UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
- --------------------------------------------------------------------------------
(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
- --------------------------------------------------------------------------------
Commission File Number: 33-30608
DEFINITION, LTD.
(Exact name of small business issuer as specified in its charter)
Nevada 75-2293349
(State of incorporation) (IRS Employer ID Number)
1334 Killian Drive, Lake Park, Florida 33403
(Address of principal executive offices)
(407) 844-7701
(Issuer's telephone number)
- --------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
September 10, 1996: 4,891,842
Transitional Small Business Disclosure Format (check one): YES NO X
<PAGE>
DEFINITION, LTD.
Form 10-QSB for the Quarter ended June 30, 1996
Table of Contents
Part I - Financial Information
Item 1 Financial Statements
Consolidated Financial Statements
Item 2 Management's Discussion and Analysis
Part II - Other Information
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
<PAGE>
DEFINITION, LTD.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
ASSETS
(unaudited) (audited)
June 30, December 31,
1996 1995
----------- -----------
Current assets:
Cash and cash equivalents $ 9,030 $ 177,450
Notes receivable 210,000 210,000
Accounts receivable - trade 5,731,852 3,129,480
Accounts receivable - other 10,520 10,520
----------- -----------
Total current assets 5,961,402 3,527,450
----------- -----------
Property and Equipment:
Broadcast resource library 3,015,536 2,985,536
Computer, production and broadcast equipment 819,785 814,896
Building and improvements 469,153 250,141
Other 2,380 887
----------- -----------
4,306,854 4,051,460
Accumulated depreciation (1,179,527) (878,390)
----------- -----------
Net property and equipment 3,127,327 3,173,070
----------- -----------
Other Assets:
Contracts and accounts receivable - long-term 1,667,692 1,876,430
Equity investment in joint venture and other
companies 376,493 330,602
----------- -----------
Total other assets 2,044,185 2,207,032
----------- -----------
TOTAL ASSETS $11,132,914 $8,907,552
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
(unaudited) (audited)
June 30, December 31,
1996 1995
----------- -----------
Current liabilities:
Current portion of long-term debt $ 1,330 $ 1,330
Accounts payable - trade 4,480 28,735
Accounts payable - affiliates 1,542,399 641,879
Federal income tax payable 647,214 184,787
----------- -----------
Total current liabilities 2,195,423 856,731
Long-term debt 81,094 81,777
---------- ----------
Total liabilities 2,276,517 938,508
Shareholders' equity:
Common stock, $.001 par value, 100,000,000
shares authorized,4,891,842 shares issued
and outstanding,respectively 4,892 4,892
Additional paid-in capital 9,650,422 9,650,422
Retained earnings 954,205 66,852
---------- ----------
10,609,519 9,722,166
Deferred advertising and broadcast airtime
credits (1,753,122) (1,753,122)
---------- ----------
Total shareholders' equity 8,856,397 7,969,044
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,132,914 $8,907,552
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995
(unaudited) (unaudited)
Three months Three months
ended ended
June 30, 1996 June 30, 1995
-------------- --------------
Revenues $ 1,121,660 $ 694,506
Cost of revenues 791,759 139,284
-------------- --------------
Gross Revenue 329,901 555,222
-------------- --------------
Operating expenses:
General and administrative 110,238 82,451
Depreciation and amortization 150,568 272,482
-------------- --------------
Total operating expenses 260,806 354,933
-------------- --------------
Income from operations 69,095 200,289
Other income (expenses):
Interest and other (1,968) (3,009)
-------------- --------------
Income before income taxes 67,127 197,280
Provision for income taxes 22,823 -
-------------- --------------
Net Income $ 44,304 $ 197,280
============== ==============
Income per weighted-average share of
common stock outstanding
Primary $0.18 $0.07
============== ==============
Fully diluted $0.18 $0.06
============== ==============
Weighted-average number of shares of
common stock outstanding
Primary 4,891,842 4,019,695
============== ==============
Fully diluted 4,891,842 4,891,537
============== ==============
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1996 and 1995
(unaudited) (unaudited)
Six months Six months
ended ended
June 30, 1996 June 30, 1995
-------------- --------------
Revenues $ 3,595,795 $ 1,052,506
Cost of revenues 1,691,305 300,665
-------------- --------------
Gross Revenue 1,904,490 751,841
-------------- --------------
Operating expenses:
General and administrative 254,935 111,990
Depreciation and amortization 301,137 339,767
-------------- --------------
Total operating expenses 556,072 451,757
-------------- --------------
Income from operations 1,348,418 300,084
Other income (expenses):
