ENTERTAINMENT INTERNATIONAL LTD. 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Year Ended December 31, 2000 Commission File No. 001-14646
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Entertainment International, Ltd.
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(Exact Name of Registrant as Specified in Its Charter)
New York 06-1113228
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(State of Incorporation) (I.R.S. Employer Identification No.)
7380 Sand Lake Road, Suite 350, Orlando, Florida 32819
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(Address of principal executive offices) (Zip Code)
(407) 351-0011
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Registrant's Telephone Number
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 29, 2000 was $6,504,558 using the closing bid
price of $0.1225 on March 29, 2001.
The number of shares of Common Stock outstanding as of March 29, 2001
was 69,597,282.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
A list of Exhibits to this Annual Report on Form 10-K begins on page
12.
ENTERTAINMENT INTERNATIONAL LTD.
2000 FORM 10-K REPORT
TABLE OF CONTENTS
PART I Page
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Item 1 Business .............................................................. 1
Item 2. Properties ............................................................ 1
Item 3. Legal Proceedings ..................................................... 1
Item 4. Submission Of Matters To A Vote Of Security Holders ................... 2
PART II
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Item 5. Market For Registrant's Common Equity And Related Stockholder Matters.. 2
Item 6. Selected Financial Data ............................................... 3
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations ................................... 3
Item 8 Financial Statements And Schedules .................................... 7
Item 9. Changes In And Disagreements With Accountants On Return Accounting
And Financial Disclosure .............................................. 7
PART III
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Item 10. Directors And Executive Officers Of The Registrant .................... 8
Item 11. Executive Compensation ................................................ 9
Item 12. Security Ownership Of Certain Beneficial Owners And Management ........ 10
Item 13. Certain Relationships And Related Transactions ........................ 11
Item 14. Exhibits, Financial Statements And Reports On Form 8-K ................ 12
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The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Annual Report contains certain forward-looking
statements and information that are based on the beliefs of management as well
as assumptions made by and information currently available to management. The
statements contained in this Annual Report relating to matters that are not
historical facts, are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, general economic conditions, government regulation,
competition and customer strategies, capital deployment, the impact of pricing
and reimbursement and other risks and uncertainties. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected.
PART I
Item 1. Business
General
Entertainment International, Ltd. (the "Company") operated
lighter-than-air airships, which were used to advertise and promote the products
and services of the Company's clients through 1995. Since that time, the Company
generally has had no operations and no opportunity to commence operations in the
airship industry in which it had conducted its business operations. As a result,
the Company has experienced significant losses and negative cash flow since 1996
and has been funded by affiliated entities.
The Company's strategy for the future is to acquire new business
operations or merge (through a direct, indirect, reverse or other form of
merger) with an entity that has ongoing business operations. In connection with
this strategy, the Company changed its name to "Entertainment International,
Ltd." to reflect the new direction for the Company's operations, which the
Company currently believes will involve the entertainment industry or an
Internet-based business. Except as set forth below, as of the date hereof, the
Company has no agreements with any third party to effect any such acquisition or
merger, and no assurances can be given that any such acquisition or merger will
in fact be effected in the future or that any such transaction will involve an
entity in either of these industries.
On March 28, 2000, the Company signed a letter of intent to acquire
WeBeCD.com, Inc., a private New York software company whose technology transfers
regular CD's, DVD's and other electronic media into intelligent e-commerce
vehicles. Although a letter of intent has been signed between the parties, no
binding agreement or commitment has yet been executed. Any such agreement or
commitment that is reached may be on terms that substantially differ from those
set forth in the letter of intent. Consummation of any such agreement or
commitment would be subject to the satisfaction of various conditions and there
can be no assurance that any transaction will occur.
The Company was incorporated in New York on June 9, 1982 and commenced
operations in August 1985 following the completion of the Company's initial
public offering in June 1985.
The Company's principal executive offices are located at 7380 Sand Lake
Road, Suite 350, Orlando, Florida 32819 and its telephone number is (407)
351-0011. The Company also maintains a small office in New York, New York.
Item 2. Properties
Since May 7, 1996, the Company has subleased approximately 500 square
feet of office space from Trans Continental Airlines, Inc. on a month-to-month
basis for monthly rental payments of approximately $770.
Item 3. Legal Proceedings
From time to time, the Company is a party to various legal proceedings
arising in the ordinary course of business. As of March 29, 2001 the Company was
not a party to any legal proceeding which would have a material adverse effect
on its financial condition.
On April 7, 1999, U.S. Airship Leasing, Inc. f/k/a WDL Airship, Inc.
("US Airship") commenced a suit in the Florida Circuit Court of the Ninth
JudicialCircuit, Orange County, entitled U.S. Airship Leasing, Inc. f/k/a WDL
Airship,Inc. v. Louis J. Pearlman, Airship International Ltd. Corporation and
Trans Continental Airlines Travel Services, Inc. a/k/a Trans Continental
Airlines Service, Inc. US Airship sought damages of $1,488,613.90 plus interest,
costs and other relief. On
April 8, 1999, WDL Luftschiffgesellschaft MBH ("WDL"), an affiliate company,
commenced a suit in the same court, entitled WDL Luftschiffgesellschaft MBH v.
Airship International Ltd. and Louis J. Pearlman. The suit sought $148,558.49 in
damages plus prejudgment interest, costs and other relief. These cases were both
settled on July 28, 1999 for $1,030,000.
In June 1999, Gulf Oil Limited Partnership f/n/a Catamount Petroleum
Limited Partnership ("Gulf Oil"), commenced an action in the United States
District Court, District of Massachusetts against the Company, captioned Gulf
Oil Limited Partnership f/n/a Catamount Petroleum Limited Partnership, by its
General Partner, Catamount Management Corporation vs. Entertainment
International Ltd. f/n/a Airship International Ltd. The parties reached a
settlement on December 16, 1999, pursuant to which the Company paid to Gulf Oil
$100,000 and issued to Gulf Oil 1,500,000 shares of the Company's common stock.
Item 4. Submission Of Matters To A Vote Of Security Holders
The Company held a Special Meeting of Stockholders on December 28,
2000. At the Special Meeting, the Company's Stockholders ratified and approved a
one-for-twenty reverse split of the Company's issued and outstanding capital
stock. A total of 57,308,322 votes were cast in favor of the Reverse Split and a
total of 1,942,563 votes were cast against the reverse split (with 90,644
abstentions). The Company has not yet effected the Reverse Split.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock currently trades under the symbol "ENTI."
Prior to the Company changing its name to "Entertainment International Ltd.,"
the Company's Common Stock and Preferred Stock traded under the symbols "BLMP"
and "BLMPP," respectively.
Since July 5, 1995 (when the Company's securities were de-listed from
the Nasdaq SmallCap Market) the Company's Common Stock (and Preferred Stock,
until its conversion into Common Stock in June 1998 pursuant to the vote of the
Company's shareholders at the Company's Annual Meeting) have traded on the
over-the-counter market. The price ranges presented below represent the highest
and lowest quoted bid prices during each quarter for 1999 and 2000 reported by
the National Quotation Bureau, Inc. and Nasdaq. The quotes represent prices
between dealers and do not reflect mark-ups, markdowns or commissions and
therefore may not necessarily represent actual transactions.
Common Stock
Year Period Bid Information
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High Low
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1999 1st Quarter $.39 $.09
2nd Quarter $.455 $.12
3rd Quarter $.34 $.165
4th Quarter $.195 $.10
2000 1st Quarter $.745 $.12
2nd Quarter $.26 $.245
3rd Quarter $.27 $1.95
4th Quarter $.285 $.09
2
As reported by the Nasdaq OTC Bulletin Board, on March 29, 2001 the
closing bid price of the Common Stock was $0.1225 per share.
As of March 29, 2001 there were 1,702 holders of record of the
Company's Common Stock.
No dividends were declared or paid on the Common Stock during the
foregoing periods and the Company does not anticipate paying any dividends on
its Common Stock in the foreseeable future.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction
with the Company's financial statements and related notes and Management's
Discussion and Analysis of Financial Condition and Results of Operation
appearing elsewhere herein.
Operating Statement Data:
2000 1999 1998 1997 1996
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Gross $- $- $- $- $-
Revenues.................
Net loss................. $(1,646,000) $(4,569,000) $(996,000) $(2,294,000) $(2,506,000)
Net earnings (loss) per
share.................... $(0.02) $(0.07) $.10 $(.09) $(0.10)
Balance Sheet Data:
At December 31,
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2000 1999 1998 1997 1996
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Total Assets..................... $ 1,095,000 $1,952,000 $3,945,000 $4,374,000 $4,496,000
Long-Term Obligations............ - - $10,000 $4,080,000 $3,016,000
Obligations under capital lease.. $231,000 $839,000 $1,692,000 $2,477,000 $3,158,000
Total Liabilities................ $ 5,407,000 $4,832,000 $4,765,000 $22,057,000 $18,334,000
Stockholders' deficit............ $(4,312,000) $(2,880,000) $(820,000) $(17,683,000) $(13,838,000)
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation
Note Regarding Forward-looking Information
Certain statements under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Annual Report constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the Company's limited operating
history over
3
the past five years, its ability to attract acquisition candidates, general
economic and business conditions with respect to the Internet and online
commerce, changes in government regulations, competition and the ability of the
Company to implement its business strategy and other risks discussed in section
entitled "Factors That May Affect Our Business, Financial Condition and Results
of Operation" in this Form 10-K.
Forward-looking statements speak only as of the date of this Form 10-K.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were to update or correct a forward-looking statement,
investors and others should not conclude that the Company will make additional
updates or corrections thereafter.
The following discussion should be read in conjunction with the
financial statements contained in Item 8 of Part IV of this Form 10-K.
