company decreased by
$32,471.
Management believes that during the fiscal year ending December 31, 1995
cash flows from continuing operations and accounts receivable will be sufficient
to cover current working capital needs.
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
The financial statements and independent auditor's report for the year
ended December 31, 1995, and required in response to Item 7 of this Report, is
presented beginning on page F-1.
(i) Report of Independent Certified Public Accountants
(ii) Balance Sheet - as of December 31, 1995 and 1994
(iii) Income Statement - Years ended December 31, 1995 and 1994
(iv) Statement of Changes in Stockholders' Equity - Years Ended
December 31, 1995 and 1994
(v) Statement of Cash Flows - Years ended December 31, 1995 and 1994
(vi) Notes to Financial Statements
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company's certifying accountant, S. W. Hatfield + Associates, C.P.A.'s,
Dallas, Texas, resigned effective as of October 27, 1995. The Company was
informed that such resignation was due to increased business and related travel
commitments. The former accountant's report on the audit of the Company's
financial statements for the years ended December 31, 1993 and December 31,
1994, respectively, contained a qualification as to the Company's ability to
continue as a going concern. No dispute, difference of opinion or disagreement
exists with the former accountant with respect to the Company's financial
statements reviewed or reported on by such accountant, nor has such accountant
advised the Company of any reportable facts or events described under Item
304(a)(1) of Regulation S-K of the Securities Act of 1933, as amended.
Effective as of November 9, 1995, the Company's Board of Directors approved
the engagement of Smith, Dance & Company, C.P.A.'s, Irving, Texas, as the
Company's new certifying accountant.
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors and Executive Officers.
(i) Directors. The following table sets forth as of May 15, 1996: (1) the names
and ages of the directors and the positions held by each person; and (ii) any
period during which he has served.
Term of
Office as Period
Name Director Position Age Served
- ---- --------- -------- --- -------
Gerald Beeson 1 year Chief Executive Officer
and Director 61 1995-96
Gary A. Cooper 1 year President and Director 52 1993-96
Anne Marie Villano 1 year Secretary and Director 30 1993-96
Michael DeLuise 1 year Director 45 1993-96
David L. Holt 1 year Director 51 1995-96
The present Board of Directors and officers were all elected in October 1995.
All directors of the Registrant hold office until the next annual meeting of
stockholders and until their successors have been elected and qualified.
(ii) Officers. The following table sets forth as of May 15, 1996: (1) the
names and ages of the officers and the positions held by each person; and (ii)
any period during which he has served.
Office with Officer
Name Registrant Age Since
---- ----------- --- -------
Gerald Beeson Chief Executive Officer 61 1995
Gary A. Cooper President 52 1993
Anne Marie Villano Secretary 30 1993
The respective executive officers are elected by the Board of Directors
after an annual meeting of the stockholders and hold office until their
successors are chosen and qualified, or until death, their resignation or
removal from office.
<PAGE>
(iii) Background of Directors and Officers.
Gerald Beeson, age 61, brings to the Company over 30 years of business and
financial management experience. He has served as a Senior Vice President of
Business Development at First Western National Bank, Plano, Texas; Vice
President of Business Development at Fidelity National Bank, Dallas, Texas; and
Vice President of Business Development at Capital Bank, Dallas, Texas;
respectively. From 1958 to 1986 he served as President of Dallas Cash Register
Company, Dallas, Texas. He currently serves as President of CHM Satellite
Communications, Inc., Dallas, Texas.
Gary A. Cooper, age 52, brings to the Company over 20 years of
telecommunications engineering, sales and management experience as a systems
engineer, regional sales manager and consultant in broadcast and cable
television, radio and RF system engineering. Mr. Cooper holds an FCC commercial
license, a Society of Broadcast Engineers certificate as a Professional Engineer
and is a long standing member of the Society of Motion Picture and Television
Engineers.
Anne Marie Villano, age 30, brings to the Company over 7 years of
television broadcast operational experience at WAQ-TV 19 in West Palm Beach,
Florida where she serves as general manager.
Michael DeLuise, age 45, has spent over 20 years in the management of a
marketing, advertising, public relations and promotions firm representing high
profile clients such as The New York Philharmonic, Radio City Music Hall and The
John F. Kennedy Center. He has served as President of DeLuise, Hirchman and
Holley a full service marketing firm with offices in New York, Boston and
Washington D.C. He is currently Assistant Vice President of Public Relations for
Hofstra University in New York.
David L. Holt, age 51, has 25 years experience in design engineering and,
more recently, in robotics. During the past five years, Mr. Holt has been
employed as design engineer and systems manager for KBA Motter Corp., Motion
Control, Inc., Butler Services (contract) and Cybex Tech Inc./Robotronics Inc.
(contract), respectively. He has significant experience in AutoCAD and related
computer systems.
(iv) Directorships
Each director of the Registrant has indicated to the Registrant that he or
she is not a director of any other company with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the
requirements of Section 15(d) of such act or any investment company registered
under the Investment Registration Act of 1940.
(b) Identification of Certain Significant Employees: None
(c) Family Relationships
No family relationship exists between any officer or director of the
Registrant.
(d) Involvement in Certain Legal Proceedings
No event listed in Sub-paragraphs (1) through (4) of Subparagraph (d) of
Item 401 of Regulation S-B has occurred with respect to any executive officer or
director of the Registrant during the past five years and which is material to
an evaluation of the ability or integrity of such director or officer.
<PAGE>
ITEM 10 EXECUTIVE COMPENSATION
The Registrant qualifies as a "small business issuer" as that term is defined by
Item 10(a)(1) of Regulation S-B.
COMPENSATION OF EXECUTIVE OFFICERS
The following tabulation sets forth certain information with respect to
compensation paid or earned or services in all capacities to the Company for the
fiscal year ended December 31, 1995, of those persons who were at December 31,
1995 (i) the Chief Executive Officer and (ii) the other four most highly
compensated executive officers of the Registrant (the "Named Officers").
Summary Compensation Table
Annual Long Term
Compensation Compensation
Names and ----------------------------------- ---------------------
Principal Stock Options SAR/
Position Year Salary Bonuses Other (Shares) Other
- ------------ ------ ------- ------- ----- ------------- -----
Gerald Beeson
Chairman 1995 $14,000 (1) -0- -0- -0- -0-
Gary A. Cooper,
President 1995 $ -0- -0- -0- -0- -0-
Anne Marie Villano,
Secretary 1995 $36,000 -0- -0- -0- -0-
- ------------
(1) Represents only a partial year salary.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The Registrant does not have a Stock Option or SAR Plan.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE
TABLE
The Registrant does not have a Stock Option or SAR Plan.
LONG-TERM INCENTIVE PLANS
The Registrant does not have any long-term incentive plans.
COMPENSATION OF DIRECTORS
During 1995 each of the five directors received $300 for attending Board
meetings.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
CHANGE IN CONTROL ARRANGEMENTS
No executive officer of the Registrant is employed pursuant to a written
employment agreement.
During the fiscal year ended December 31, 1995, no officer, director or
principal stockholder of the Registrant either received or is to receive any
remuneration as a result of either: (i) the termination of such person's
employment, whether by resignation, retirement or otherwise; or (ii) a change of
control of the Registrant or a change in such individual's responsibilities
following a change of control of the Registrant.
REPORT ON REPRICING OF OPTIONS
During the fiscal year ended December 31, 1995, no options were granted by
the Registrant and accordingly, no options were repriced.