Interest and other (3,946) (3,420)
-------------- --------------
Income before income taxes 1,344,472 296,664
Provision for income taxes 457,120 -
-------------- --------------
Net Income $ 887,352 $ 296,664
============== ==============
Income per weighted-average share of
common stock outstanding
Primary $0.18 $0.07
============== ==============
Fully diluted $0.18 $0.06
============== ==============
Weighted-average number of shares of
common stock outstanding
Primary 4,891,842 4,019,695
============== ==============
Fully diluted 4,891,842 4,891,537
============== ==============
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEFINITION, LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
(unaudited) (unaudited)
Six months Six months
ended ended
June 30, 1996 June 30, 1995
-------------- --------------
Cash flows from operating activities:
Net income $ 887,352 $ 296,664
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 301,137 339,766
Net increase (decrease) in operating
assets and liabilities:
Accounts receivable (2,602,372) (755,440)
Contracts and long-term receivables 208,738 -
Accounts payable - trade (24,255) (101,074)
Accounts payable - affiliates 900,187 992
Accrued federal income tax 462,427 -
-------------- --------------
Net cash provided by operating activities 133,214 (219,092)
-------------- --------------
Cash flows from investing activities:
Investment in joint venture (45,891) -
Acquisition of property and equipment (255,394) -
-------------- --------------
Net cash used in investing activities (301,285) -
-------------- --------------
Cash flow from financing activities:
Net change in bank overdraft - 3,488
Decrease on long-term debt (349) (385)
Advances from affiliates - 248,237
-------------- --------------
Net cash provided by (used in)
financing activities (349) 251,340
-------------- --------------
Net increase (decrease) in cash (168,420) 32,248
Cash at beginning of period 177,450 11,227
-------------- --------------
Cash at end of period $ 9,030 $ 43,475
============== ==============
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Purchase of office condominium and
improvements with long-term mortgage
payable and advances from affiliates $ 219,012 $ 105,000
============== ==============
Exchange of inventory and broadcast $ - $ 232,966
airtime credits for barter trade credits ============== ==============
Reclassifications and offset of trade
accounts receivable and accounts payable
to affiliates $ - $ 181,053
============== ==============
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 1996 and 1995
(Unaudited)
Note 1. Interim Consolidated Financial Statements
In the opinion of management, the accompanying consolidated financial
statements for the six months ended June 30, 1996 and 1995, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial condition, results of operations and cash
flows of Definition, Ltd. and subsidiaries (the Company) and include the
accounts of the Company and all of its subsidiaries. All material
intercompany transactions and balances are eliminated.
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. It is
suggested that these unaudited financial statements be read in conjunction
with the financial statements and notes thereto included in the Companys
Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission for the year ended December 31, 1995. Certain reclassifications
and adjustments may have been made to the financial statements for the
comparative period of the prior fiscal year to conform with the 1995
presentation. The results of operations for the interim periods are not
necessarily indicative of the results to be obtained for the entire year.
Note 2. Subsequent Event
Subsequent to June 30, 1996, the Company issued to a consultant
190,000 shares of its Common Stock in consideration of consulting services
rendered by such consultant. Such shares were valued, in the aggregate, at
approximately $534,000, which amount will appear as a charge against the
Companys earnings during the period to end September 30, 1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The discussion below pertains to the financial condition of the
Company, including subsidiary operations, for the three months and six
months ended June 30, 1996, and 1995, as well as for each of the business
segments of the Company for such periods. The Companys business segments
are: (I) television segment, which includes the operation of a television
station, sales of copies of its film library to television stations and
production of infomercials and educational programs; (ii) multimedia
segment, which includes parental education programs, computer hardware
sales and cable television/internet operations; and (iii) import segment,
which involves the import and sale of objects of art and other items,
including furniture. Unless otherwise noted, references to the Company
include all of its subsidiaries.