Overview
The Company commenced operations in August 1985 following the
completion of the Company's initial public offering in June 1985. Historically,
substantially all of the Company's revenues were derived from the operation of
the airships pursuant to aerial advertising contracts with its clients. Since
1995, the Company generally has had no operations and no opportunity to commence
operations in the airship industry in which it had conducted its business
operations. As a result, the Company has experienced significant losses and
negative cash flow since 1995 and has been funded by affiliated entities. The
Company's strategy for the future is to acquire new business operations or
merge(through a direct, indirect, reverse or other form of merger) with an
entity that has ongoing business operations.
In connection with this strategy, the Company changed its name in
October 1998 to "Entertainment International, Ltd." to reflect the new direction
for the Company's operations, which the Company currently believes will involve
the entertainment industry or a media/Internet-based business. On March 28,
2000, the Company signed a letter of intent to acquire WeBeCD.com, Inc., a
private New York software company whose technology transfers regular CD's, DVD's
and other electronic media into intelligent e-commerce vehicles.
Although a letter of intent has been signed between the WeBeCD.com
parties, no binding agreement or commitment has yet been executed. Any such
agreement or commitment that is reached may be on terms that substantially
differ from those set forth in the letter of intent. Consummation of any such
agreement or commitment would be subject to the satisfaction of various
conditions and there can be no assurance that any transaction will occur.
On January 12, 2001, the Company signed a stock purchase agreement to
purchase all of the outstanding shares of EMG, including options and warrants
convertible into common stock, for a negotiated number of shares of the
Company's common stock for each one share of EMG stock owned. The agreement
called for the issuance of up to 4,000,000 shares of the Company's common stock
based on achieving certain levels of revenue of up to $23.5 million for the
fiscal year ended December 31, 2001. On March 16, 2001, the Company terminated
its proposed acquisition of EMG due to EMG's failure to meet in a timely fashion
in accordance with the terms of the stock purchase agreement various conditions
of closing, including among others, to provide the required financial
statements, opinions of counsel, good standing certificates and agreements with
various third parties, all as specified in the stock purchase agreement.
4
The Company has been approached by entities which have expressed an
interest in effecting an acquisition or merger of the Company primarily due to
the fact that the Company is a publicly-held corporation. In addition, the
Company has incurred Net Operating Losses ("NOLs") which, to a lessor degree,
may make the Company attractive to a prospective suitor.
Year Ended December 31, 2000, as compared to Year Ended December 31, 1999
Overall Financial Situation. The Company had a stockholder's deficit at
December 31, 2000 in the amount of $4,312,000, an increase of $1,432,000 from
the stockholders' deficit at December 31, 1999 of $2,880,000. This increase is
primarily due to the net loss of $1,646,000 offset by the issuance of common
stock totaling $214,000 of debt repayment. The Company did not have revenues
during 2000 or 1999. Operating costs were substantially lower in 2000 than in
1999 by approximately $168,000 or 67%. In addition, selling general and
administrative expenses decreased significantly from 1999 by $1,318,000 or 77%,
resulting in a loss from operations of $480,000 for 2000. Interest expense
decreased by more than $349,000 or 52% for 2000 from 1999 due to the stock
issued for the arrangement of continued financing from related parties in 1999.
Results of Operations.
The Company did not have any revenues from operations during 2000 or
1999.
Operating costs for 2000 were $82,000, a decrease of $168,000 or 67%
compared to operating costs of $250,000 for 1999, primarily as a result of the
elimination of depreciation expense on assets reclassified as held for sale.
Selling, general and administrative costs for 2000 were $398,000, a
decrease of $1,318,000 or 77% compared to costs of $1,716,000 for 1999. This
decrease is primarily attributable to common stock issued as employee
compensation in the amount of $616,375 and as consulting compensation in the
amount of $574,000 during 1999.
Interest expense for 2000 was $328,000, a decrease of $349,000 or 52%
from interest expense of $677,000 in 1999. This decrease was due to the common
stock issued for the arrangement of continued financing during 1999 from Trans
Continental Airlines, Inc.
Year Ended December 31, 1999, as compared to Year Ended December 31,
1998
Overall Financial Situation. The Company had a stockholder's deficit at
December 31, 1999 in the amount of $2,880,000, an increase of $2,741,000 from
the stockholders' deficit at December 31, 1998 of $139,000. This increase is
primarily due to the net loss of $4,569,000 offset by the issuance of common
stock totaling $1,697,000 in the form of employee compensation, consultant
services and for the arrangement of continued financing from related parties.
The Company did not have revenues during 1999 or 1998. Operating costs were
substantially higher in 1999 than in 1998 by approximately $180,000 or 257%. In
addition, selling general and administrative expenses increased significantly
from 1998 by $1,182,000 or 221%, resulting in a loss from operations of
$1,966,000 for 1999. Interest expense increased by more than $135,000 or 25% for
1999 from 1998 due to the stock issued for the arrangement of continued
financing from related parties in 1998.
Results of Operations.
The Company did not have any revenues from operations during 1999 or
1998.
Operating costs for 1999 were $250,000, an increase of $180,000 or 257%
compared to operating costs of $70,000 for 1998, primarily as a result of a
substantial credits that were posted to accounts payable during 1998.
5
Selling, general and administrative costs for 1999 were $1,716,000, an
increase of $1,182,000 or 221% compared to costs of $534,000 for 1998. This
increase is primarily attributable to common stock issued as employee
compensation in the amount $616,375 and as consulting compensation in the amount
of $574,000 during 1999.
Interest expense for 1999 was $667,000, an increase of $135,000 or 25%
from interest expense of $542,000 in 1998. This increase was due to the common
stock issued for the arrangement of continued financing during 1998 from Trans
Continental Airlines, Inc. ("Trans Continental") and Louis J. Pearlman.
Liquidity and Capital Resources
As shown in the accompanying financial statements, the Company has
experienced significant operating losses and negative cash flow from operations
in recent years and has an accumulated deficit of $55,996,000 at December 31,
2000. During the years ended December 31, 2000, 1999, and 1998, the Company did
not generate any revenues from airship operations. The Company also reported net
losses of $1,646,000, $4,569,000, and $996,000 for the years ended December 31,
2000, 1999, and 1998, respectively and had working capital deficiencies of
$4,316,000 and $4,815,000 at 2000 and 1999, respectively. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan to improve the financial position and operations with
the goal of sustaining the Company's operations for the next twelve months and
beyond include:
Arranging with Trans Continental or other related parties to provide
funds on a monthly basis as a loan, and separately, acquiring assets and
operations of one or more entities, with which the Company has been in
negotiation. The expectation is that such a business combination, if completed,
would provide additional cash flow and net income to the Company.
While the Company believes that its plans for additional funding or for
obtaining a possible business combination have a reasonable possibility of
improving the Company's financial situation and ensuring the continuation of its
business, there can be no assurance that the Company will be successful in
carrying out its plans and the failure to achieve them could have a material
adverse effect on the Company. On March 28, 2000, the Company signed a letter of
intent to acquire WeBeCD.com, Inc., a private New York software company whose
technology transfers regular CD's, DVD's and other electronic media into
intelligent e-commerce vehicles. Although a letter of intent has been signed
between the parties, no binding agreement or commitment has yet been executed.
Any such agreement or commitment that is reached may be on terms that
substantially differ from those set forth in the letter of intent. Consummation
of any such agreement or commitment would be subject to the satisfaction of
various conditions and there can be no assurance that any transaction will
occur.
During 2000, the Company's operations used $789,000 compared to using
approximately $1,827,000 during 1999. This decrease in cash used by operations
was primarily attributable to the net loss during 1999 and decrease in accounts
payable during 1999 in the amount of $818,000.
During 1999, the Company's operations used $1,827,000 compared to using
approximately $1,319,000 during 1998. This decrease in cash used by operations
was primarily attributable to the net loss during 1999 in the amount of
$4,569,000 and a reduction in accounts payable during 1999 in the amount of
$818,000. This was offset by noncash transactions during 1999 for impairment of
long lived assets in the amount of $1,677,000 and the issuance of common stock
as compensation and services in the amount of $1,408,000.
6
Cash was provided by financing activities in the amount of $546,000 and
$1,828,000 in 2000 and 1999, respectively. Cash provided by financing activities
in 2000, 1999 and 1998 was primarily from the working capital financing provided
by Trans Continental.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires recognition of the fair value of derivatives in the statement of
financial position, with changes in the fair value recognized either in earnings
or as a component of other comprehensive income dependent upon the nature of the
derivative. SFAS No. 133 was adopted by the Company in 1999 and has not had a
material effect on the consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). The Company adopted SAB
101 in 2000. The Company does not believe that the adoption of SAB 101 will have
a material effect on its financial position or results of operations.
Inflation
Since the formation of the Company in August 1985, the rate of
inflation has remained low and the cost of the Company's operations has not been
significantly affected by inflationary trends in the economy.
Item 8. Financial Statements and Schedules
The report of the Company's Independent Auditor, the Company's
financial statements and notes to financial statements appear herein commencing
on Page F-1.
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial
None.
7
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information, as of December 31, 2000,
concerning each director and executive officer of the Company.
Positions with
Name Age the Company Position Held Since
- ---- --- ----------- -------------------
Louis J. Pearlman 46 Chairman of the June 1982
Board of Directors,
President and Chief
Executive and
Operating Officer and
Treasurer
James J. Ryan 52 Director July 1986
The following sets forth the business experience of each director,
executive officer, including principal occupations, at present and for at least
the past five years.
Louis J. Pearlman has been Chairman of the Board, President, Chief
Executive and Operating Officer and Treasurer of the Company, and a Director of
the Company, since June 1982. Since November 1976, Mr. Pearlman has been
President and Chief Operating Officer, a director and a 21% shareholder of Trans
Continental Airlines, Inc. ("Trans Continental"). Mr. Pearlman currently devotes
approximately 50% of his time to the affairs of Trans Continental and the
remainder of his time to the affairs of the Company. See "Certain Relationships
and Related Transactions."