<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
(a) and (b) Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the Registrant's
Common Stock beneficially owned at December 31, 1995, (i) by each person who is
known by the Registrant to own beneficially or exercise voting or dispositive
control over 5% or more of the Registrant's Common Stock, (ii) by each of the
Registrant's Directors, and (iii) by all officers and Directors as a group. At
December 31, 1995, there were outstanding 4,891,842 shares of Common Stock of
the Registrant. In general, a person is deemed to be a "beneficial owner" of a
security if that person has or shares the power to vote or direct the voting of
such security, or the power to dispose or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within sixty
days.
Name and Number of Shares Percentage of
Address or of Common Stock Beneficial
Identity of Group Beneficially Owned Ownership
----------------- ------------------ --------------
Gary Cooper (1) 45,391 0.93%
371 Oakview Drive
Lewisville, Tx 75067
Gerald Beeson (2) 31,400 0.64%
1400 Turtle Creek
Suite 177
Dallas, Texas 75207
Anne Marie Villano (3) 40,000 0.82%
1334 S. Killian Dr.
Lake Park, Fl 33403
Michael DeLuise (4) 40,000 0.82%
565 Caledonia Road
Dix Hills, NY 11746
David L. Holt (5) -0- -0-
3429 Morning Star Lane
Garland, Texas 75043
F.P.I., Inc. (6) 419,400 8.57%
C/O Felice Padnos
1176 Oxford Court
Highland Park, Il 60035
Lopere Productions, Inc. 262,500 5.37%
661 Old Town Road
Port Jefferson, NY 11776
----------------------- -------- -------
All Officers and 156,791 3.21%
Directors as a ======== =======
Group (5 persons)
(1) Mr. Cooper is President and Director of the Registrant.
(2) Mr. Beeson is Vice President and Director of the Registrant.
(3) Ms. Villano is Secretary and Director of the Registrant.
(4) Mr. DeLuise is a Director of the Registrant.
(5) Mr. Holt is a Director of the Registrant.
(6) F.P.I., Inc. served as a financial consultant to the
Registrant from October 1995 to April 1996. Does not include
150,000 shares due as of March 31, 1996 as bonus
compensation under the Consulting Agreement.
(c) Changes in Control. None
<PAGE>
ITEM 12 CERTAIN RELATIONSHIPS AND TRANSACTIONS
(a) Transactions with Management and Others.
In August and December 1994, the Registrant acquired certain broadcast
assets and airtime from Royal Lane Studios, Inc. and WAQ-TV 19, Inc., companies
controlled by certain shareholders of the Registrant, respectively, for
convertible notes equal to $750,000 and $4,150,000, respectively.
As of December 31, 1995, the Registrant owed $641,879 in loans or advances
made to the Registrant by shareholders or companies controlled by shareholders,
respectively.
During 1995, as a result of the acquisition of broadcast airtime from
WAQ-TV 19, Inc. ("WAQ"), a company controlled by a shareholder of the
Registrant, the Registrant uses the broadcast station as an agent for the sale
of purchased airtime. WAQ serves as the collection agent for the Registrant and
is paid (or to WAQ's sales representatives) a commission equal to 15% of gross
sales generated by the broadcast station. Additionally, the Registrant pays
certain operating expenses on behalf of WAQ related to such sales. 1995 revenue
attributable to WAQ was $303,315 and costs of sales were $366,000.
The Registrant had acquired $1,575,000 in deferred advertising credits from
an unrelated party in exchange for common stock. In an unrelated matter to the
Registrant, a shareholder/consultant to the Registrant acquired such stock in
settlement of a civil lawsuit. Since the unrelated third party was not
performing under the terms of its agreement with the Registrant, it was
negotiated with the shareholder/consultant to the Registrant to either transfer
such stock to the Registrant or to provide the Registrant with the equivalent in
airtime. As a result, effective as of December 31, 1995, the Registrant received
an additional six (6) hours of airtime from WAQ for a period of fifteen (15)
years. This transaction provided the Registrant with the entire 24 hours of
airtime of WAQ (less 15 hours sold outright during 1995). Accordingly, all
advertising revenues from WAQ are now paid to the Registrant.
The Registrant pays CHM Satellite Communications, Inc. ("CHM"), a company
whose President is the Registrant's CEO, for consulting and professional
services. During 1995, the Registrant paid CHM approximately $103,215 for
consulting and professional fees. The Company also recognized $32,000 in
revenues from CHM in 1995.
The Registrant utilizes the video production services of Royal Lane
Studios, Inc., a company controlled by a shareholder of the Registrant. During
1995, the Registrant accrued approximately $493,390 for such services and paid
$34,000 in consulting fees to this affiliate.
During 1995, the Registrant paid or accrued approximately $40,110 for
legal, accounting and consulting services to three individuals who were or are
either direct shareholders of the Registrant or affiliated with corporate
shareholders of the Registrant.
(b) Not applicable
(c) Parents of Registrant. None.
(d) Transactions with Promoters None.
<PAGE>
PART IV
ITEM 13 EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-B
Exhibit
Number Title of Document and Location
3(i)(1) Articles of Incorporation2
3(i)(2) Certificate of Amendment of Articles of Incorporation5
3(i)(3) Certificate of Designation of Rights, Restrictions of Series A
Convertible Preferred Stock1
3(ii) By-Laws2
4(a) Form of Common Stock Certificate (specimen)5
5 Opinion regarding legality of issuance2
10(a) Agreement with Wall Street Connections, Inc. dated August 18, 19945
10(b) Agreement with Lopere Productions, Inc. dated August 18, 19943
10(c) Agreement with Royal Lane Studios, Inc. dated August 18, 19943
10(d) Agreement with Idea House, Inc. dated December 1, 19944
10(e) Agreement with WAQ-TV 19, Inc. dated December 1, 19944
10(f) Agreement with Academy Concepts Inc. dated February 2, 19955
10(g) Adjustable Rate Note and Commercial Mortgage dated February 19955
10(h) Agreement with E&F Investors, Ltd. dated June 7, 19951
10(i) Agreement with Digital Ad Media dated August 1, 19956
10(j) Agreement with Redstone Securities, Inc. dated October 31, 19951
10(k) Agreement with F.P.I., Inc. dated November 30, 19951
10(l) Warrant Agreement with AMC Consulting, Inc. dated January 8, 19961
21 Subsidiaries of the Registrant5
1Filed herewith.
2Previously Included with form S-1 filed on August 4, 1992.
3Previously filed with Report on Form 8-K filed on September 19, 1994.
4Previously filed with Report on Form 8-K filed on December 14, 1994.
5Previously filed with Annual Report on Form 10-KSB filed on June 7, 1995.
6Previously filed with Report on Form 8-K filed on September 12, 1995.
(b) Reports of Form 8-K
The following reports on Form 8-K have been filed by the Registrant during
the fourth quarter of the fiscal year ended December 31, 1995 or subsequent to
year end:
Report on Form 8-K filed November 13, 1995, reporting a change in the
Registrant's certifying accountants from S. W. Hatfield + Associates to Smith,
Dance & Company.
Amendment to Report on Form 8-K filed November 29, 1995, reporting the
approval of the Registrant's former certifying accountant with the disclosure
contained in the Form 8-K filed November 13, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 22d day of May,
1996.
DEFINITION, LTD.
By: /S/ GERALD BEESON
Gerald Beeson,
Chief Executive Officer
<PAGE>
Pursuant to the requirements of 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 and on the date indicated.
Signatures Title Date
---------- ----- ----
/S/ GERALD BEESON C.E.O and Director May 22, 1996
Gerald Beeson
/S/ GARY COOPER President and Director April 19, 1996
Gary Cooper
/S/ ANNE MARIE VILLANO Secretary and Director April ___, 1996
Anne Marie Villano
/S/ MICHAEL DELUISE Director April ___, 1996
Michael DeLuise
/S/ DAVID L. HOLT Director April ___, 1996
David L. Holt
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders of Definition,Ltd.