Results of Operations
Three Months Ended June 30, 1996, versus Three Months Ended June 30,
1995. Revenues from the Companys operations for the three months ended
June 30,1996 (Current Period), were $1,121,660 (unaudited), a 62%
increase in revenues from the three months ended June 30, 1995 (Prior
Period), of $694,506 (unaudited). This substantial increase in revenues is
due to the Companys exploitation of its film library and development of
its Import Segment. However, during the Current Period, the Companys cost
of sales as a percentage of revenues increased significantly, from 20% in
the Prior Period to 70% in the Current Period. The increase in the
Companys cost of sales as a percentage of revenues is attributable
primarily to costs of duplicating for sale the Companys film library. The
Company expects its cost of sales as a percentage of revenues to remain at
its present level for the remainder of Fiscal 1996. The increase in cost of
sales caused the Company to report a lower gross profit of $329,901
(unaudited) in the Current Period compared to a gross profit of $555,222
(unaudited) for the Prior Period. The Companys operating expenses for the
Current Period were $260,806 (unaudited), a 27% reduction from the Prior
Period, when operating expenses were $354,933 (unaudited). This reduction
in operating expenses is attributable to a 45% decrease in depreciation and
amortization from the Prior Period, which offset a 33% increase in general
and administrative expenses during the Current Period. The Company expects
to continue to incur general and administrative expenses at similar levels
during the remainder of Fiscal 1996, or about 10% of revenues, until such
time as its revenues from the Television Segment return to prior levels
(see discussion below under Television Segment). Income from operations
for the Current Period was off 66% from the Prior Period, $69,095
(unaudited) from $200,289 (unaudited), while net income for the current
period fell 78%, $44,304 (unaudited) from $197,280 (unaudited). Subsequent
to June 30, 1996 and pursuant to a consulting agreement, the Company issued
to a consultant 190,000 shares of its Common Stock in consideration of
consulting services rendered on behalf of the Company. Such shares were
valued at $2.8125 per share, or $534,375, in the aggregate. Such amount
will appear in the Companys financial statements for the period to end
September 30, 1996, as an expense and will, therefore, significantly and
negatively impact the Companys net income for such interim period.
<PAGE>
Television Segment - Current Period versus Prior Period. Revenues of
the Television Segment for the Current Period were $104,360 (unaudited)
compared to revenues of $694,506 (unaudited) for the Prior Period.
Additionally, the Television Segments Current Periods reduced revenues is
even more dramatic when compared to its revenues for the three months ended
March 31, 1996, of $2,408,135 (unaudited). This dramatic decrease in
revenues of the Television Segment is attributable to the Companys
television station being removed from the local cable operators basic
package. The Company believes such removal to have been wrongful and a
breach of its agreement with the local cable operator; the Company is
attempting to have its stations signal reinstated to the local cable
operators basic package, but no prediction can be made as to whether or
when that would occur, if ever. Should the Company not return to the local
cable operators basic package within the very near future, it is possible
that the Company would institute legal proceedings against the local cable
operator to recover damages and to have its signal again included in the
basic cable package. There can be no prediction with respect to the outcome
of any such litigation, should litigation be commenced in this situation.
The Current Periods reduced revenues from sales of television advertising
is a result of an adjustment in the Companys pre-sold advertising, which
adjustment was negotiated as a result of the Companys television stations
having been removed from the local cable operators basic package. It is
not expected that revenues from sales of television advertising will return
to prior levels unless and until the Companys station returns to the local
cable operators basic package. However, in an effort boost advertising
sales in the near and short term, the Company will, in the immediate
future, place its television stations signal on the internet, which will
be available to internet participants worldwide. No prediction can be made
as to the level of success such a strategy will have. Also within the
Television Segment during the Current Period, sales of copies of the
Companys film library were dramatically down from the three months ended
March 31, 1996. The Company anticipates that sales of its film library will
continue to be inconsistent, with some reporting periods showing dramatic
increases while others dramatic decreases. Because sales of the film
library are expected to be sporadic in nature, the fluctuation of this
business within the Television Segment will, for the foreseeable future,
result in fluctuations in the Companys overall performance during any
particular reporting period.