James J. Ryan has been a director of the Company since July 1986. Mr.
Ryan served as Executive Director of Sedgwick Aviation of North America, an
international insurance brokerage firm, from 1994 until 1999. Until 1994, for
more than 20 years, he had been employed with Alexander and Alexander Inc., an
international insurance brokerage firm (and its predecessor firm), where he most
recently held the title of Senior Vice President of the Aviation and Aerospace
Division.
The Company's directors are elected for a period of one year and until
their successors are duly elected and qualified. There are currently two members
of the Board of Directors. Alan A. Siegel resigned as director of the Company as
of June 1, 2000.
To the knowledge of management of the Company, except as set forth
above, no director of the Company holds any directorship in any other company
with a class of securities registered pursuant to Section 12, or subject to the
requirements of Section 15(d), of the Securities Exchange Act of 1934 or in any
company registered as an investment company under the Investment Company Act of
1940.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and persons who own more
than ten percent of a registered class of the Company's equity securities to
file certain reports regarding ownership of, and transactions in, the Company's
securities with the Securities and Exchange Commission (the "SEC"). These
officers, directors and stockholders are also required by SEC rules to furnish
the Company with copies of all Section 16(a) reports that are filed with the
SEC. Based solely on a review of copies of such forms
8
received by the Company, and written representations received by the Company
from certain reporting persons, the Company believes that for the year ended
December 31, 2000 all Section 16(a) reports required to be filed by the
Company's executive officers, directors and 10% stockholders were filed on a
timely basis.
Item 11. Executive Compensation
The following table summarizes all compensation earned by or paid to
the Company's Chief Executive Officer for services rendered in all capacities to
the Company for the three years ended December 31, 2000 and all officers who
earned over $100,000 (the "Named Executive Officers"). No other executive
officer's or employee's annual salary and bonus exceeded $100,000 during the
Company's past three fiscal years.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
----------------------------------------------------------- ----------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options/SARs(#)
- --------------------------- ---- ---------- --------- ---------------- ---------------
Louis J. Pearlman 2000 -- -- -- --
Chairman, President, Chief 1999 -- -- (1) --
Executive and Operating Officer and 1998 -- -- -- --
Treasurer
Alan A. Siegal 2000 -- -- -- --
Secretary and 1999 -- -- (2) --
Director 1998 -- -- -- --
- -------------------
(1) Represents 3,000,000 shares of the Company's common stock issued to Mr.
Pearlman in consideration of services rendered and the waiver and deduction of
salary payable by the Company.
(2) Represents 1,000,000 shares of the Company's common stock issued to Mr.
Siegal in consideration of services rendered and the waiver and deduction of
salary payable by the Company. Mr. Siegal resigned as a director of the Company
effective as of June 1, 2000.
Director's Compensation
Directors who are not employees of the Company are compensated at a
rate of $500 for each meeting of the full Board of Directors which they attend
in person, up to a maximum of $2,000 in any one year, plus expenses for
attending such meetings. Officers are appointed annually by the Board of
Directors and serve at the discretion of the Board.
OPTIONS/SAR GRANTS IN 2000
There were no option grants in 2000.
AGGREGATE OPTION EXERCISES IN 2000 AND
2000 FISCAL YEAR-END OPTION VALUES
There were no option exercises in 2000.
9
Compensation Committee Interlocks and Insider Participation
The Board of Directors of the Company does not have a compensation
committee. The Board of Directors determines executive compensation, based on
corporate performance and market conditions.
Employment Agreements
The Company had an employment agreement with Louis J. Pearlman which
expired in 1994. The Company and Mr. Pearlman have not entered into a new
employment agreement. Mr. Pearlman's compensation is determined by the Company's
Board of Directors, of which Mr. Pearlman is the Chairman.
1994 Employee Share Purchase Plan
The Company has an employee share purchase plan (the "Plan") for
employees of the Company and any present or future "subsidiary corporations."
The Company intends for the Plan to be an "employee stock purchase plan" as
defined in Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code"). The Plan, approved by the Company's shareholders on April 11, 1995, was
effective November 1, 1994. All employees are eligible to participate in the
Plan, except that the Company's appointed committee may exclude any or all of
the following groups of employees from any offering: (i) employees who have been
employed for less than 2 years; (ii) employees whose customary employment is 20
hours or less per week; (iii) employees whose customary employment is not more
than 5 months in any calendar year; and (iv) highly compensated employees
(within the meaning of Code Section 414(q)). The shares issuable under the Plan
shall be common shares of the Company subject to certain restrictions up to a
maximum of 1,000,000 shares. The committee shall determine the length of each
offering but no offering may exceed 27 months. The option price for options
granted in each offering may not be less than the lessor of (i) 85% of the fair
value of the shares on the day of the offering, or (ii) 85% of the fair market
value of the shares at the time the option is exercised.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the number and percentage of shares of
Common Stock beneficially owned, as of April 11, 2000, by (i) all persons known
by the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, (ii) each of the Company's directors, (iii) the
Company's Chief Executive Officer and the Named Executive Officers, and (iv) all
executive officers and directors of the Company as a group (3 persons).
Name and Address Number of Shares Percent of Class
---------------- ---------------- ----------------
Louis J. Pearlman(1)(2)(4).................. 18,469,153 25.79%
James J. Ryan(1)(3)......................... 530,000 *
Trans Continental Airlines, Inc.(4)... 7,666,862 11%
All officers and directors as a group
(2 persons)............................... 18,999,153 26.35%
- ------------------------
* Less than 1%.
(1) The business address of each person is c/o Entertainment International Ltd.,
7380 Sand Lake Road, Suite 350, Orlando, Florida 32819.
10
(2) Represents: (i) 8,802,291 shares of the Company's common stock; (ii)
warrants exercisable for 2,000,000 shares of the Company's Common Stock; and
(iii) 7,666,562 shares of the Company's common stock owned of record by Trans
Continental Airlines, Inc. ("Trans Continental"). Mr. Pearlman is the President
and Chief Operating Officer, a director and an approximately 21% owner of the
issued and outstanding shares of Trans Continental.
(3) Includes options to purchase 500,000 shares of the Company's common stock.
(4) Represents: (i) 3,666,862 shares of common stock issued to Trans Continental
in consideration for its guaranty of certain loans to the Company; and (ii)
1,000,000 shares of common stock issued to Trans Continental for entering into a
line of credit of $150,000 with the Company in July 1998, and (iii) 3,000,000
shares of the Company's common stock issued to Trans Continental in
consideration for continuing to provide lines of credit and funding the ongoing
costs and expenses of the Company. The 3,666,862 shares of common stock were
granted to Trans Continental in consideration for its guaranty of the Company's
obligations under the loans with Allstate Financial Corporation, Phoenixcor.,
Inc. Senstar Capital Corporation, the Argentina Lease Agreement and the
Argentina Operations Agreement with Mastellone Hnos, S.A., and a corporate
credit card issued for the Company's benefit. See "Certain Relationships and
Related Transactions."
Item 13. Certain Relationships and Related Transactions
Since May 7, 1996, the Company has subleased approximately 500 square
feet of office space from Trans Continental Airlines, Inc. on a month-to-month
basis for monthly rental payments of approximately $770.
In April 1999, the Company issued to Louis J. Pearlman 3,000,000 shares
of the Company's common stock in consideration for services rendered and the
waiver and deduction of salary payable by the Company to Mr. Pearlman.
In January 2000, the Company granted James J. Ryan the option to
purchase 500,000 shares of the Company's common stock at a price of $.01 per
share in consideration for services rendered to the Company by Mr. Ryan.
In January 1999, the Company issued to Alan Siegel 1,000,000 shares of
the Company's common stock in consideration for services rendered and the waiver
and deduction of salary payable by the Company to Mr. Siegel during the period
from 1985 through 1998. Mr. Siegal resigned as a director of the Company as of
June 1, 2000. In addition, 1,000,000 shares, 500,000 shares and 250,000 shares
of the Company's common stock was issued to Frank Sicoli, Scott Bennett and
Francisco Vasquez, respectively, for services rendered to the Company.
In April, 1999, the Company issued to Trans Continental 3,000,000
shares of the Company's common stock in consideration for continuing to provide
lines of credit and funding the ongoing costs and expenses of the Company. On
July 29, 1998, the Company issued to Trans Continental 1,000,000 shares of the
Company's common stock in consideration of Trans Continental granting to the
Company a $150,000 line of credit. Mr. Louis J. Pearlman owns 21 % of Trans
Continental and is Trans Continental's Chairman of the Board, President and
principal shareholder.
On June 10, 1998, a majority of the Company's shareholders voted to
approve the conversion of each outstanding share of preferred stock into three
shares of common stock. Shareholders also waived
11
their rights to accrued but undeclared dividends, and the authorized but
unissued shares of preferred stock were removed from authorization. In
connection with the shareholders' approval of such conversion, Louis Pearlman,
Trans Continental and Trans Continental Leasing, Inc. each agreed to waive
approximately $2 million, $5.5 million and $4.0 million, respectively, for
advances to the Company, as well as accrued and unpaid salaries in the case of
Mr. Pearlman.
On December 24, 1996, Trans Continental Leasing, Inc. obtained a loan
with Norwest Equipment Finance, Inc. in the amount of $4,709,000. The proceeds
of this refinancing were used to repay the Company's debt to Senstar and to
provide working capital to the Company. TC Leasing is a wholly owned subsidiary
of Trans Continental. The Company owed to TC Leasing the aggregate amount of
approximately $4,090,000, which amount was waived in connection with the June
1998 shareholders' meeting.
The Company has purchased hull insurance for the Company's airships
through Sedgwick Aviation of North America, an international insurance brokerage
firm of which Mr. James J. Ryan is the Executive Director.