We have audited the accompanying consolidated balance sheet of Definition,
Ltd. (a Nevada corporation) and subsidiaries as of December 31, 1995 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The 1994 consolidated financial statements were audited by other auditors
whose report dated May 25, 1995 on those statements included an explanatory
paragraph describing conditions that raised substantial doubt about the
Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Definition, Ltd. and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. As discussed in Note
15 to the financial statements, certain errors resulting in an overstatement of
previously reported assets and additional paid-in capital as of December 31,
1994, were discovered by management of the Company during the current year.
Accordingly, the 1994 financial statements have been restated to correct the
error.
SMITH,DANCE &COMPANY
Irving, Texas
May 17, 1996
<PAGE>
DEFINITION, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
1995 1994
---- ----
Current assets:
Cash and cash equivalents (Note 1) $177,450 $11,227
Notes receivable (Note 6) 210,000 -
Accounts receivable - net of allowance for
doubtful accounts of $25,000 and $0, at 1995
and 1994, respectively (Note 1) 3,129,480 313,667
Accounts receivable - affiliates (Note 12) - 45,000
Accounts receivable - other 10,520 829
Inventory (Note 1) - 56,664
----------- -----------
Total current assets 3,527,450 427,387
----------- -----------
Property and Equipment (Notes 1, 11 and 15):
Broadcast resource library 2,985,536 2,983,036
Computer, production and broadcast equipment 814,896 795,147
Building and improvements 250,141 141,857
Other 887 887
----------- -----------
4,051,460 3,920,927
Accumulated depreciation (878,390) (56,344)
----------- -----------
Net property and equipment 3,173,070 3,864,583
----------- -----------
Other Assets:
Contracts and accounts receivable - long-term
portion net of deferred revenue of $1,184,670
and $0, at 1995 and 1994, respectively (Note 5) 1,876,430 61,333
License agreement, net of accumulated amortization
of approximately $156,302 (Notes 1 and 7) - 174,698
Equity investment in joint venture and other
companies (Note 8) 330,602 10,200
----------- -----------
Total other assets 2,207,032 246,231
----------- -----------
TOTAL ASSETS $8,907,552 $4,538,201
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
------ ------
Current liabilities:
Cash overdraft $ - $ 2,617
Current portion of long-term debt (Note 10) 1,330 -
Accounts payable - trade 28,735 241,156
Accounts payable - affiliates (Note 12) 641,879 663,474
Federal income tax payable (Note 9) 184,787 -
Accrued interest expense - affiliates (Note 12) - 2,383
---------- ----------
Total current liabilities 856,731 909,630
Long-term debt (Note 10) 81,777 -
---------- ----------
Total liabilities 938,508 909,630
Commitments and contingencies (Note 13) - -
Minority interest in equity of subsidiary - 31,513
Shareholders' equity (Notes 11 and 15):
Preferred stock - $.01 par value; 5,000,000
shares authorized, Series A - 500,000 shares
allocated; -0- and 290,614 shares issued and
outstanding, at 1994 - 2,906
Common stock, $.001 par value, 100,000,000
shares authorized,4,891,842 and 4,019,695
shares issued and outstanding,at 1995 and
1994, respectively 4,892 4,020
Additional paid-in capital 9,650,422 9,648,388
Retained earnings (deficit) 66,852 (983,256)
---------- ----------
9,722,166 8,672,058
Deferred advertising and broadcast airtime
credits (Notes 4 and 5) (1,753,122) (5,075,000)
---------- ----------
Total shareholders' equity 7,969,044 3,597,058
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,907,552 $4,538,201
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Year Period Ended December 31, 1995, 1994 and 1993
1995 1994 1993
Revenues (Note 1): ---- ---- ----
Domestic $ 1,201,051 $ 1,232,461 $ -
International 2,958,770 105,000 -
----------- ----------- -----------
Total revenues 4,159,821 1,337,461 -
Cost of revenues 1,390,579 203,786 -
----------- ----------- -----------
Gross Revenue 2,769,242 1,133,675 -
Operating expenses:
General and administrative 180,443 43,758 -
Consulting and other
professional fees 196,998 99,222 20,552
Depreciation and amortization 822,047 90,943 39,100
Total operating expenses 1,199,488 233,923 59,652
----------- ----------- -----------
Income (loss) from operations 1,569,754 899,752 (56,652)
Other income (expenses):
Interest and other income 1,222 - 3,665
Loss from joint venture (48,705) - -
Interest expense (5,290) (88,056) (384)
Loss on sale of assets (22,966) - -
Valuation impairment of marketable
securities - (413,758) -
Loss on write down of airtime
credits from an affiliate (405,211) - -
Bad debt reserve for uncollectible
amounts due from affiliates - - (139,555)
----------- ------------ -----------
Total other income (expenses) (480,950) (501,814) (136,274)
----------- ------------ -----------
Income(loss) before income taxes
and discontinued operations 1,088,804 397,938 (192,926)
Provision for income taxes
(Note 9) 176,292 - -
----------- ------------ -----------
Income (loss) from continuing
operations 912,512 397,938 (192,926)
Discontinued operations:
Loss from operations of Stone
Grill Restaurants, Inc.and UPM,
Inc., net of applicable income
taxes of $0, $0 and $0,
respectively - - (89,581)
Loss from New Alpine Productions,
Inc. net of applicable income
taxes of $0, $0 and $0,
respectively - (114,871) (682,748)
Loss on recision of acquisition of
television broadcast properties
and related costs - (251,821) -
Gain from forgiveness of accounts
payable - 112,898 -
Minority interest in gain of New
Alpine Productions, Inc. 137,596 762,822 17,484
---------- ---------- -----------
Total effect of discontinued
operations 137,596 509,028 (754,845)
---------- ---------- -----------
Net income (loss) $ 1,050,108 $ 906,966 $(947,771)
=========== ========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
Three-Year Period Ended December 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Income (loss) from continuing
operations $ 912,512 $ 397,938 $ (195,926)
Total effect of discontinued
operations 137,596 509,028 (754,845)
--------- --------- -----------
Net income (loss) $1,050,108 $ 906,966 $ (950,771)
========== ========== ===========
Earnings per common share and common stock equivalents (Note 1):
Income (loss) per weighted-average share of common
stock outstanding
Primary
From operations $ 0.19 $ 0.14 $ (0.09)
From discontinued operations 0.03 0.17 (0.36)
---------- ---------- -----------
Total primary earnings per share $ 0.22 $ 0.21 $ (0.45)
========== ========== ===========
Fully diluted
From operations $ 0.19 $ 0.13 $ (0.09)
From discontinued operations 0.03 0.17 (0.36)
---------- ---------- -----------
Total fully diluted earnings per
share $ 0.22 $ 0.30 $ (0.45)
========== ========== ===========
Weighted average number of common
shares outstanding
Primary 4,891,842 2,925,169 2,116,389
========== =========== =========
Fully diluted 4,891,842 3,064,135 2,116,389
========== =========== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'EQUITY
Two-Year Period Ended December 31, 1995 and 1994
Common Stock Preferred Stock
Shares Value Shares Value
------ ----- ------ -----
Shareholder's equity at
December 31, 1993 52,909,722 $52,910 - $ -
Effect of 1 for 25
reverse stock split (50,793,333) (50,793)
------------ -------- ------- --------
Shareholder's equity at
December 31, 1993,
restated 2,116,389 2,117 - $ -
Sale of common stock 628,306 628
Issuance of common stock for:
Professional fees 480,000 480
Director's fees 150,000 150
Conversion of notes payable 645,000 645 290,614 2,906
Recognition of impairment of
carrying value of marketable
securities
Net Income
----------- -------- -------- --------
Shareholders' equity at
December 31, 1994 4,019,695 4,020 290,614 2,906