Multimedia Segment - Current Period versus Prior Period. For the
Current Period, the Company had revenues of $117,300 (unaudited) compared
to no revenues for the Prior Period. Substantially all of the revenues from
the Current Period were derived from sales of computer hardware made in
connection with the Companys Parent Academy Network (the Network)
project currently underway in the Baltimore, Maryland, school system. The
Network provides interactive teaching materials to member schools, based
upon a video and computer platform, utilizing educational materials,
certain of which are, and will be, produced by the Companys Television
Segment. The Network attempts to bring parents, teachers and students
together in an educational learning partnership, all with a view to
increasing student attendance and parental involvement, as well as reducing
delinquency and crime in participating schools and their respective
communities. The Company, through a subsidiary, is the exclusive provider
of technical support and consultant to the Network. There are currently six
schools participating in the Network, and the Company is to be paid for its
services to each such school on a monthly basis. However, the Company has
not been paid currently by every participating school, and, in addition,
has had no communication from its partner in the Network. The Company
expects to be forced to institute litigation to recover some $323,000 it
has invested in the Network, as well as for an accounting, because of the
lack of communication from its Network partner. During the remainder of
Fiscal 1996, the Company expects to generate additional revenues in the
Multimedia Segment through sales of design services relating to internet
pages and through the exploitation of a concept known as an Internet
Business Center. There is no assurance that such activities will generate
significant cash flow during the remainder of Fiscal 1996.
Import Segment. The Import Segment is a newly operating business
segment. During the Current Period, the Import Segment had revenues of
$900,000 (unaudited). The Import Segment conducts is business by importing
works of art and other items of a cultural nature, then selling such
merchandise in cooperation with Southebys Auction House and Hoffstra
University, Hempstead, New York. The Company expects that it will report
increasing revenues attributable to the Import Segment for the three months
to end September 30, 1996, and for the remainder of Fiscal 1996. Further,
it is expected that the Company will gain significant liquidity during the
period to end September 30, 1996, as result of the Import Segments
operations, although there is no assurance that such will be the case.
<PAGE>
Six Months Ended June 30, 1996, versus Six Months Ended June 30, 1995.
Overall, revenues from the Companys operations for the six months ended
June 30,1996 (Interim 1996), were $3,595,795 (unaudited), a
over-threefold increase in revenues from the six months ended June 30, 1995
(Interim 1995), of $1,052,506 (unaudited). This substantial increase in
revenues is due to the Companys exploitation of its film library and
development of its Import Segment. However, during the Interim 1996, the
Companys cost of sales as a percentage of revenues increased
significantly. The increase in the Companys cost of sales as a percentage
of revenues is attributable primarily to costs of duplicating for sale the
Companys film library. In spite of the increase in cost of sales, the
Company to report a higher gross profit of $1,904,490 (unaudited) for
Interim 1996 compared to a gross profit of $751,841 (unaudited) for Interim
1995. The Companys operating expenses for Interim 1996 were $556,072
(unaudited), a 19% increase from Interim 1995, when operating expenses were
$451,757 (unaudited). This increase in operating expenses is commensurate
with the Companys overall increase in revenues achieved during Interim
1996. General and administrative expenses during Interim 1996 were $254,935
(unaudited), a doubling of similar expenses incurred during Interim 1995 of
$111,990 (unaudited). The Company expects to continue to incur general and
administrative expenses at similar, or slightly higher, levels during the
remainder of Fiscal 1996, and until such time as its revenues from the
Television Segment return to prior levels. Income from operations for
Interim 1996 was up over 400% from Interim 1995, while net income for
Interim 1996 was up approximately 300% from Interim 1995, $887,352
(unaudited) from $296,664 (unaudited). The Company expects that income from
operations and net income results from the second half of Fiscal 1996 will
not keep pace with the levels achieved during Interim 1996.
Television Segment - Interim 1996 versus Interim 1995. Revenues from
the Television Segment for Interim 1996 were $2,512,495 (unaudited), a more
than 200% increase in revenues from Interim 1995. Approximately 80% of such
revenues were derived from sales of its film library to a single European
customer. It is expected that the trend of large sales to few customers
will continue for the foreseeable future. The Company also expects that any
future sales of its film library will be made to customers in Europe,
although the Company has continued to market its film library to domestic
television stations and expects to experience increased sales domestically
in the near future. However, no assurance can be made in this regard.