Item 14. Exhibits, Financial Statements And Reports On Form 8-K
Page
----
(a)(1) The following financial statements of the Company are filed
herewith:
A. Report of Independent Certified Accountant....................... F-1
B. Balance Sheets for the years ended December 31, 1998
and 1997......................................................... F-3
C. Statements of Operations for the years ended December 31,
1998, 1997 and 1996.............................................. F-3
D. Statements of Changes in Stockholders' Deficit for the years
ended December 31, 1998, 1997 and 1996........................... F-4
E. Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.............................................. F-5
F. Notes to Financial Statements.................................... F-6 to F-15
(2) The following exhibits of the Company are filed herewith, unless
otherwise indicated:
Exhibit Incorporated by
Number Description Reference to
- ------ ----------- ------------
3.1 Certificate of Incorporation of the Company filed
June 9, 1992..................................................... Exhibit 2(12)
3.2 Amendment to Certificate of Incorporation filed September 18,
1984............................................................. Exhibit 3(2)
3.3 Amendment to Certificate of Incorporation filed
April 8, 1985.................................................... Exhibit 4(12)
3.4 Amendment to Certificate of Incorporation filed
August 1, 1986................................................... Exhibit 5(12)
12
3.5 Amendment to Certificate of Incorporation filed
January 27, 1989................................................. Exhibit 6(12)
3.6 Amendment to Certificate of Incorporation filed
August 5, 1992................................................... Exhibit 7(12)
3.7 Certificate of Correction to Amendment of Certificate of
Incorporation filed on February 26, 1993......................... Exhibit 8(12)
3.8 Amendment to Certificate of Incorporation filed February 26,
1993............................................................. Exhibit 9(12)
3.9 Certificate of Amendment to Certificate of Incorporation filed on
June 18, 1998.................................................... Exhibit 3.1(20)
3.10 Certificate of Amendment to Certificate of Incorporation filed on
October 16, 1998................................................. Exhibit 3.10(21)
3.11 By-laws of the Company........................................... Exhibit 3.9(19)
4.1 Warrant Agreement dated February 14, 1991 between the
Company and American Securities Transfer, Inc. including form
of Class A Warrant and Form of Class B Warrant................... Exhibit 4.1(4)
4.2 Warrant dated February 7, 1991 issued to Stephen M. Bathgate..... Exhibit 4.2(4)
4.3 Two warrants dated respectively December 31, 1991 and February
25, 1992 issued to Julian M. Benscher............................ Exhibit 4.3(4)
4.4 Two warrants dated respectively February 7, 1991 and March 23,
1991 issued to Kenneth S. Bernstein.............................. Exhibit 4.4(4)
4.5 Two warrants dated respectively February 7, 1991 and May 23,
1991 issued to Chatfield Dean & Co., Inc......................... Exhibit 4.5(4)
4.6 Warrant dated September 26, 1991 issued to Dr. Joseph C. F.
Chow and Cynthia B. Chow......................................... Exhibit 4.6(4)
4.7 Warrant dated September 26, 1991 issued to Cohig & Associates,
Inc.............................................................. Exhibit 4.7(4)
4.8 Warrant dated May 1, 1991 issued to Daliz Associates............. Exhibit 4.8(4)
4.9 Two warrants dated respectively February 8, 1990, and February
21, 1991 issued to Emanuel and Company........................... Exhibit 4.9(4)
4.10 Warrant dated December 10, 1991 issued to After Falkowitz........ Exhibit 4.10(4)
4.11 Four warrants dated respectively June 5, 1990, December 5,
1990, December 17,1990, and February 21, 1991 issued to Alfonso
Figlioia......................................................... Exhibit 4.11(4)
4.12 Two warrants dated respectively, May 23, 1991 and February 7,
1992 issued to Sanford D. Greenberg.............................. Exhibit 4.12(4)
4.13 Warrant dated December 7, 1991 issued to Edward C. Larkin........ Exhibit 4.13(4)
4.14 Warrant dated December 4, 1991 issued to David Mathis............ Exhibit 4.14(4)
4.15 Warrant dated February 7, 1991 issued to Eugene McColley......... Exhibit 4.15(4)
4.16 Warrant dated February, 1992 issued to Nour Collection, Inc...... Exhibit 4.16(4)
4.17 Warrant dated November 3, 1989 issued to ORIX Commercial
Credit Corporation ("ORIX")...................................... Exhibit 10.29(5)
4.18 Warrant date February, 1992 issued to Chahram Pahlavi............ Exhibit 4.18(4)
4.19 Warrant dated April 7, 1992 issued to Jim Ryan................... Exhibit 4.19(4)
4.20 Warrant dated May 1, 1992 issued to Sterling Capital Group, Inc.. Exhibit 4.20(4)
4.21 Warrant dated May 1, 1991 issued to Jonathan Turk................ Exhibit 4.21(4)
13
4.22 Warrant dated February 7, 1991 issued to Steven R. Hinkle........ Exhibit 4.22(4)
4.23 Warrant dated April 1, 1992 issued to Simon Zamet................ Exhibit 4.23(4)
4.24 Warrant dated May 8, 1992 issued to Louis J. Pearlman............ Exhibit 4.24(6)
4.25 Two Warrants dated April 17, 1992 issued to Emanuel and Company.. Exhibit 4.25(6)
4.26 Representatives' Preferred Stock Warrant issued to Emanuel and
Company and Chatfield Dean & Co. Inc............................. Exhibit 4.26(6)
4.27 Action by Written Consent of the Board of Directors dated April
15, 1997 extending warrant granted to Louis J. Pearlman.......... Exhibit 4.27
10.1 Amended and Restated Loan Agreement dated as May 8, 1992
between the Company and Louis J. Pearlman........................ Exhibit 10.1(6)
10.2 Form of Subscription Agreement between the Company and certain
investors relating to the 1992 Private Placement................. Exhibit 10.2(6)
10.3 Letter Agreement dated April 17, 1992. between the Company
and Emanuel and Company in connection with the 1992 Private
Placement........................................................ Exhibit 10.3(6)
10.4 Incentive Stock Option Plan as amended, of the Company........... Exhibit 10.2(1)
10.5 Amendment to Incentive Stock Option Plan dated December 9,
1991............................................................. Exhibit 10.2(4)
10.6 Aerial Airship Agreement dated October 26, 1987 by and between
the Company and the Metropolitan Life Insurance Company
("MetLife")...................................................... Exhibit 10.29(7)
10.7 Amendment dated as of March 15, 1988 to the Advertising
Agreement between the Company and MetLife........................ Exhibit B.1(3)
10.8 Amendment dated as of March 15, 1988 to the Aerial Advertising
Agreement between the Company and MetLife........................ Exhibit 10.14(5)
10.9 Amendment dated as of March 15, 1988 to the Aerial Advertising
Agreement between the Company and MetLife........................ Exhibit 10.15(5)
10.10 Amendment dated as of March 15, 1988 to the Aerial Advertising
Agreement between the Company and MetLife........................ Exhibit 19.4(8)
10.11 Airship Advertising Agreement dated as to April 27, 1990
between the Company, Airship Industries (USA), Inc. ("AIUSA")
and Anheuser Busch Companies, Inc. ("Anheuser") Exhibit 10.8(4)
10.12 Termination Agreement dated as of January 1, 1991 between the
Company, Anheuser, and AIUSA..................................... Exhibit 19.2(8)
10.13 Airship Advertising Agreement dated as of January 1, 1951
between the Company and Anheuser................................. Exhibit 19.3(8)
10.14 Amendment to Airship Advertising Agreement dated May 31, 1991
between the Company and Anheuser................................. Exhibit 10.11(4)
10.15 Passenger Airship Agreement dated May 31, 1991 between the
Company and Anheuser............................................. Exhibit 19.12(4)
10.16 Airship Advertising Agreement dated March 12, 1992 between
the Company and Anheuser......................................... Exhibit 10.13(4)
10.17 Term Loan Agreement dated as of February 27, 1990 between State
Bank of South Australia and the Company in the principal amount
of $250,000...................................................... Exhibit 10.3(9)
10.18 Airship Lease dated February 27, 1990 between the Company
and the State Bank of South Australia together with Lease
Supplement No. 1 thereto......................................... Exhibit 10.23(5)
14
10.19 Subordination Agreement dated February 27, 1990, between the
Company, State Bank of South Australia and Louis J. Pearlman..... Exhibit 10.16(4)
10.20 Line of Credit Agreement dated December 31, 1991 between Julian
Benscher and the Company in the amount of $1,000,000, as amended
on February 20, 1992 and Secured and Credit Note dated December
31, 1991 from the Company to Julian Benscher in the principal
amount of $1,000,000............................................. Exhibit 10.17(4)
10.21 Loan Agreement dated December 8, 1988 between the Company
and Louis J. Pearlman relating to a loan of $500,000............. Exhibit C.1(3)
10.22 Promissory note dated December 8, 1988 of the Company............ Exhibit D.1(3)
10.23 Demand Note dated as of December 31, 1988 of the Company to
Louis J. Pearlman, in the principal amount of $324,929.76........ Exhibit H.1(3)
10.24 Term Note for the principal amount of $850,000 dated January
31, 1990 from the Company to Louis J. Pearlman................... Exhibit 10.21(4)
10.25 Stock Option Agreement dated January 1, 1989 between the
Company and Louis J. Pearlman to purchase 1,000,000 shares....... Exhibit E.1(3)
10.26 Amendment to Stock Option Agreement between the Company
and Louis J. Pearlman dated as of February 7, 1991............... Exhibit 10.24(4)
10.27 Exchange Agreement dated January 29, 1992 between Slingsby
Aviation Limited and the Company................................. Exhibit 10.28(4)
10.28 Purchase Agreement Assignment dated November 2, 1989 between the
Company and ORIX and Consent by Airship UK....................... Exhibit 10.26(5)
10.29 Letter of Credit dated November 2, 1989 between the Company and
ORIX............................................................. Exhibit 10.309(5)
10.30 Assignment of (MetLife) Aerial Advertising Agreement and Consent
dated as of November 2, 1989 between the Company and Airship (UK) Exhibit 10.27(5)
10.31 Guaranty of Louis J. Pearlman in favor of ORIX dated as of
November 2, 1989................................................. Exhibit 10.28(5)
10.32 Note and Warrant Purchase Agreement dated as of November 2,
1989 between the Company and ORIX................................ Exhibit 109.33(5)
10.33 Agreement dated November 12, 1990 among the Company, the
Receiver for Airship UK, AIUSA and others........................ Exhibit 10.30(10)
10.34 Corporate Financial Consulting Agreement dated February 14,