Correction of errors in
prior periods (Note 15):
Revaluation of property
and equipment
----------- -------- -------- -------
Adjusted balance of share-
holder's equity at
December 31, 1994 4,019,695 4,020 290,614 2,906
Conversion of preferred
stock to common stock 872,147 872 (290,614) (2,906)
Net income
----------- -------- --------- -------
Shareholder's equity at
December 31, 1995 4,891,842 $ 4,892 - $ -
=========== ======== ========= =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'EQUITY
Two-Year Period Ended December 31, 1995 and 1994
Net
Additional Unrealized loss
Paid-in on non-current
Capital equity securities
------------ ------------------
Shareholder's equity at
December 31, 1993 $2,273,635 $(409,758)
Effect of 1 for 25
reverse stock split
------------ ----------
Shareholder's equity at
December 31, 1993,
restated 2,273,635 (409,758)
Sale of common stock 49,382
Issuance of common stock for:
Professional fees 59,520
Director's fees 18,600
Conversion of notes payable 10,232,006
Recognition of impairment of
carrying value of marketable
securities 409,758
Net income
----------- ---------
Shareholders' equity at
December 31, 1994 12,633,143 -
Correction of errors in
prior periods (Note 15):
Revaluation of property
and equipment (2,984,755)
----------- ---------
Adjusted balance of share-
holder's equity at
December 31, 1994 9,648,388 -
Conversion of preferred
stock to common stock 2,034
Net income
----------- ---------
Shareholder's equity at
December 31, 1995 $9,650,422 $ -
=========== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Two-Year Period Ended December 31, 1995 and 1994
Total
Retained Shareholder's
Earnings Equity
------------ ------------------
Shareholder's equity at
December 31, 1993 $(1,890,222) $ 25,565
Effect of 1 for 25
reverse stock split (50,793)
------------ ----------
Shareholder's equity at
December 31, 1993,
restated (1,890,222) (24,228)
Sale of common stock 50,010
Issuance of common stock for:
Professional fees 60,000
Director's fees 18,750
Conversion of notes payable 10,235,557
Recognition of impairment of
carrying value of marketable
securities 409,758
Net income 906,966 906,966
------------ -----------
Shareholders' equity at
December 31, 1994 (983,256) 11,656,813
Correction of errors in
prior periods (Note 15):
Revaluation of property
and equipment (2,984,755)
------------ -----------
Adjusted balance of share-
holder's equity at
December 31, 1994 (983,256) 8,672,058
Conversion of preferred
stock to common stock
Net income 1,050,108 1,050,108
------------ -----------
Shareholder's equity at
December 31, 1995 $ 66,852 $9,722,166
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three-Year Period Ended December 31, 1995
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income (loss) $1,050,108 $906,966 $(950,771)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 822,047 90,943 39,100
Stock issued for services - 78,750 -
Stock exchanged for accrued interest - 85,556 -
Valuation impairment of marketable
securities - 413,758 -
Broadcast acquisition fees - - 609,814
Reserve for uncollectible accounts
from affiliates - - 139,555
Loss on recision of television
properties acquired in prior year - 251,821 -
Gain on forgiveness of accounts payable - (112,898) -
Minority interest in loss of subsidiary (137,596) (762,822) (17,484)
Loss from joint venture 48,705 - -
Write-off of assets 21,362 - 651
Net increase (decrease) in operating
assets and liabilities:
Accounts receivable (3,127,518) (420,000) 1,771
Prepaid expenses and television
production costs - - 242,339
Accounts payable - trade (212,421) 45,833 22,873
Accounts payable - affiliates (21,595) 234,546 (242,339)
Accrued interest expense - affiliates (2,383) 21,128 61,856
Accrued federal income tax 184,787 - -
Deferred revenue 1,746,878 (793,005) 33,530
------------- ----------- ------------
Net cash provided by (used in)
operating activities 372,374 40,576 (59,105)
------------- ----------- ------------
Cash flows from investing activities:
Cash advanced to affiliates - (75,282) (126,890)
Investment in joint venture (156,107) (10,000) -
Acquisition of property and equipment (47,427) (4,795) -
------------- ----------- ------------
Net cash provided by (used in)
investing activities (203,534) (90,077) (126,890)
------------- ----------- ------------
Cash flow from financing activities:
Net change in bank overdraft (2,617) (748) 3,365
Advances received on notes payable
to affiliates - net - 11,319 25,000
Issuance of common stock for cash - 50,010 -
------------- ----------- ------------
Net cash provided by (used in)
financing activities (2,617) 60,581 28,365
------------- ----------- ------------
Net increase (decrease) in cash 166,223 11,080 (157,630)
Cash and cash equivalents at
beginning of year 11,227 147 157,777
------------- ----------- ------------
Cash and cash equivalents at
end of year $ 177,450 $ 11,227 $ 147
============= =========== ============
Supplemental disclosure of cash flow information: Cash paid for:
Interest $ 7,673 $ 500 $ -
Income tax - - 1,771
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
Three-Year Period Ended December 31, 1995
1995 1994 1993
SUPPLEMENTAL SCHEDULE OF NON-CASH ---- ---- ----
INVESTING AND FINANCING ACTIVITIES
Reclassification and offset of accounts
receivable and accounts payable to
affiliates and other related parties $91,223 $199,049 $ -
========= ========= ==========
Acquisition of property and equipment
with convertible notes payable and
subsequent conversion to preferred
and common stock $ - $6,900,000 $ -
========= =========== ==========
Acquisition of deferred advertising
credits and broadcast airtime for
convertible notes payable and
subsequent conversion to preferred
and common stock $ - $3,500,000 $ -
========= =========== ==========
Acquisition of television broadcast
rights and development costs for
notes payable and accounts payable
to affiliates and subsequent
abandonment due to recision of
acquisition of related broadcast
rights and development costs in
1994 $ - $ (80,052) $ 80,052
========= ============ ==========
Broadcast acquisition fees paid with
common stock holdings in
subsidiary $ - $ - $ 609,814
========= ============ ==========
Exchange of receivable from affiliates
for restricted, unregistered
common stock of affiliate $ - $ - $ 207,608
========= ============ ==========
Exchange of inventory, license
agreement and broadcast airtime
credits for barter trade credits $232,966 $ - $ -
========= ============ ==========
Exchange of barter trade credits
for a note receivable $201,000 $ - $ -
========== ============ ==========
Conversion of preferred stock
for common stock $ 2,906 $ - $ -
========== ============ ==========
Purchase of office condominium with
long-term mortgage payable
and advances from affiliates $105,000 $ - $ -
========== ============ ==========
Exchange of non-affiliated broadcast
airtime credits for affiliated
broadcast airtime credits $1,575,000 $ - $ -
=========== ============ ==========
Reclassification of accounts
receivable to investment in other
companies $ 213,000 $ - $ -
=========== ============ ==========
Sale of deferred broadcast airtime
credits in exchange for long-term
contract $2,916,667 $ - $ -
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business Organization -
Definition, Ltd. (formerly Stone Grill International, Inc.) (Definition)
was incorporated under the laws of the State of Nevada in March 1989, as Stone
Grill International, Inc. Definition's original business operations were related
to the marketing of products and operating of restaurants utilizing a heated
stone cooking surface for food preparation. Prior to 1992, all of Definition's
efforts had been directed toward the establishment of the business and,
therefore, was considered to be a "development stage enterprise" for financial
reporting purposes.