Multimedia Segment - Interim 1996 versus Interim 1995. For Interim
1996, the Multimedia Segment had revenues of $183,300 (unaudited) compared
to revenues of $13,000 (unaudited) for Interim 1995. Substantially all of
the revenues from Interim 1996 were derived from sales of computer hardware
made in connection with the Network project currently underway in the
Baltimore, Maryland, school system. During the remainder of Fiscal 1996,
the Company expects to generate additional revenues in the Multimedia
Segment through sales of design services relating to internet pages and
through the exploitation of a concept known as an Internet Business
Center. There is no assurance that such activities will generate
significant cash flow during the remainder of Fiscal 1996.
Segment Information - Domestic/Foreign Revenues. During Interim 1996,
approximately 60% of the Companys revenues were derived from a single
foreign customer, World Wide Trading of Venice, Italy, while the remainder
of its revenues were derived from domestic sources. Approximately 25% of
the Companys revenues during Interim 1996 were derived from a single
domestic customer, Da Verona, Inc., Corpus Christi, Texas.
<PAGE>
Liquidity and Capital Resources
June 30, 1996. Since December 31, 1995, the Companys position of
liquidity has deteriorated. At June 30, 1996, the Companys cash and cash
equivalents were $9,030 (unaudited), down from $177,450 (audited) at
December 31, 1995. However, the Companys overall working capital position
was improved at June 30, 1996, to $3,765,979 (unaudited), compared to
working capital of $3,489,557 (unaudited) at March 31, 1996, and $2,670,719
(audited) at December 31, 1995. This increase in working capital is
attributable to a 68% increase in accounts receivable, which more than
offset the decrease in cash and cash equivalents from December 31, 1995, to
June 30, 1996. As described above, the Companys working capital available
for use in operations was significantly impaired at June 30, 1996, and
continues to be so impaired currently, due primarily to the loss of
revenues from sales of television advertising occurring during the six
months ended June 30, 1996. The Company expects that its Import Segment
will, during the last part of September 1996, begin to generate significant
positive cash flow, which will alleviate the existing lack of liquidity of
the Company. The Import Segment expects to derive its positive cash flow
based on an agreement (currently oral in nature, which is expected to be
reduced to writing) with an unaffiliated third party whereby the Company is
to receive approximately $10 (market value) of mostly Italian merchandise
for every $1 of Company accounts receivable, up to $20,000,000. The Company
believes that this credit exchange arrangement will allow the Company to
generate cash on a very short-term basis, rather that having to wait one to
two years for its accounts receivable to mature and be collected. To date,
approximately $2,000,000 of merchandise has been received by the Company
under such arrangement.
Cash Flow from Operating Activities. The Companys operations provided
$133,214 (unaudited) in cash for Interim 1996, substantially all of which
cash was provided by the Television Segment. Management expects that cash
flows from operating activities will increase during the remainder of
Fiscal 1996 and the first half of Fiscal 1997. It is expected that the
Import Segment will be the primary source of such increased cash flows, if
such an increase is achieved.
Cash Flow from Investing Activities. Investing activities of the
Company used cash in Interim 1996 of $301,285 (unaudited). $255,394
(unaudited) of such amount was used for purchases of property and
equipment, of which $45,891 (unaudited) was invested in the Companys
Parent Academy Network (the Network) project. During the remainder of
Fiscal 1996, the Company expects to purchase additional property and
equipment as needed, which purchases are expected to be comparable in
nature and amount as occurred during Interim 1996, while the Company does
not anticipate further investment in the Network, unless and until it is
able to reestablish a working relationship with its partner in the Network.
No return on such investment is expected to be received by the Company in
the foreseeable future.
Cash Flow from Financing Activities. The Company had no significant
financing activity during Interim 1996. The Company does not currently
intend to seek any financing sources during the remainder of Fiscal 1996.
Nevertheless, should an opportunity relating to financing arise, it is
possible that the Company would avail itself of such an opportunity.
Capital Expenditures
The Company does not expect to acquire any capital assets in the
foreseeable future. However, the Company has announced that its Board of
Directors has authorized exploratory discussions relating to a business
combination transaction with Dallas, Texas-based TeleWorld. These
discussions are very preliminary in nature and there can be no prediction
made with respect to the result of such discussions.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed during the three
months ended June 30, 1996.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: September 13, 1996 DEFINITION, LTD.
By: /s/ Gerald Beeson
Gerald Beeson
Executive Vice President,
Chief Executive Officer and
Principal Financial Officer
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