1991 between the Company and Cohig & Associates.................. Exhibit 10.38(4)
10.35 Engagement Letter dated September 22, 1988 between Emanuel
and Company and the Company...................................... Exhibit K.1(3)
10.36 Agreement dated August 28, 1992 between Seoul Olympic Sports
Promotion Foundation and the Company............................. Exhibit 10.45(11)
10.37 Fifth Amendment to Aerial Advertising Agreement effective as of
September 1, 1992 between Metropolitan Life and the Company...... Exhibit 10.46(11)
10.38 Loan Agreement dated October 14, 1992 between Sequel Capital
Corporation and the Company...................................... Exhibit 10.47(11)
10.39 Agreement dated December 17, 1992 between J&B Enterprises
Limited (UK) Corp., Julian Benscher and the Company.............. Exhibit 10.48(11)
15
10.40 Airship Mortgage dated December 17, 1992 between the Company and
J&B Enterprises Limited (UK) Corp................................ Exhibit 10.49(11)
10.41 Employment Agreement dated as of December 31, 1992 between
the Company and Seth Bobet....................................... Exhibit 10.50(11)
10.42 Employment Agreement dated as of December 31, 1992 between the
Company and Alan Siegel.......................................... Exhibit 10.51(11)
10.43 Employment Agreement dated as of December 31, 1992 between
the Company and Frank Sicoli..................................... Exhibit 10.52(11)
10.44 Amended Employment Agreement dated as of February 15, 1993
between the Company and Louis J. Pearlman........................ Exhibit 10.53(11)
10.45 Second Amendment to Stock Option Agreement between the
Company and Louis J. Pearlman dated as of February 15, 1993...... Exhibit 10.54(11)
10.46 Mast Sale Agreement dated December 30, 1992 between J&B
Enterprises Limited (UK) Corp., Julian Benscher and the
Company.......................................................... Exhibit 10.55(11)
10.47 Mortgage dated December 30, 1992 between the Company and
J&B Enterprises Limited (UK) Corp................................ Exhibit 10.56(11)
10.48 Subscription Agreements between the Company and certain
investors relating to the 1992 Private Placement................. Exhibit 10.57(11)
10.49 Sublease Agreement between Westinghouse Airships, Inc. and
the Company dated November 9, 1992............................... Exhibit 10.58(13)
10.50 Amendment to Sublease Agreement between Westinghouse
Airships, Inc. and the Company dated November 9, 1992............ Exhibit 10.59(13)
10.51 Lease Agreement between Sand Lake IV-A Limited Partnership
and the Company dated February 25, 1991.......................... Exhibit 10.60(13)
10.52 Lease Agreement between T&L Leasing and the Company dated
January 13, 1992................................................. Exhibit 10.61(13)
10.53 Lease Agreement between Westdeutsche Luftwerbung Theodor
Wullenkemper GMBH and the Company dated May 16, 1993............. Exhibit 10.52(15)
10.54 Manufacturers Agreement between WDL Luftschiffgesellschaft
MBH and the Company dated May 16, 1993........................... Exhibit 10.53(15)
10.55 Escrow Agreement between and among Westdeutsche Lufterbung
Theodor Wullenkemper GMBH & Co., WDL Luftschiffgesellschaft MBH,
Trans Continental Airlines Inc., and Exhibit 10.54(15)
the Company dated May 15, 1993................................... Exhibit 10.55(15)
10.56 Aerial Advertising Agreement between the Company
and Catamount Petroleum Limited Partnership dated May 28, 1993... Exhibit 10.56(15)
10.57 Amendment to Aerial Advertising Agreement between the
Company and Catamount Petroleum Limited Partnership dated
July 27, 1993.................................................... Exhibit 10.57(15)
10.58 Second Amendment to Aerial Advertising Agreement between
the Company and Catamount Petroleum Limited Partnership
dated August 9, 1993............................................. Exhibit 10.58(15)
10.59 Third Amendment to Aerial Advertising Agreement between the
Company and Catamount Petroleum Limited Partnership dated
October 13, 1993................................................. Exhibit 10.59(15)
16
10.60 Fourth Amendment to Aerial Advertising Agreement between the
Company and Catamount Petroleum Limited Partnership dated
November 9, 1993 ................................................ Exhibit 10.60(15)
10.61 Aerial Advertising Agreement between Kingstreet Tours Limited and
the Company dated as of January 18, 1994 ........................ Exhibit 10.61(15)
10.62 Passenger Airship Agreement between
Anheuser-Busch Companies. Inc. and the Company dated as
of January 2, 1994 .............................................. Exhibit 10.62(15)
10.63 Amendment to Airship Advertising Agreement dated March 12, 1992,
between the Company and Anheuser-Busch Companies, Inc. dated
March 4, 1994 and related letter agreement dated
February 11, 1994 ............................................... Exhibit 10.63(15)
10.64 Amendment to note agreement dated as of November 2, 1989 between
the Company and ORIX dated January 11, 1994 ..................... Exhibit 10.64(15)
10.65 Loan Agreement between Don Golden and the Company dated
June 30, 1993 ................................................... Exhibit 10.65(15)
10.66 Guarantee of Louis J. Pearlman in favor of the Company dated as
of June 30, 1993 ................................................ Exhibit 10.66(15)
10.67 Loan Agreement between Superboard Limited and the Company
dated December 7, 1997 .......................................... Exhibit 10.67(15)
10.68 Guarantee of James Stuart Tucker in favor of the Company dated
as of December 7, 1993 .......................................... Exhibit10.68(19)
10.69 Kingstreet Tours Limited Aerial Advertising Agreement dated
January 18, 1994, by and between the Company and Kingstreet
Tours Limited ................................................... Exhibit 10.69(19)
10.70 Amended and Restated Airship Advertising Agreement, dated
July 8, 1994, by and between the Company and Anheuser-Busch
Companies. Inc, ................................................. Exhibit 10.70(19)
10.71 Aircraft Lease Agreement, dated December 15, 1994, by and
between the Company and Mastellone Hnos., S.A ................... Exhibit 10.71(19)
10.72 Airship Operations Agreement, dated December 15, 1994, by and
between Airship Operations (USA), Inc. and Mastellone Hnos,
S.A ............................................................. Exhibit 10.72(19)
10.73 Passenger Airship Agreement. Dated as of January 2, 1994,
by and between the Company and Anheuser-Busch Companies,
Inc ............................................................. Exhibit 10.73(19)
10.74 Letter Agreement Modification, dated January 11, 1994, by and
between the Company and ORIX USA Corporation .................... Exhibit 10.74(19)
10.75 Amendment to Lease, dated May 12, 1994, by and between the
Company and ORIX USA Corporation ................................ Exhibit 10.75(19)
10.76 Collateral and Security Agreement, dated as of May 10, 1994, by
and between the Company and ORIX USA Corporation ................ Exhibit 10.76(19)
10.77 Aircraft Collateral Funding Repayment Agreement, dated as of
November 16, 1994, by and between the Company and Allstate
Financial Corporation ........................................... Exhibit 10.77(19)
10.78 Guaranty, dated December 6, 1994, of Louis J. Pearlman .......... Exhibit 10.78(19)
10.79 Guaranty, dated December 6, 1994, of Trans-Continental
Airlines. Inc ................................................... Exhibit 10.79(19)
17
10.80 Aircraft Lease Agreement, dated as of May 31, 1995, by and
between Trans Continental Leasing, Inc.. as Lessor and the
Company, as Lessee .............................................. Exhibit 10.80(19)
10.81 Full Warranty Bill of Sale, dated as of May 31, 1994, by the
Company to Trans Continental Leasing, Inc ....................... Exhibit 10.81(19)
10.82 Credit Agreement, dated November 30, 1995, by and between the
Company and Senstar Capital Corporation ......................... Exhibit 10.82(19)
10.83 Term Note, dated November 30, 1995, of the Company to Senstar
Capital Corporation ............................................. Exhibit 10.83(19)
10.84 Aircraft Mortgage and Security Agreement, dated November 30,
1995, by and between the Company and Senstar Capital
Corporation ..................................................... Exhibit 10.84(19)
10.85 Assignment of Contract Rights, dated November 30, 1995, by and
between the Company and Senstar Capital Corporation ............. Exhibit 10.85(19)
10.86 Agreement of Guaranty and Suretyship, dated November 30, 1995,
by and between Trans Continental Airlines and Senstar Capital
Corporation ..................................................... Exhibit 10.86(19)
10.87 Release and Settlement Agreement, dated September 20, 1993, by
and between the Company and Sequel Capital Corporation and
Louis J. Pearlman ............................................... Exhibit 10.87(19)
10.88 Promissory Note, dated October 1994, of Louis J. Pearlman to
Airship Airways, Inc ............................................ Exhibit 10.88(19)
10.89 Promissory Note, dated October 26, 1994, of Louis J. Pearlman to
Airship Airways, Inc ............................................ Exhibit 10.89(19)
10.90 Form of Share Subscription Agreement, dated August 11, 1994,
between the Company and __________________ ...................... Exhibit 10.90(19)
10.91 List of Purchasers in the 1994 Private Placement ................ Exhibit 10.91(19)
10.92 Secured Promissory Note, dated October 26, 1994, of Airship
Airways, Inc. to the Company .................................... Exhibit 10.92(19)
10.93 Option Agreement, dated as of August 11, 1994, between the
Company and Louis J. Pearlman ................................... Exhibit 10.93(19)
10.94 Airship International Ltd. Employee Share Purchase Plan. ........ Exhibit 1(18)
10.95 Amended and Restated Lease Agreement, dated June 2, 1995,
between Orix USA Corporation. and The Company ................... Exhibit 10.95(21)
10.96 Letter of Intent with WeBeCD.com, Inc. dated March 28, 2000...... (22)
10.97 Settlement Agreement, dated as of July 28, 1999 between the
Company and WDL Luftschiffgeseilschaft *
10.98 Settlement Agreement, dated as of December 16, 1999 between
the Company and Gulf Oil Limited Partnership f/n/a Catamount
Petroleum Limited Partnership ................................... (22)
11.1 Statement re: Computation of Per Share Earnings *
16.1 Letter of Wiss & Co. dated June 22, 1993 ........................ Exhibit 16.1(14)
16.2 Letter of Grant Thornton dated July 7, 1997 ..................... Exhibit 16(16)
16.3 Letter of Grant Thornton dated July 22, 1997 .................... Exhibit 16(17)
21.1 List of Subsidiaries ............................................ Exhibit 21.1(19)
27.1 Financial Data Schedule *
18
- ---------------------
*Filed herewith.