In 1992, Definition formed a wholly-owned subsidiary, Stone Grill
Restaurants, Inc. (SGR) (a Nevada corporation) for the purpose of operating a
restaurant using the stone grill cooking method concept and to market stone
grill cooking stones. In January 1993, the Company closed its pilot restaurant
facility. In May 1994, Definition entered into an agreement to sell 100% of the
issued and outstanding stock in SGR to a company controlled by Definition's
former executive officer. The sale of the stock was for consideration of
$250,000; payable $25,000 within 90 days of the execution of the agreement and a
note receivable, bearing interest at 8.0% per annum with four (4) annual
payments of $25,000; and a balloon payment of $125,000 in April 1999. The note
was secured by the issued and outstanding stock of SGR. In December 1994,
Definition terminated and canceled the sale due to non-performance by the
purchasing party. In January 1995, Definition entered into a contract with an
unrelated third party to sell the inventory and equipment in exchange for barter
trade credits.
In 1992, Definition established a "d/b/a" division, Universal Products
Marketing (UPM), to provide marketing services to affiliated and nonaffiliated
entities. In 1993, Stone Grill International, Inc. incorporated these activities
as UPM, Incorporated (a Nevada corporation). In mid 1994, Definition ceased all
operations of this subsidiary and sold the subsidiary to an affiliate of a
shareholder of Definition for the assumption of all existing known and unknown
liabilities.
In August 1993, Definition created a new wholly-owned subsidiary,
Interactive Systems, Inc. (ISI) (a Nevada corporation) for the purpose of
entering into joint ventures with related and unrelated parties to develop
interactive television programming, utilizing "1-800" and "1-900" telephone
communication and satellite and fiber-optic signal delivery systems. During
1994, this subsidiary began the production and sale of "infomercial" and
commercial demonstration videos for unrelated third party corporate customers.
Additionally, ISI and Definition entered into an agreement in principle with a
third party corporation whereby ISI and the third party will develop, install,
support and provide programming for an interactive educational computer network.
In November 1993, UPM incorporated New Alpine Productions, Inc. (NAPI) (a
Nevada corporation) as a wholly-owned subsidiary to produce and syndicate
one-half to one hour television shows for use in the broadcast and cable
television industries. In December 31, 1993, UPM converted its note receivable
from NAPI related to the acquisition of television broadcast rights and
development costs into approximately 174,458 shares of common stock of NAPI.
Concurrent with this conversion of intercompany debt receivable/payable, UPM
utilized approximately 59,500 shares of NAPI stock to satisfy a commitment to
NAPI's President for facilitating the acquisition of the various broadcast
properties. The net effect of this transaction caused NAPI to be an approximate
65.90% owned subsidiary of UPM. (Note 3) During 1994, as a result of litigation,
NAPI rescinded the acquisition transaction and ceased all operations.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Business Organization - Continued
In the second quarter of 1994, ISI entered into negotiations with a related
party and an unrelated party to form a joint venture to provide interactive
television programming. In February 1995, the negotiations were finalized and
Interactive Systems, Inc. entered into a long term contract with Baltimore based
Academy Concepts, Inc. to form, equip and maintain "The Parent Academy Network,"
an interactive scholastic network targeting 2500 lower income East Coast
schools. Both companies will jointly develop, install, support and provide
programming for the computer-based, interactive educational computer network.
This network will provide interactive teaching materials to member schools, via
an on-line video/computer platform, using Interactive Systems, Inc.'s media
library. Interactive Systems, Inc. will also serve as the exclusive technical
provider and consultant to the network.
During 1995, the Company's business included the production of direct
response programming, and interactive programming for world wide application,
including educational software, infomercials, interactive computer media, video,
and the sale of television advertising media (utilizing broadcast airtime
through WAQ-TV 19 (West Palm Beach, Florida)). During 1995, the Company also
utilized and sold, from time to time, primarily into foreign markets, copies of
video, film clips and programming from its broadcast film library, which
includes certain copyrighted programs, documentaries, newsreels, music blocks,
and educational footage. ISI is currently involved in a computer-based,
interactive educational network with Academy Concepts ("ACI") as previously
described. Additionally, ISI is involved with the production of television
programs for broadcast in the West Palm Beach, Florida and the Dallas/Fort
Worth, Texas metropolitan areas, respectively. ISI is also engaged in the
production of one-half hour infomercials for video and cable television
broadcast.
Principles of Consolidation -
Definition consolidates its wholly-owned and majority-owned subsidiaries,
Stone Grill Restaurants, Inc., UPM, Incorporated, Interactive Systems, Inc. and
New Alpine Productions, Inc. The accompanying consolidated financial statements
contain the accounts of Definition, SGR, UPM, ISI and NAPI. All significant
intercompany transactions and balances have been eliminated in consolidation.
The consolidated group is referred to as the "Company". The equity method of
accounting is used for joint ventures. (Note 8)
Cash Equivalents -
Cash equivalents include cash on hand, cash on deposit and all highly
liquid debt instruments with a maturity of less than ninety (90) days. The fair
value of cash and equivalents approximates their carrying amount. Bank overdraft
positions may occur from time to time due to the timing of depositing cash
receipts and releasing disbursements, in accordance with the Company's cash
management policies.
Accounts Receivable and Allowance for Doubtful Accounts -
In the normal course of business, the Company sells the production of
infomercials, commercial demonstration videos and mixed media titles from the
Company's programming library to unrelated third party customers located
primarily in the United States and Italy on unsecured credit terms with extended
payment terms up to twelve months. All associated revenues have been recognized
currently.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Accounts Receivable and Allowance for Doubtful Accounts - Continued
Through periodic charges to expense, the Company maintains an allowance for
losses expected to arise from uncollectible accounts and contracts receivable.
Such allowance balance is maintained based on the Company's past experience of
actual net uncollectible account losses (accounts identified and charged off as
uncollectible, less recoveries of accounts previously charged off) and the
periodic evaluations of individual accounts. As individual customer accounts
become doubtful as to collections, the balances are charged to the allowance for
uncollectible accounts.
Inventory -
Inventory consists of stone grills and related accessories and is carried
at the lower of cost or market using the first-in, first-out method of
accounting. This inventory was acquired in prior years from an affiliate in
exchange for restricted, unregistered common stock and was recorded at the
affiliate's historical cost basis.
Long-Lived Assets -
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operation when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. No
material effect on the financial statements resulted from the adoption of this
standard.
International Sales -
A significant portion of the Company's revenues are generated from foreign
companies, primarily from Italy. All sales and receipts are denominated in U.S.
dollars and therefore the Company has no foreign currency translation exposure.
Property and Equipment -
Property and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method over the following estimated useful
lives of the assets:
Buildings 39 years
Building improvements 7 years
Computer, production and
broadcast equipment 5-7 years
The amortization of the broadcast resource library is computed using the
individual-film-forecast-computation method. This method amortizes the cost of
the library in the same ratio that current gross revenues bear to anticipated
total gross revenues.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Property and Equipment - Continued
Expenditures for repairs and maintenance are charged to the expense as
incurred. Expenditures for major renewals and betterments, which significantly
extend the useful lives of existing plant and equipment, are capitalized and
depreciated. Upon retirement or disposition of assets, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in income. Depreciation and amortization expense in 1995,
1994 and 1993 was $822,047, $56,344, and $5,796, respectively.