(1) The Company's Registration Statement on Form S-18 Registration No. 2.96334
NY as filed with the Securities and Exchange Commission (the "SEC") on
March 9, 1985.
(2) The Company's Registration Statement on Form S-1 Registration No. 33-7830,
as filed with the SEC on August 7, 1986.
(3) The Company's Annual Report on Form 10-K for fiscal year ended December 31,
1988.
(4) The Company's Annual Report on Form 10-K for fiscal year ended December 31,
1991.
(5) The Company's Registration Statement on Form S-2, Registration No.
33-32619, as filed with the SEC on December 18, 1989.
(6) The Company's Post-effective Amendment No. 1 on Form S-3 to Form S-2,
Registration No. 33-38076, as filed with the SEC on May 14, 1992.
(7) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1987.
(8) The Company's Report on Form 8 dated August 14, 1991.
(9) The Company's Report on Form 8-K dated February 27, 1990.
(10) The Company's Registration Statement on Form S-2, Registration No.
33038076, as filed with the SEC on December 5, 1990.
(11) The Company's Registration Statement on Form S-1, Registration No.
33-56382, as filed with the SEC on February 16, 1993.
(12) The Company's Registration Statement on Form 8-A. as filed with SEC on
March 16, 1993.
(13) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
(14) The Company's Report on Form 8-K dated July 9, 1993.
(15) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1993.
(16) The Company's Report on Form 8-K, as filed with the SEC on July 11, 1997.
(17) The Company's Report on Form 8-K/A, as filed with the SEC on July 22, 1997.
(18) The Company's Proxy Statement, as filed with the SEC on March 20, 1995.
(19) The Company's Annual Report on Form 10-K for the year ended December 31,
1994.
(20) The Company's Quarterly Report on Form 10-Q, as amended, for the quarter
ended June 30, 1998.
(21) The Company's Annual Report on Form 10-K for the year ended December 31,
1998.
(22) The Company's Annual Report on Form 10-K for the year ended December 31,
1999.
(b) The Company did not file any Current Reports on Form 8-K during the
last quarter of 2000.
19
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 30, 2001.
ENTERTAINMENT INTERNATIONAL, LTD.
By: /s/ Louis J. Pearlman
-----------------------------
Louis J. Pearlman,
Chairman, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated.
Signature Title Date
--------- ----- ----
/s/ Louis J. Pearlman Chairman of the Board and March 30, 2001
- --------------------------- Chief Executive Officer
Louis J. Pearlman (Principal Executive and
Financial Officer) and Director
/s/ James J. Ryan Director March 30, 2001
- ---------------------------
James J. Ryan
20
Index to Consolidated Financial Statements
Page
A. Report of Independent Certified Public Accountant F-1
B. Balance Sheets as of December 31, 1999 and 1998 F-2
C. Statements of Operations for the years ended
December 31, 1999, 1998, and 1997 F-3
D. Statements of Changes in Stockholders' Deficit for the
Years ended December 31, 1999, 1998, and 1997 F-4
E. Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 F-5
F. Notes to Financial Statements F-6 to F-15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Entertainment International Ltd.
Orlando, Florida
We have audited the accompanying balance sheets of Entertainment International
Ltd. as of December 31, 2000 and 1999, and the related statement of operations,
stockholders' deficit, and cash flows for the years ended December 31, 2000,
1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entertainment International
Ltd. at December 31, 2000 and 1999, and the results of its operations and its
cash flows for the years ended December 31, 2000, 1999 and 1998, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note B to the
financial statements, the Company has experienced significant operating losses,
an accumulated deficit and negative working capital at December 31, 2000, 1999
and 1998. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Meeks, Dorman & Company, P.A.
Longwood, Florida
March 5, 2001
F-1
Entertainment International, Ltd.
Balance Sheets
December 31, December 31,
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 1,000
Prepaid expenses -- 16,000
Assets held for sale 1,091,000 --
Total current assets 1,091,000 17,000
Airships and related equipment:
Airships -- 963,000
Vehicles -- 529,000
Airship components -- 674,000
Parts, equipment and other -- 392,000
-- 2,575,000
Less: accumulated depreciation and amortization -- (629,000)
-- 1,946,000
Other assets 4,000 6,000
$ 1,095,000 $ 1,952,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Bank overdraft $ 242,000 $ --
Accounts payable 314,000 226,000
Customer payment on future services 200,000 514,000
Accrued expense and other liabilities 45,000 32,000
Obligations under capital leases 231,000 839,000
Due to related parties 4,375,000 3,221,000
Total liabilities 5,407,000 4,832,000
Contingencies and commitments
Stockholders' Deficit:
Common stock, $.01 par value, 110,000,000 shares authorized,
issued and outstanding 69,597,000 shares in
2000 and 68,097,000 in 1999 696,000 681,000
Capital in excess of par value 50,987,000 50,788,000
Accumulated deficit (55,995,000) (54,349,000)
Total stockholders' deficit (4,312,000) (2,880,000)
$ 1,095,000 $ 1,952,000
The accompanying notes are an integral part of these financial statements.
F-2
Entertainment International Ltd.
Statements of Operations
For the Years Ended December 31,
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Airship Revenue - - -
- --------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Operating costs 82,000 250,000 70,000
Selling, general and administrative expenses 398,000 1,716,000 534,000
- --------------------------------------------------------------------------------------------------------------------------
480,000 1,966,000 604,000
Loss from operations (480,000) (1,966,000) (563,000)
- --------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Write-down of impaired assets (838,000) (1,677,000) -
Gain (Loss) on sale of airship components
to Stockholder - - (22,000)
Loss on retirement of airship components - (2,000) -
Loss on settlement - (258,000) -
Forgiveness of debt by stockholder - 88,000
Realized gain on sale leaseback - 44,000
Interest expense (328,000) (677,000) (542,000)
Interest and other income - 11,000 40,000
- --------------------------------------------------------------------------------------------------------------------------
(1,166,000) (2,603,000) (392,000)
- --------------------------------------------------------------------------------------------------------------------------
Net loss $(1,646,000) (4,569,000) $ (955,000)
===========================================================================================================================
Weighted average number of common shares 69,544,000 62,262,000 46,736,000
- --------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common shares:
Net loss (1,646,000) (4,569,000) $ (996,000)
Abolishment of accrued preferred dividends - - 6,508,000
Preferred stock dividend - - (647,000)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shares (1,646,000) (4,569,000) $ 4,865,000
===========================================================================================================================
Net income (loss) per common share $(0.02) $(.07) $.10
===========================================================================================================================
The accompanying notes are an integral part of these statements.
F-3
Entertainment International Ltd.
Statements of Changes in Stockholders' Deficit
Capital in Excess of
Par Value
Preferred Stock Common Stock ---------------------
--------------- ------------ Preferred Common Accumulated
Shares Par Value Shares Par Value Stock Stock Deficit
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,459,000 24,000 42,523,000 425,000 14,447,000 22,066,000 (54,645,000)
- ------------------------------------------------------------------------------------------------------------------------------
Conversion of preferred stock
into Common stock (2,459,000) (24,000) 11,524,000 115,000 (14,447,000) 14,356,000 -
Reimbursement of 1993 stock
Subscriptions - - - - - (22,000)
Common stock issued to Trans
Continental for obtaining line of
Credit - - 1,000,000 10,000 - 32,000 -
Write-off of underwriter
compensation - - - - - 51,000
Capital contributions from
Stockholders due to
Extinguishment of debt - - - - - 11,886,000 -
Dividends accrued on preferred
stock - - - - - - (647,000)
Abolishment of dividends accrued on
Preferred stock - - - - - - 6,508,000
Net loss - - - - - - (996,000)
Prior period adjustment - - - - - 722,000 -
Balance at December 31, 1998, as
adjusted - - 55,047,000 550,000 49,091,000 (49,780,000)
- -------------------------------------------------------------------------------------------------------------------------------
Stock issued for compensation - - 5,950,000 60,000 - 774,000
Stock issued for services - - 4,100,000 41,000 533,000
Stock issued for extinguishment debt - - 3,000,000 30,000 - 390,000
Net Loss (4,569,000)
Balance at December 31, 1999 - - 68,097,000 681,000 - 50,788,000 (54,349,000)
- -------------------------------------------------------------------------------------------------------------------------------
Stock issued as settlement of debt - - 1,500,000 15,000 - 199,000 -
Net boss - - - - - - (1,646,000)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 - - 69,597,000 696,000 - 50,987,000 (55,995,000)
The accompanying notes are an integral part of these financial statements.
F-4
Entertainment International Ltd.
Statement of Cash Flows
For the years ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,646,000) $(4,569,000) $ (996,000)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation and amortization - 136,000 143,000
Realized gain on sale leaseback - - (44,000)
Proceeds from issuance of common stock - - 92,000
Loss on disposition of airships and
Related equipment - 3,000 22,000
Impairment of long lived assets 838,000 1,677,000 -
Issuance of common stock for services - 1,408,000 -
Issuance of common stock for interest - 420,000 -
Changes in operating assets and liabilities:
Prepaid insurance and other 18,000 5,000 1,000
Accounts payable - trade 88,000 (818,000) (491,000)
Accrued expenses and other liabilities 13,000 (89,000) (46,000)
Customer payments on future services (100,000) - -
Net cash flows used in operating activities (789,000) (1,827,000) (1,319,000)
Cash flows from investing activities:
Net change in due from related parties - - 261,000
Net cash flows provided by investing activities - - 261,000
Cash flows from financing activities:
Principal payments on capital leases and loans (608,000) (853,000) (1,101,000)
Reimbursement of 1993 stock subscriptions - - (22,000)
Changes in loans from related parties 1,154,000 2,681,000 2,179,000
Net cash flows provided by financing activities 546,000 1,828,000 1,056,000
Net decrease in cash and cash equivalents (243,000) 1,000 (2,000)
Cash and cash equivalents, beginning of year 1,000 - 2,000
Cash and cash equivalents, end of year (242,000) 1,000 -
Supplemental information:
Interest paid 6,000 263,000 542,000
Non-cash accrual of dividend on preferred stock - - 647,000
Non-cash abolishment of accrued preferred dividends - - 6,508,000
Non-cash extinguishment of debt due to stockholders - 420,000 11,164,000
Non-cash extinguishment of debt 214,000 - -
Reclassification of fixed assets to assets held for sale 1,090,000 - -
The accompanying notes are an integral part of these financial statements.
F-5
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company operated lighter-than-air airships, also
commonly known as blimps, which were used to advertise and promote the products
and services of the Company's clients. The Company has not operated any airships
since 1995 and is holding the airships and related equipment as available for
sale. The majority of the Company's operating expenses relate to the pursuit of
a suitable acquisition candidate. The Company is considered a "blank check"
company as of December 31, 2000.
Cash and Cash Equivalents - The Company considers unrestricted short-term,
highly liquid investments with maturities of three months or less at the time of
purchase to be cash equivalents.
Airships and Related Equipment - As of December 31, 1999, airships and related
equipment were stated at cost. Depreciation was provided by the straight line
method over the estimated useful lives of the assets - 10 to 20 years
(airships), 4 to 8 years (vehicles), and 3 to 5 years (parts, equipment and
other). Airship components were not in service and not being depreciated.
Depreciation expense for the years ended December 31, 1999 and 1998 was
$136,000, and $143,000, respectively.
Assets Held for Sale - As of December 31, 2000, the airships and related
equipment were reclassified to assets held for sale since they are no longer
operating assets of the Company and the Company is seeking a potential buyer.
Impairment of Long-Lived Assets - The Company follows the provisions of
Statement of Financial Accounting Standards 121, "Accounting" for the Impairment
of Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 121 requires that
long-lived assets held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company obtained an independent appraisal of its
airship components in August 1997 and wrote down the balance of its airship
components to liquidation sale value that year. Based on the Company's
expectation of future undiscounted net cash flows, these assets have been
written-down further to their estimated realizable values. During the fiscal
years ended 2000 and 1999, the Company wrote down $838,000 and $1,677,000 of
airships and related equipment, respectively.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-6
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Significant Accounting Estimates - The Company's provision for the write-down of
airships and related equipment is based on the Company's best estimate of the
net realizable value of the airships and related equipment from prior year's
appraisals and offers to purchase. It is at least reasonably possible that the
estimated value used may be materially different from the actual amount or
results.
The Company's has approximately $19 million of deferred tax assets resulting
from net operating loss carryforwards. Realization of this asset is dependent on
the Company's ability to generate approximately $49 million of future taxable
income. Management can not yet determine the amount of this asset to be
realized, and has created a valuation allowance to adjust the asset down to
zero. It is at least reasonably possible the realization of a portion of this
asset may be materially different from the actual amount or results.
Income Taxes - The Company follows the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting For Income Taxes", which requires the
recognition of deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect when these
differences are expected to reverse. Valuation allowances are established when
appropriate, to reduce deferred tax assets to the amount expected to be
realized.
Fair Market Value of Financial Statements - Unless otherwise noted, the fair
value of financial instruments approximates book value.
Stock Based Compensation - The Company has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). As it relates to stock options granted to employees, SFAS 123 permits
companies who have not done so already, to either adopt the accounting method
promulgated by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" to measure compensation, or to adopt
the fair value base method prescribed by SFAS 123. If APB 25's method is
followed, pro forma disclosures are required as if SFAS 123 accounting
recognition method was adopted. SFAS 123 pertains to stock options granted after
December 31, 1995. Management has determined not to adopt SFAS 123's accounting
recognition provisions related to stock options granted to employees and,
accordingly, will continue following APB 25's accounting provisions.
F-7
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Reclassifications - Certain reclassifications have been made in the 1999
financial statements to conform to the 2000 presentation.
Net Loss Per Common Share - The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings per share," ("SFAS 128"). This
pronouncement establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly-held common stock or potential common
stock. The pronouncement requires the presentation of net loss per common share
based on the weighted average number of shares outstanding during the periods.
It also requires the presentation of diluted EPS. When losses have been
incurred, warrants and options are not included since the effect would dilute
loss per share, however, preferred stock dividends are included in the loss per
share calculation. Therefore, diluted EPS is not presented for the Company for
the years ended December 31, 2000, 1999 and 1998 because there were net losses
in all years. When net income applicable to common stock is reported, warrants
and options are included using the treasury stock method, provided exercise
prices are less than the average market price, and when such inclusion results
in further dilution. The options and warrants outstanding at December 31, 2000
all provided for exercise prices higher than the average market price.
New Accounting Standards - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," ("SFAS No. 133"). This
statement establishes accounting and reporting guidelines for derivatives and
requires an establishment to record all derivatives as assets or liabilities on
the balance sheet at fair value. Additionally, this statement establishes
accounting treatment for four types of hedges: hedges of changes in the fair
value of assets or liabilities, firm commitments, forecasted transactions and
hedges of foreign currency exposures of net investments in foreign operations.
Any derivative that qualifies as a hedge, depending upon the nature of that
hedge, will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. SFAS No.
133 is effective for years beginning after June 15, 2000. The Company does not
currently participate in these types of financing activities and does not
anticipate that the adoption of this statement will have a material impact on
its consolidated balance sheets, statements of operations, or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). The Company is required to adopt
SAB 101 no later than its quarter ended June 30, 2000. The Company does not
believe that the adoption of SAB 101 will have a material effect on its
financial position or results of operations.
F-8
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE B - SIGNIFICANT UNCERTAINTIES AND MANAGEMENT'S PLANS TO OVERCOME OPERATING
DIFFICULTIES AND MEET CASH REQUIREMENTS
As shown in the accompanying financial statements, the Company has experienced
significant operating losses and negative cash flow from operations in recent
years and has an accumulated deficit of $55,996,000 at December 31, 2000. During
the years ended December 31, 2000, 1999 and 1998, the Company did not generate
any revenues from airship operations and it reported net operating losses and
negative cash flows from operating activities for each of the three years. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
The Company has relied on loans from Trans Continental Airlines, Inc. ("TCA")
and Trans Continental Records, Inc. ("TCR"), which are affiliated companies.
There can be no assurance that TCA or TCR will make additional loans on an
ongoing basis. At December 31, 2000 the Company owed TCA $3,503,000 and TCR
$834,000 (see Note C). TCA and TCR have deferred repayment of such amounts for
an indefinite period.
Management's plans to improve the financial position of the Company, with the
goal of sustaining the Company's operations for the current year and beyond
include: (1) establishing continued arrangements with TCA and TCR to provide
funding on a monthly basis, and (2) establishing goals for the acquisition of
assets and operations of one or more entities, with the expectation that such
business combinations, if completed, would provide additional cash flow and net
income. The Company is continuing to seek candidates engaged in the
entertainment industry or a media/Internet-based business for an acquisition or
merger (See Note G).
While the Company believes that its plans to secure additional funding or enter
into a possible business combination have the reasonable capability of improving
the Company's financial situation and ensuring the continuation of its business,
there can be no assurance that the Company will be successful in carrying out
its plans and the failure to achieve them could have a material adverse effect
on the Company.
F-9
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE C - RELATED PARTY TRANSACTIONS
The Company has the following net liabilities for advances or expenses paid by
related entities on behalf of the Company:
2000 1999
---- ----
Due to TransContinental Airlines $3,503,000 $3,241,000
Due to TransContinental Leasing - 30,000
Due to Shape CD 33,000 22,000
Due to (from)TransContinental Records 834,000 (69,000)
Due from Chippendales Properties LLC - (3,000)
Due to TransContinental Travel 5,000 -
---------- ----------
Total $4,375,000 $3,221,000
========== ==========
Office Lease - The Company is allocated approximately 500 square feet of office
space from Trans Continental Records, Inc. on a month-to-month basis for monthly
rental payments of approximately $770. Rent plus operating expenses totaled
$10,000, $12,000 and $9,240 for the years ended December 31, 2000, 1999 and
1998, respectively.
Airship Storage Lease - The Company leases space for the storage of the airships
and related equipment from Mr. Julian Benscher ("Mr. Benscher"). Mr. Benscher
beneficially owns less than 5.0% of the common stock of the Company at December
31, 2000. The Company has agreed to allow Mr. Benscher to use an airship, along
with certain related components and equipment, in exchange for storage space at
his facility. Rent expense is estimated at $4,000 per month and is offset by
estimated rent income of the same amount.