Television Production Costs -
The Company amortizes television production costs and the related broadcast
rights and development costs using the anticipated revenue stream on each show
over the contracted number of shows to be produced. In the event that a show or
production concept is determined to not be economically feasible, all related
capitalized costs are charged against operations at that time.
Deferred Advertising and Broadcast Airtime Credits -
The Company had acquired advertising and broadcast airtime credits from
various affiliates and nonaffiliates. In prior years, approximately $2,750,000
(face value) in deferred advertising credits were acquired from nonaffiliates in
exchange for restricted, unregistered common stock of the Company. These credits
were recorded at a discounted value of approximately $1,575,000 to allow for
estimated nonspecific contingencies.
Broadcast airtime credits acquired from an affiliate are being amortized
over the ten year life of the acquisition agreement. Credits which expire unused
by the Company are amortized as a reduction of additional paid-in capital due to
the related party nature of the transaction. Utilized airtime, either used
directly by the Company or sold to third parties, is amortized as a component of
cost of revenues.
License Agreement -
The license agreement (Note 7) is being amortized over the ten year life of
the agreement using the straight-line method. Amortization expense related to
the agreement for the years ended December 31, 1995, 1994 and 1993 was
approximately $0, $33,200 and $33,100, respectively.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Investments -
Investments in other companies in which the Company holds a less than 20
percent equity interest are accounted for by the cost method. Where investment
securities are acquired in exchange for property, services or debt, the
investment is valued at the approximate value of the related goods or services
or the face amount of the debt owed to the Company or the value of the
investment received, which ever is more clearly determinable. Investments in
other companies where the Company holds a 20 percent or greater equity interest
are accounted for using the equity method. Stock values are computed at 75.0% of
the bid price on the date of the transaction for securities that are restricted
in transfer rights. The Company's policy is to hold these securities for
long-term investment and not for resale. Management has provided an allowance
for unrealized losses on equity securities where the market value of the
respective security has declined below the acquisition value of the security.
Revenue Recognition -
Deferred gains and/or revenues represent amounts due the Company for sales
of goods and services, and related interest thereon, for which the ultimate
realization is uncertain. Deferred gains are also provided as an allowance to
investment securities received in exchange for goods and services where the
ultimate profit realization is contingent upon future events which may or may
not occur. Ultimate realization of deferred gains from these transactions will
be recognized at such time as realization is reasonably certain. In connection
with advertising credits sold in prior years, revenue will be recognized when
payment is reasonably assured and noncancellable contracts are executed between
the respective broadcast station and the advertiser.
Income Taxes -
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" which requires the asset and
liability method of accounting for income taxes rather than the deferred method
previously used, effective January 1, 1993. No material effect on the financial
statements resulted from the adoption of this standard.
Earnings (Loss) Per Share -
Earnings (loss) per weighted-average common share outstanding is computed
by dividing net income by the weighted average number of common shares and
common stock equivalents outstanding during the period. The Company's Preferred
Stock is convertible at the rate of three (3) shares of common stock for each
share of preferred stock. Therefore, the primary weighted average of common
stock includes the conversion to common stock as if it was converted at the
beginning of the year.
Basis of Presentation -
Certain financial statement items in prior years have been reclassified to
conform to the current year's format.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Accounting Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
NOTE 2 - CHANGES IN SUBSIDIARIES BEING CONSOLIDATED
The consolidated financial statements presented for the periods ended
December 31, 1993, 1994, and 1995, included the results of operations of the
Company and its wholly owned subsidiaries. The following indicates which
subsidiaries were consolidated for the appropriate periods:
December 31, 1993
Subsidiaries: Stone Grill Restaurants, Inc.
Universal Products Marketing, Inc.
New Alpine Productions, Inc.
Interactive Systems, Inc.
December 31, 1994
Subsidiaries: Stone Grill Restaurants, Inc.
Universal Products Marketing, Inc.
New Alpine Productions, Inc.
Interactive Systems, Inc.
Stone Grill Restaurants, Inc., Universal Products Marketing, Inc., and New
Alpine Productions, Inc. were disposed of in 1994.
December 31, 1995
Subsidiaries: Interactive Systems, Inc.
Due to a change in consolidated subsidiaries and their respective activities for
each of the periods reported, the consolidated financial statements are not
comparable between periods.
NOTE 3 - TELEVISION BROADCAST RIGHTS AND DEVELOPMENT COSTS
On October 6, 1993, UPM acquired all broadcast rights, production graphics,
pilot episodes, "in-the-can" produced shows, music and scripts to four (4)
separate television shows, either currently in production or in various
development phases, from entities and individuals affiliated with the Company
for a long-term note payable in the amount of $2,000,000. This acquisition cost
approximates both fair market value for the programming and the previous owner's
founder's costs, including additional production costs incurred by the Company.
These rights were subsequently sold to NAPI, as discussed in Note 1.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 4 - DEFERRED ADVERTISING CREDITS
In the second quarter of 1994, Hollywood Broadcasting, Inc. (a FCMI
affiliate) filed a lawsuit against UPM, NAPI and the original sellers of the
television broadcast rights (Note 1) challenging the ownership and transference
of the properties as it relates to FCMI's bankruptcy filing. The Presiding Court
has issued an injunction against UPM and NAPI whereby all revenues, etc. related
to the properties in question are to be held in an escrow account maintained by
Hollywood Broadcasting, Inc. and may not be utilized or distributed to any party
until completion of the pending litigation. Effective June 1, 1994, the
acquisition transaction was rescinded and the related television properties were
returned to the sellers. The Company recognized a loss of approximately $250,000
on the recision transaction.
The Company has acquired deferred advertising credits, primarily in
exchange for common stock, from unrelated parties aggregating $1,575,000. The
advertising credits were recorded at net realizable value, based upon the
seller's published rate cards at the date of acquisition or the historical
founder's cost as it relates to related party transactions. (Notes 1 and 12)
Approximately $2,000,000 of credits were sold to a publicly held
corporation during 1992, for 590,000 shares of the purchaser's unregistered,
restricted common stock. This transaction was valued at approximately $156,000,
which approximated 50% of the purchasing company's bid price on the transaction
date with a corresponding cost basis in the deferred advertising credits of
approximately $-0-. The gain from the sale of the advertising credits was
recognized during 1994, upon the expiration of the related advertising credits.
NOTE 5 - BROADCAST AIRTIME CREDITS
On December 1, 1994, the Company acquired 18 of the available 24 hours of
daily broadcast airtime transmitted by a television station controlled by a
shareholder of the Company for a ten year period. The Company executed a
convertible note of $3,500,000 payable to the selling television station in
consideration for the transaction. The note was for a term of five (5) years and
bore interest at 8.0% per annum. Approximately $3,250,000 and accrued but unpaid
interest (aggregating $3,269,616) was converted into 79,825 shares of Series A
Preferred Stock and 243,750 post-split unregistered, restricted shares of Common
Stock, per the terms of the note agreement, on December 30, 1994. In 1995, the
Company acquired the remaining 6 of the available 24 hours of daily broadcast
airtime for a fifteen year period. (Note 12)
During the quarter ended September 30, 1995 the Company sold 15 of the 24
hours to an unrelated third party for $120,000 cash and a contractual obligation
payable in the amount of $4,000,000 payable quarterly over a 5 year period in
quarterly installments. The profit has been deferred, reported net against the
receivable, and will be recognized over the life of the contract. Due to the
fixed term of the agreement, the credits are amortized pro-rata over the term of
the contract using the straight-line method. Utilized airtime, either used
directly by the Company or sold to third parties, is amortized as a component of
cost of revenue.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 6 - NOTES RECEIVABLE
On January 16, 1995, the Company entered into a sales agreement with an
unrelated third party to sell 100% of its inventory and restaurant equipment,
reacquired on December 13, 1994, as a result of a breach of contract on a
previous sale transaction, and 112 one-half hour segments of broadcast airtime
for barter trade credits having a face value of $258,000. The transaction was
recorded at $233,000, representing the Company's founders cost in the inventory
and equipment (approximately $57,000), the broadcast airtime value
(approximately $3,000) and the unamortized cost of a license agreement (Note 7)
(approximately $173,000).
In December 1995, the barter trade credits were exchanged for a note
receivable in the amount of $210,000. The note bears interest at 8% and is
payable in three installments of $70,000 with final payment due December 1,
1996. The note is secured by the stone grills and related accessories.
NOTE 7 - LICENSE AGREEMENT
The Company acquired the exclusive licensing rights to a proprietary food
service method, including design and operational protocol methods, and marketing
rights to patented material through June 1, 1997. These rights extend to all of
North America, excluding Phoenix and Tucson, Arizona. This license was acquired
in 1989 in exchange for $650,000 in convertible promissory notes. In October
1989, $400,000 of these notes were converted to 8,000,000 unregistered,
restricted common stock of the Company. In 1990, the balance of these notes were
acquired by Main Street TV, Inc. (MSTV), an affiliate of the Company.
Additionally, in 1989, the license agreement was restated to equal the
predecessor's historical cost basis of $331,000.
In January 1995, concurrent with the Company's sale of inventory and
restaurant equipment, the unamortized amount, approximately $173,000, was recast
as a component of the consideration received in the transaction (Note 6)
NOTE 8 - INVESTMENTS IN JOINT VENTURES AND OTHER COMPANIES
Investments in other companies consist of the following at December 31,
1995 and 1994, respectively:
Number of Historical Cost Basis
shares 1995 1994
--------- -------- --------
Teleconics, Inc. 590,000 $156,350 $156,350
Classic Video Theatre, Inc. 10,000 50,000 50,000
Future Communications, Inc. 27,010 207,608 207,608
-------- --------
413,958 413,958
Impairment of carrying value (413,758) (413,758)
-------- --------
Carrying value, which approximates
market value 200 200
The Parent Academy Network 330,402 10,000
-------- --------
$330,602 $ 10,200
======== ========
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 8 - INVESTMENTS IN JOINT VENTURES AND OTHER COMPANIES - Continued
All of the above securities are of companies which are publicly owned and
traded. These shares were obtained during 1992, subject to Rule 144 of the
Securities and Exchange Commission, which severely restricts the public trading
of these shares. As of December 31, 1994, the appropriate holding periods
restricting the sale of these securities had expired. (Note 1)
Investment in the joint venture, The Parent Academy Network, consists of
the amounts contributed by the Company to the formation and operations of this
venture. For federal income tax purposes, one-third (33%) of the joint venture
taxable income (loss) are included in the Company consolidated financial
statements.
Condensed financial information of the joint venture for 1995 is summarized
below:
Condensed financial information:
Assets $ 225,858
Liabilities $ -
Equity $ 225,858
Loss for the year $(143,249)
NOTE 9 - INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, "Accounting for
Income Taxes".
The following is a reconciliation between financial income and income
reported for federal tax purposes as of December 31, 1995, 1994 and 1993:
1995 1994 1993
---- ---- ----
Financial income before taxes $1,227,228 $ 906,966 $(950,771)
Book bad debt expense in excess
of tax bad debts due to the
specific write-off of accounts
for tax purposes and the reserve
method for financial reporting 28,000 - -
Other differences 221 - -
--------- ---------- ---------
1,255,509 908,397 (950,771)
Net operating losses utilized (770,574) (908,397) -
--------- ---------- ---------
Federal Taxable Income $ 484,935 $ - $(950,771)
========= ========== =========
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 9 - INCOME TAXES - Continued
The provision for income taxes consists of the following:
1995 1994 1993
---- ---- ----
Current:
Federal - current operations $129,510 $ - $ -
Federal - discontinued operations 46,782 - -
Deferred - - -
-------- ---------- ----------
Total Income Taxes $176,292 $ - $ -
======== ========== ==========
A reconciliation between the federal statutory income tax rate to the
Company's effective tax rate is shown below:
1995 1994 1993
------ ------ ------
Statutory tax rate 35.0% 35.0% 35.0%
Tax credits:
Net operating losses utilized (21.0) (35.0) (35.0)
------ ------ ------
14.0% 0.0% 0.0%
====== ====== ======
NOTE 10 - MORTGAGE PAYABLE
On January 29, 1995, ISI purchased an office condominium located in Lake
Park, Florida for $105,000. The consideration given was approximately $21,000
cash and a note payable to a financial institution for $84,000. The note is
payable in monthly installments of approximately $867, including interest at an
initial rate of 11.0%. The interest rate is adjustable on March 1, 2000 and is
calculated using the Average Weekly Yield of United States Treasury Securities
adjusted to a constant maturity of one year plus 3.5%. The minimum interest rate
for the life of the loan will be 11.0% and the maximum interest rate for the
life of the loan will be 17.0%. Additionally, the lender has a call option
during a 30-day period commencing on the tenth anniversary of the loan whereby
the entire unpaid balance can be called as due and payable within 90 days of the
date that the lender exercises the call option. The loan is secured by the
office condominium and the guarantee of Definition.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 10 - MORTGAGE PAYABLE - Continued
Future maturities of mortgages payable are as follows:
Year ending
December 31, Amount
------------ ---------
1996 $ 1,330
1997 1,484
1998 1,655
1999 1,847
2000 2,061
Thereafter 74,730
---------
Total $83,107
=========
NOTE 11 - EQUITY SECURITY TRANSACTIONS
Reverse Split -
In December 1994, pursuant to actions approved at a Shareholders' meeting,
Definition approved a one-for-25 reverse stock split, effective as of March 31,
1995. All outstanding shares and per share amounts shown in the accompanying
financial statements reflect the effects of this reverse stock split.
Preferred Stock -
On December 17, 1994, the Company's Board of Directors allocated 500,000
shares from its authorized Preferred Stock to establish Series A Convertible
Preferred Stock. The Series A Convertible Preferred Stock has a liquidation
value of $ 10.00 per share and is convertible at any time after the date of
issuance at the option of the Holder. The Preferred shares are convertible to
three (3) shares of the Company's common stock.
During the quarter ended September 30, 1995, the preferred shareholders of
the Company converted their holdings into common stock according to the
provisions of the agreements wherein the preferred stock was acquired.
Property and Equipment Acquisitions -
On August 18, 1994, the Company acquired certain television programs, film
footage (including, but not limited to, copyrighted programs), documentaries,
music blocks, educational and other productions and films from an unrelated
third party for a convertible note payable of $5,250,000. The note was for a
term of five (5) years and bore interest at 8.0% per annum. The note and accrued
but unpaid interest (aggregating $5,301,781) was converted into 165,789 shares
of Series A Preferred Stock and 262,500 post-split unregistered, restricted
shares of Common Stock, per the terms of the note agreement, on October 3, 1994.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 11 - EQUITY SECURITY TRANSACTIONS - Continued
Property and Equipment Acquisitions -
On August 18, 1994, the Company acquired certain cable, radio and
television broadcast equipment from WAQ-TV 19, Inc., a company controlled by a
shareholder of the Company, for a convertible note payable of $750,000. The note
was for a term of five (5) years and bore interest at 8.0% per annum. The note
and accrued but unpaid interest (aggregating $757,397) was converted into
197,360 shares of Series A Preferred Stock and 93,750 post-split unregistered,
restricted shares of Common Stock, per the terms of the note agreement, on
October 3, 1994.