Line of Credit - On July 29, 1998, the Company issued 1,000,000 shares of common
stock to Trans Continental in exchange for extending the Company a $150,000 line
of credit. On April 19, 1999, the Company issued 3,000,000 shares of common
stock to Trans Continental in consideration for continuing to provide lines of
credit and funding the operating costs of the Company. As of December 31, 2000
and 1999, the Company had $3,503,000 and $3,241,000 outstanding with Trans
Continental, respectively. The balances included interest accrued at 8.0% and
8.3% at December 31, 2000 and 1999, respectively.
The Company has paid or accrued interest expense on related party debt in the
amount of $296,000, $574,000, and $334,000, for the years ended December 31,
2000, 1999, and 1998, respectively.
F-10
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE C - RELATED PARTY TRANSACTIONS (CONTINUED)
Extinguishment of Debt - On September 30, 1998, the Company signed agreements
with Trans Continental Airlines, Inc., Transcontinental Leasing, Inc. ("TC
Leasing") and Louis Pearlman, to waive certain amounts owed by the Company as of
June 10, 1998. TC Leasing, Inc. is a wholly owned subsidiary of Trans
Continental. In these agreements, Mr. Pearlman agreed to waive $1,265,000,
consisting of advances to the Company for working capital, deferred salary,
bonuses and interest. Trans Continental waived $6,868,000 advanced to the
Company for lease payments, working capital, and interest. TC Leasing, Inc.
waived $3,753,000, consisting of principal and interest. The extinguishment of
debt by the three related parties was recorded as an addition to capital in
excess of par value because all are direct or indirect shareholders.
Employee Salaries -The Company and certain affiliates employ common employees. A
portion of such employees' salaries and related benefits are allocated to the
Company and such affiliated entities based on the approximate amount of time
such employees devote to the Company and its affiliates. As of December 31,
2000, 1999 and 1998, the Company's allocated portion of such costs amounted to
$96,000, $284,000 and $228,000, respectively.
F-11
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE D - INCOME TAXES
At December 31, 2000, the Company had net operating loss carryforwards for
income tax purposes of approximately $46,860,390 available as offsets against
future taxable income. During 1991, the Company experienced changes in the
Company's ownership as defined in Section 382 of the Internal Revenue Code. The
effect of these changes in ownership is to limit the utilization of certain
existing net operating loss carryforwards for income tax purposes. Operating
losses incurred after the ownership change are not limited. As a result,
approximately $32,570,000 of the operating losses, which occurred after the
ownership change are not limited. The operating losses incurred prior to the
ownership change are limited to a specified dollar amount each year. The net
operating loss carryforwards expire during the years 2000 to 2020. The company
also had unused investment tax credits of $140,000 which expired in the year
2000.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities, consist of the
following at December 31:
2000 1999
=======================================================================================================
Deferred tax assets
Net operating loss $18,510,000 $18,734,000
Investment tax credits - 140,000
-------------------------------------------------------------------------------------------------------
18,510,000 18,874,000
Less: Valuation allowance 17,823,000 18,188,000
-------------------------------------------------------------------------------------------------------
687,000 686,000
Deferred tax liabilities: -
Airships and related equipment (687,000) (686,000)
-------------------------------------------------------------------------------------------------------
(687,000) (686,000)
-------------------------------------------------------------------------------------------------------
Net deferred tax asset - $ -
=======================================================================================================
The net change in the valuation allowance was approximately $365,000 relating to
net operating losses from 2000, and the expiration of carryforwards from prior
years.
F-12
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE E - CAPITAL LEASE
The Company has a capital lease with ORIX Commercial Corp. ("ORIX") which
originally financed the `Met Life" airship for $6,200,000. In 1995, the ORIX
lease was renegotiated calling for payments of principal only of $20,000 for
twelve months. At the end of the initial twelve-month period, the Company began
to make principal and interest payments at the rate of prime plus 1% of $40,000
for the next six months, followed by payments of $60,000 for the next six months
and finally payments equaling the higher of $80,000 or 50% of the annual cash
flows for the fiscal year immediately prior to the commencement of each
applicable twelve-month period for the remaining term of the lease until the
lease is fully amortized or a larger payment is made based upon the annual cash
flow of the year. The balance under this capital lease amounted to $231,000 and
$839,000 at December 31, 2000 and 1999, respectively. The capital lease is
guaranteed by Mr. Pearlman and Trans Continental and is secured by substantially
all business assets of the Company. At December 31, 2000, three payments of
$80,000 each, or $240,000, were currently due, with $9,000 representing interest
and $231,000 representing principal.
F-13
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE F - STOCKHOLDERS' EQUITY
Preferred Stock - On June 10, 1998, the Company's common and preferred
stockholders approved the conversion of each share of the Company's outstanding
Class A 8% Cumulative Convertible Voting preferred stock, par value $.01 per
share, into three shares of the Company's Common Stock, par value $.01 per
share, and all outstanding preferred shares were converted to common shares. In
addition, the stockholders waived their rights to the accrued but undeclared
preferred dividends. The authorized but unissued shares of preferred stock were
cancelled, and the number of authorized shares of common stock was increased to
110,000,000. The Company accrued $647,000 in dividends from January 1, 1998
through June 10, 1998 which brought the total dividends waived to $6,508,000.
Common Stock - In January 1999, the Company issued to Alan Siegel 1,000,000
shares of the Company's common stock in consideration for services rendered and
the waiver and deduction of salary payable by the Company to Mr. Siegel during
the period from 1995 through 1998. In addition, the Company issued to other
employees of the Company 1,750,000 shares of the Company's Common Stock, as
compensation in connection with their employment by the Company. The Company
also issued stock in consideration for services rendered by Louis J. Pearlman.
The Company issued 3,000,000 unregistered shares of common stock to Mr. Pearlman
for services rendered and the waiver of salary payable to Mr. Pearlman during
the period from 1995 through 1998 and 4,000,000 shares of common stock to a
consultant in consideration of financial consulting services rendered during the
period from 1997 to March 1999. Trans Continental was also issued 3,000,000
shares of common stock in consideration for continuing to provide lines of
credit and funding the operating costs of the Company.
In January 2000, the Company paid $100,000 and issued 1,500,000 shares of common
stock to settle liabilities under an agreement with Gulf Oil Limited
Partnership. The 1,500,000 shares of par value $.01 common stock were valued at
$.14 per share on the date of grant or $213,872.
F-14
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
Employee Share Purchase Plan - The Company has an employee share purchase plan
(the "Plan") for employees of the Company and any present or future "subsidiary
corporations." The Company intends the Plan to be an "employee stock purchase
plan" as defined in Section 423 of the Internal Revenue Code. The Plan was
effective November 1, 1994. All employees are eligible to participate in the
Plan, except that the Company may exclude any or all of the following groups of
employees from any offering: (i) employees who have been employed for less than
2 years; (ii) employees whose customary employment is 20 hours or less per week;
(iii) employees whose customary employment is not more that 5 months in any
calendar year; and (iv) highly compensated employees. The shares issuable under
the Plan shall be common shares of the Company subject to certain restrictions
up to a maximum of 1,000,000 shares. The committee shall determine the length of
each offering but no offering may exceed 27 months. The option price for options
granted in each offering may not be less than the lessor of (i) 85% of the fair
value of the shares on the day of the offering, or (ii) 85% of the fair market
value of the shares at the time the option is exercised.
Options - Outstanding options at December 31, 2000, all of which are currently
exercisable, after giving effect to adjustments through such date for
anti-dilution provisions and exercisable price reductions are as follows:
Exercise
Shares Price Expiration
Issuable Per Share Date
---------------------------------------------------------------------------------------------------------
Warrants:
Issued to Company President in May
1992 in consideration of restructuring
Terms of loans due, extended through
May 2001. 2,000,000 $.10 May 2001
Options:
Issued to officers and others
in 1989 and 1991 through the
Company's Employee Share
Purchase Plan 165,000 $0.01 to 1.28 October 2001
Issued to director in 2000 in
consideration of services rendered
to the Company 500,000 $.01 December 2004
F-15
ENTERTAINMENT INTERNATIONAL LTD.
Notes to Financial Statements
================================================================================
NOTE G - PENDING ACQUISITIONS
On March 28, 2000, the Company announced its letter of intent to acquire
WeBeCD.com, Inc. WeBeCD.com, Inc. is a private New York software company whose
technology transforms regular CD's, DVD's and other electronic media into
intelligent e-commerce vehicles. The transaction is subject to, but not limited
to, satisfactory due diligence, receipt of necessary approvals, and the
execution of a stock purchase agreement. As of the date of this report, a stock
purchase agreement was not in place, however discussions with management from
both sides continued.
On October 25, 2000, the Company signed a letter of intent to acquire all of the
issued and outstanding shares of European Multimedia Group AB ("EMG"). EMG is a
private multimedia company headquartered in Malmo, Sweden. They are engaged in
the business of representing artists and recording companies to the
international music industry, licensing and sub-licensing musical content, and
creating and selling special premium products through direct response
television.
NOTE H - SUBSEQUENT EVENTS
On January 4, 2001, the Company announced its intent to effect a one for twenty
reverse stock split after the close of its proposed acquisition of EMG.
On January 12, 2001, the Company signed a stock purchase agreement to purchase
all of the outstanding shares of EMG, including options and warrants convertible
into common stock, for a negotiated number of shares of the Company's common
stock for each one share of EMG stock owned. The agreement calls for the
issuance of up to 4,000,000 shares of the Company's common stock based on
achieving certain levels of revenue ranging from $1 million to $23.5 million for
the fiscal year ended December 31, 2001.
On March 16, 2001, the Company terminated its proposed acquisition of EMG due to
EMG's failure to meet in a timely fashion in accordance with the terms of the
stock purchase agreement various conditions of closing, including among others
to provide the required financial statements, opinions of counsel, good standing
certificates and agreements with various third parties all as specified in the
stock purchase agreement.
F-16