On December 1, 1994, the Company acquired certain production studio
equipment and leasehold improvements from an unrelated third party for a
convertible note payable of $250,000. The note was for a term of five (5) years
and bore interest at 8.0% per annum. The note and accrued but unpaid interest
(aggregating $251,589) was converted into 7,018 shares of Series A Preferred
Stock and 12,500 post-split unregistered, restricted shares of Common Stock, per
the terms of the note agreement, on December 30, 1994.
On December 1, 1994, the Company acquired certain films, movies, selected
short subjects, computer equipment, cable TV and other broadcast equipment,
facilities and related assets (exclusive of the FCC broadcast license) from
Royal Lane Studios, Inc., a company controlled by a shareholder of the Company,
for a convertible note of $650,000 (which approximates the seller's founders
cost and estimated fair market value). The note was for a term of five (5) years
and bore interest at 8.0% per annum. The note and accrued but unpaid interest
(aggregating $653,916) was converted into 18,246 shares of Series A Preferred
Stock and 32,500 post-split unregistered, restricted shares of Common Stock, per
the terms of the note agreement, on December 30, 1994.
Additionally, on December 1, 1994, the Company acquired approximately 18 of
the available 24 hours of daily broadcast airtime transmitted under the FCC
broadcast license mentioned in the preceding paragraph for an unspecified future
period to be subsequently negotiated from WAQ-TV 19, Inc., a company controlled
by a shareholder of the Company, for a convertible note of $3,500,000. The note
was for a term of five (5) years and bore interest at 8.0% per annum.
Approximately $3,250,000 and accrued but unpaid interest, (aggregating
$3,269,616) was converted into 79,825 shares of Series A Preferred Stock and
243,750 post-split unregistered, restricted shares of Common Stock, per the
terms of the note agreement, on December 30, 1994.
NOTE 12 - RELATED PARTY TRANSACTIONS
In August and December 1994, the Company acquired certain broadcast assets
and airtime from companies controlled by a shareholder of the Company. The
transactions are more fully discussed in Note 11.
Accounts payable - affiliates includes noninterest bearing, demand advances
made to the Company or expenses paid on behalf of the Company by individuals and
other companies affiliated with the Company and/or its shareholders, including
related family members. The payable amounts are $641,879 and $663,474 as of
December 31, 1995 and 1994 respectively.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 12 - RELATED PARTY TRANSACTIONS - Continued
In 1995, as a result of the acquisition of broadcast airtime from WAQ-TV
19, a company (broadcast station) controlled by a shareholder of the Company
(Note 11), the Company uses the broadcast station as an agent for the sale of
the purchased airtime. The broadcast station also acts as the collection agent
for the Company and is paid a commission of 15% of gross sales generated by the
broadcast station. Additionally, the Company pays certain operating expenses on
behalf of the broadcast station. The financial statements include revenue from
WAQ-TV 19 of $303,315 and cost of sales of $366,000 in 1995.
The Company had acquired $1,575,000 in deferred advertising credits from an
unrelated third party for common stock. In an unrelated matter to the Company, a
stockholder/consultant to the Company acquired these shares of stock in a civil
lawsuit. As this third party was not performing under the terms of the
agreement, it was negotiated with the stockholder/consultant to either transfer
the stock back to the Company or provide the equivalent in airtime. As a result,
the Company received an additional six (6) hours of airtime from WAQ-TV 19 for a
period of fifteen years. This transaction provided the Company with the entire
24 hours of airtime of WAQ-TV 19. Accordingly, all advertising revenues are now
paid to the Company and the commission agreement mentioned earlier is no longer
valid.
The Company pays CHM Satellite Inc., a company sharing common management
with the Company, for consulting and professional services. For the year ending
December 31, 1995, the Company paid this affiliate approximately $103,215 for
consulting and professional fees. The Company also recognized revenue in the
amount of $32,000 from this affiliate for the year ending December 31, 1995.
The Company utilizes the video production services of Royal Lane Studios,
Inc., a company controlled by a shareholder of the Company. For the period ended
December 31, 1995, the Company paid or accrued approximately $493,390 for video
production services as a component of cost of sales. Also, the Company paid this
affiliate $34,000 in consulting fees for the year ended December 31, 1995.
During the period ended December 31, 1995, the Company has paid or accrued
approximately $40,110 for legal, accounting and consulting services to three
individuals who are either direct shareholders of the Company or affiliated with
corporate shareholders of the Company.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In August 1994, the Company entered into an agreement with an unrelated
third party corporation to provide investment banking and financial consulting
services. The agreement requires monthly fees of approximately $3,500, which is
deferred until such time that capital is raised for the Company as a direct
result of the agreement, the payment of all direct out-of-pocket expenses and
the payment of a separately negotiated "success" fee upon the consummation of a
transaction introduced by the consultant. Further, the agreement grants the
consultant a five-year option to acquire 4,000,000 (160,000 post-split) shares
of the Company's common stock at a price of $0.02 per share. The shares will
have a one-time registration right at the Company's expense and will have
"piggy-back" rights in the event of any other registration of Company
securities. This agreement was terminated in 1995.
<PAGE>
DEFINITION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 13 - COMMITMENTS AND CONTINGENCIES - Continued
In October 1995, the Company entered into a three year agreement with an
unrelated third party corporation to provide investment banking and financial
consulting services. The agreement requires an initial payment of $36,000 in
1995 and a payment of $3,000 per month during the second and third years of the
agreement. Further, the agreement grants the consultant warrants to acquire
200,000 shares of the Company's common stock at a price of $3.0625 per share
within five years.
In November 1995, the Company entered into a one year agreement with an
unrelated third party corporation to provide investment banking and financial
consulting services. The agreement grants the consultant a five year option to
acquire 100,000 shares of the Company's common stock at a price of $3.0625 per
share.
NOTE 14 - SUBSEQUENT EVENT
On January 8, 1996, the Company entered into an agreement with an unrelated
third party corporation to grant warrants to acquire 400,000 shares of the
Company's common stock at the following purchase prices: 100,000 shares at $4.00
per share; 100,000 shares at $5.00 per share; 100,000 shares at $7.00 per share,
and 100,000 shares at $8.00 per share. The terms of the agreement expire on
January 8, 2001.
NOTE 15 - PRIOR PERIOD ADJUSTMENTS AND ERROR CORRECTIONS
The additional paid-in capital balance at September 30, 1994, has been
restated from the amount previously reported to reflect a correction in the
amount reported as property and equipment. In accordance with generally accepted
accounting principles relating to monetary transactions, the property and
equipment have been adjusted to the fair market value of the consideration
surrendered to acquire the assets. The fair market value of the assets was
determined by discounting the debt issued to acquire the assets at a rate
comparable to the Company's incremental borrowing rate. As a result of this
valuation it was determined that the investments were overstated by $2,984,756.
Additional paid-in capital for the prior period will be adjusted by this amount
to reflect the overstatement of the property and equipment.
The assets as previously reported at December 31, 1994, and as it would
have appeared at December 31, 1995, if no adjustments were made is as follows:
1995 1994
---------- ----------
Property and Equipment:
Broadcast resource library $5,256,545 $5,254,045
Computer, production and broadcast
equipment 1,420,500 1,400,750
Building and improvements 358,284 250,000
Other 887 887
---------- ----------
$7,035,945 $6,905,682
========== ==========
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